Best Assigns ‘A+’,’aa-‘ Ratings to Aviva Group

October 18, 2004

A.M. Best Co. announced that it has assigned a financial strength rating of “A+” (Superior) and an issuer credit rating of “aa-” to the core companies of the U.K.’s Aviva Group.

Best also assigned an issuer credit rating of “a” to the non-operating holding company, AVIVA plc as well as ratings to a number of debt securities issued by the holding company. The outlook for all ratings is stable.

“These ratings are based on Aviva’s leading business position, strong financial performance and strong risk-based capitalisation,” said Best. “The main offsetting factor is the significant use of Fund for Future Appropriations (FFA) and Value of In Force business (VIF) as part of its economic capital, in line with a number of its peers.”

Best said it “believes that Aviva has a well diversified business profile being one of the leading insurance providers in the United Kingdom and holding top 10 positions in several European markets. Additionally, it holds strategic positions in a number of emerging economies, including Eastern Europe and the Far East.

In the U.K. life segment, the strength of the brands under which Aviva operates has helped the group refocus its operations away from traditional with-profits business and toward protection and unit-linked products. Its non-life business mainly focuses on personal insurance, and the group is the leader in the United Kingdom and Ireland and also holds a top five position in Canada and the Netherlands.

In Europe, distribution agreements with locally well-known banks are leading to increased penetration in several markets. Aviva’s consolidated gross premiums remained stable during the first six months of 2004 (compared to the same period of the previous year), reflecting the group’s resilience under difficult market conditions.”

Commenting on the group’s financial performance Best noted that it has returned to profitability (after three years of losses) and seems to be continuing in that direction. Aviva announced net after-tax profits of £263 million ($ 475 million) for the first half of 2004.

Best said it “expects the long-term profitability of the group to improve, driven by the higher margins on life business written during the last year. Results on a statutory basis are likely to be negatively affected by reduced contributions from with-profits business, new business strain from the expanding protection portfolio and the guarantees of some unit-linked products, as well as increased interest payouts due to the subordinated debt issue of 2003. In addition, A.M. Best expects the current fast growth and high profitability arising from markets like Spain and Italy to begin stabilising to lower levels in 2005.

The combined ratio of non-life business is likely to remain stable at around 100 percent, mainly assisted by the long-term impact of the cost reduction programme (initiated by the group in 2002) and the corrective actions focusing on the Canadian operations. Strategic operations such as the operations in Central Europe, India and China are expected to contribute to further earnings diversification, providing greater stability on overall results.”

The rating agency also expects Aviva’s risk-based capitalization to remain strong “as the pressures from increased business volumes are offset by the increase in economic capital driven by profit retention and further recovery of the FFA.” It noted that the FFA included an estimated $4.2 billion (7.58 billion) in “orphan estate” (basically non-allocated amounts), as well as “significant use of subordinated debt and VIF business as part of its economic capital, which is in line with the practice followed by some of its key competitors.”

Best concluded that “Aviva’s financial flexibility remains strong, with an adequate level of debt cover.”

The bulletin noted that Best has assigned its A+ (Superior) and an issuer credit rating of “aa-“to the following principal Group operating companies:

— CGU International Insurance plc
— Norwich Union Insurance Limited
— Commercial Union Life Assurance Company Limited
— CGNU Life Assurance Limited
— Norwich Union Linked Life Assurance Limited
— Norwich Union Life & Pensions Limited
— Norwich Union Annuity Limit

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