Best Downgrades AVIVA and Subsidiaries Ratings to ‘A’

March 13, 2009

A.M. Best Co. has downgraded the issuer credit rating (ICR) to “a-” from “a” of the non-operating holding company, the UK’s AVIVA plc, and the financial strength rating (FSR) to’ A’ (Excellent) from ‘A+’ (Superior) and the ICRs to “a+” from “aa-” of its rated subsidiaries. Best also downgraded the debt securities issued by AVIVA, but indicated that the outlook for all of the ratings remains stable.

“The rating action follows the company’s negative bottom line financial performance and a reduction in risk-based capitalisation, resulting from investment losses of £ 2 billion [$2.8 billion] that the company reported in its 2008 results,” Best explained. “The losses were incurred following the continuing equity market turmoil and widening credit spreads on its investment portfolio.”

Best also indicated, that while it considers that “part of the unrealised investment losses emanate from corporate bonds that the company expects to hold to maturity, the level of actual defaults (£140 million [$197 million] [or 0.2 percent of the portfolio]) and impairments (£ 260 million [$365 million]) incurred is significant.”

In addition, Best noted that the Aviva had also “increased provisions for further default losses on the assets backing its UK annuity portfolio by £ 550 million [$772 million], taking the total default provision for this business to £1.1 billion [$1.544 billion], which represents 8 percent of the value of the portfolio.”

Even though the above measures are generally “in line with that of AVIVA’s peers,” best said it is “concerned about the level of shareholders’ asset risk associated with AVIVA’s global corporate bond portfolio backing its life and GI businesses (amounting to £26 billion {$36.5 billion]), where the investment mix includes 30 percent of assets rated BBB or lower.”

Best added that in its opinion, “despite the company’s low historical default experience on its £12 billion [$16.84 billion] UK commercial mortgage portfolio, future losses are more likely. This follows the deterioration of the portfolio’s loan to value ratio from 81 percent in June 2008 to 103 percent in December 2008, though interest service cover remains strong at 1.3 times.

“In line with a number of life insurers in the United Kingdom, AVIVA’s risk-based capitalisation benefits significantly from soft elements such as value in force (VIF). Consequently, following significant reductions seen in the VIF in 2008, which in part reflects AVIVA’s adoption of market consistent embedded value (MCEV) reporting, and also factoring in the effect of investment losses on the level of AVIVA’s unallocated divisible surplus, the company’s overall capitalization decreased. A.M. Best also believes that AVIVA’s decision to maintain its dividend payments in 2008 puts further strain on its ability for a speedy return to its historical capital strength.”

However Best also indicated that the “ratings also take into account AVIVA’s diversified business profile, which is underpinned by its strong market position in the UK and European life insurance market, a growing presence in the United States, as well as its strong multinational general insurance business. AVIVA announced increased operating profits and new business sales growth of 11 percent to £36 billion [$50.5 billion] in 2008, partially attributed to currency movements, and that its market share in the UK life insurance market increased to 11.3 percent (10.5 percent in 2007). The company reported that from 2009, it is increasing its focus on balancing sales volumes against returns.

The FSR has been downgraded to A (Excellent) from A+ (Superior) on the following member companies and key European entities of AVIVA.
AVIVA International Insurance Limited
Norwich Union Insurance Limited
Commercial Union Life Assurance Company Limited
CGNU Life Assurance Limited
Norwich Union Life and Pensions Ltd
Norwich Union Annuity Limited
Delta Lloyd N.V.
AVIVA Vida y Pensiones, S.A de Seguros y Reaseguros
AVIVA Italia Holding S.p.A.
AVIVA Assurances
AVIVA Courtage
Societe d’Epargne Viagere

Best also listed a series of debt rating revisions.

Source: A.M. Best –

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