Ratings Roundup: Aviva Canada, AEGIS

June 11, 2012

A.M. Best Co. has reviewed and maintained the under review status of the financial strength ratings of A (Excellent) and issuer credit ratings (ICR) of “a+” of Aviva Insurance Company of Canada and its affiliates, Elite Insurance Company, Traders General Insurance Company, Pilot Insurance Company, Scottish & York Insurance Company, Limited and S&Y Insurance Company. All of the ratings are under review with negative implications. These companies are insurance subsidiaries of its ultimate parent company, UK-based AVIVA plc. In December 2011, the ratings were placed under review with negative implications due to the continued negative developments regarding the euro zone sovereign debt crisis. Best that subsequent to those actions it has “developed more confidence in AVIVA plc’s capital position in relation to its euro zone exposure; however, the ratings remain under review due to the recently announced strategic evaluation of AVIVA plc’s businesses and changes to its senior management, especially the departure of the chief executive officer.”  AVIVA plc is exposed to “peripheral euro zone sovereign and financial institutions debt and is affected by recessionary conditions through significant business operations in markets where consumer demand for life products has been sharply curtailed (e.g., Italy and Spain),” Best continued. The report added that, despite these pressures, Best believes that “AVIVA plc’s business profile remains well diversified, with the United Kingdom and France being its main European markets. AVIVA plc is currently conducting a strategic review of its businesses.” Best noted that “the group’s intention is to improve capital allocation between business segments and may look to possibly exit certain markets or classes of business that could have a positive impact over the medium term.” Best said it would “continue to monitor the situation and expects to resolve the under review status once there is more clarity with regard to AVIVA plc’s ongoing business strategy. Aviva Insurance Company of Canada and its affiliates’ ratings continue to reflect their leading position in the property/casualty market, along with their continued strong operating performance.”
 
A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-’ (Excellent) and issuer credit rating of “a-” of Bermuda-based Associated Electric & Gas Insurance Services Limited (AEGIS). Best said the “revised outlook reflects AEGIS’ improved risk-adjusted capitalization and operating performance in the last three years after it had encountered a net loss in 2008, which was caused by primarily significant investment losses that resulted from the financial crisis. The company’s surplus has significantly rebounded from 2008 levels and is currently within an appropriate value-at-risk, i.e., risk tolerance/appetite level.” In addition Best said the “ratings affirmations recognize AEGIS’ solid risk-adjusted capitalization for its current investment and insurance risks and a historically favorable long-term financial performance, as well as an experienced management team and comprehensive enterprise risk management processes. Reserving practices are adequate for the hazards insured and losses incurred.” The volatility inherent in AEGIS’ underwriting results, given the high severity risk profile and concentration risk of the energy market it serves,” is a partial offsetting factor,” Best indicated. The report also pointed out that “due to the long-tail nature of its business and as a mutual insurer, AEGIS typically relies on investment earnings to support overall net income where underwriting results are managed toward the break-even level, reflective of low profitability. AEGIS generally prices its business on a ‘total return’ basis, i.e., the planned use of its investment results to support underwriting pricing. The positive outlook further reflects the expectation that AEGIS’ ratings could be considered for positive rating actions if the company continues to demonstrate strong operating fundamentals in areas such as risk- adjusted capitalization, evidence of sustainable and stable investment results and favorable loss development trends. Conversely, AEGIS’ outlook could be revised if external market conditions weaken significantly, resulting in weakened free cash flow, a decline in liquidity levels, an increase in underwriting leverage and/or  outsized catastrophe or investment losses in conjunction with a significant decline in risk-adjusted capitalization.”

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