A.M. Best Europe – Rating Services Limited has revised the outlook to positive from stable and affirmed the issuer credit rating (ICR) of “a-” of the UK-Based non-operating holding company, Aviva plc. Best also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and ICR of “a+” for Netherlands-based Delta Lloyd NV. The outlook for these ratings is stable.
In addition Best has revised the outlook to positive from stable and affirmed the FSR of ‘A’ (Excellent) and the ICRs of “a+” of the remaining subsidiary companies of Aviva, as well as the outlook on the the debt securities issued by Aviva.
The change in outlook “reflects Aviva’s improved risk-adjusted capitalization and recognizes the improvements in its financial results over 2009 and through 2010, resulting from improved market conditions, management initiatives and the group’s diversified business model,” Best explained.
However, the rating agency also indicated that the “uncertainty that surrounds the performance of the restructured Aviva Europe businesses and Delta Lloyd NV; concerns as to the reliance of the non-life technical account on investment income; and the amount of leverage that remains in the group,” should be taken into account as offsetting factors.
Best explained: “Following the hybrid debt issued in 2008 over 2009, Aviva continued to strengthen its capital position in a number of ways. These measures included the sale of its Australian business; the rebasing of its dividend; the reintroduction of a dividend scrip scheme; the reattribution of the inherited estate; and the partial initial public offering (IPO) of Delta Lloyd NV. Finally, the company has significantly reshaped its investment portfolio, reducing the exposure of shareholder capital to equity risk.”
Best said it believes the capital position has “been re-enforced by a strong increase in earnings and the closure of the defined benefit pension scheme to future accruals, which has improved the net asset value of the group as well as reduced contributions going forward.
“Though the non-life technical account (excluding income from investment) has only begun to show profitability at the 2010 half-year, overall profits have increased significantly. A fresh wave of cost cuts and efficiency gains were announced at the third quarter results presentation.”
Best added that it “believes Aviva has shown its ability to deliver cost cuts, and these additional measures have the potential of improving the profitability of the non-life technical account. On the life side of the business, internal rates of return are increasing and pay-back periods have declined.
“In line with a number of life insurers in the United Kingdom, Aviva’s risk-based capitalization benefits from “soft” elements such as value in force (VIF).” Best also anticipates that 2010 will see an improvement in the company’s quality of capital, which will become less reliant on these components.
However, Best also “believes that significant operational risks remain in the restructuring of the pan-European businesses, as well as in the performance of Delta Lloyd NV subsequent to the IPO.”
On a more positive note Best said it recognizes that Aviva’s shareholding and board level representation has increased the parent’s control over the Netherlands-based insurer. In addition, the European restructuring project is envisaged to simplify and increase the efficiency of the pan-European businesses, which when combined with the company’s current joint ventures and bancassurance agreements provide a mechanism to capture any improvements in economic conditions during 2011.”
Best has also provided a complete listing of Aviva plc and its subsidiaries’ FSRs, ICRs and debt ratings.
Source: A.M. Best
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