Best Assigns Ratings to Aviva and Subsidiaries

A.M. Best Co. announced that it has assigned an “a-” Issuer Credit Rating to Aviva Plc. It has also given an ‘A’ (Excellent) financial strength rating to CGU International Insurance Plc. and Norwich Union Insurance Limited respectively, and an ‘A-‘ (Excellent) financial strength rating to Morley Pooled Pensions Limited. In addition, Best said it had upgraded the financial strength ratings of the group’s rated core subsidiaries to ‘A’ (Excellent) from ‘B++’ (Very Good).
All of the ratings have been given a “stable” outlook.

“These ratings are based on public information and reflect Aviva’s superior business profile, excellent but weakened risk-based capitalisation and excellent financial flexibility,” said Best. “The main offsetting factor is the deterioration in Aviva’s consolidated financial performance.”

The bulletin noted that “Aviva is the United Kingdom’s largest insurance group and the world’s seventh-largest insurer based on worldwide gross written premium. In several European life markets, Aviva is regarded as a lead player. On a consolidated basis, the life, pension and health businesses account for approximately 70 percent of total premium, with the remaining attributable to non-life business.

“Overall life sales increased only by 2 percent during the first 9 months of 2003 (2 percent in 2002), largely attributable to Aviva’s operations in the European markets. In the United Kingdom, sales have been negatively influenced by a low demand for investment linked products due to adverse market conditions.”

Best pointed out, however, that “Aviva’s resilience compared to peers means it has made market share gains in the UK during 2003. The health business continues to show strong growth and is expected, in line with 2002 figures, to increase by approximately 10 percent at year-end 2003. Aviva’s consolidated non-life premium growth is slowing down (5 percent in the first half of 2003) as rates for a number of its lines of business are already at the top of the cycle.”

Concerning what it termed Aviva’s “excellent but weakened risk-based capitalisation,” Best said the company is still “regarded as excellent according to A.M. Best’s capital model, despite the deterioration suffered in 2002 following asset devaluations, strengthened mortality reserves and increased tax costs in the United Kingdom.”

It noted that “the Fund for Future Appropriations, which fell sharply in 2002, increased by 47 percent during the first half of 2003. At the same time the orphan estate of UK with-profits business, which provides a realistic assessment of the strength of this business, showed a greater resilience and reached GBP 4.5 billion (USD 6.9 billion) in mid-year 2003, compared to GBP 4.7 billion (USD 7.2 billion) in mid-year 2002. The Free Asset Ratio, including implicit items, for the group’s main UK life operation, Norwich Union Life and Pensions, fell in line with peers to a still acceptable 7.7 percent at year-end 2002 from 8.9 percent in 2001.”

Best said it “expects the slow consolidated growth in life sales, the expected improvements in the equity markets to lead to a slight improvement in the prospective consolidated risk-based capitalisation.”

The rating agency also observed that “Aviva’s financial flexibility is excellent, as demonstrated by the numerous debt issues successfully placed. In addition, the company has recently announced the sale of 50 UK properties. ”

The group has, however suffered from a “deteriorated financial performance” attributable to “an overall reduced demand for key life products, especially investment linked products, combined with the asset losses,” which have “resulted in a consolidated loss for 2002 before tax, minorities and preference dividends of GBP 282 million (USD 434 million), compared with a profit of GBP 514 million (USD 792 million) for 2001.”

Best sees the group’s financial performance improving “with a reported GBP 742 million (USD 1,143 million) profit before tax during the first half of 2003.” Best said it “expects Aviva’s strong pricing actions, as highlighted by the excellent new business margins of 24.4 percent in 2002 and 25 percent for the first 9 months of 2003, will partially alleviate the continued general low demand.”

It also noted that “the non-life combined ratio still remains excellent at 101 percent, 99 percent excluding Canadian case reserve strengthening, providing strong cash flow for the group.” Best said it “expects the consolidated underlying financial performance to remain stable year-on-year after factoring the extraordinary non-recurring issues, i.e. redundancies, sale and lease-back of the UK offices and a number of cost savings initiatives.”