Best Maintains AVIVA and Subs Ratings Under Review; Negative Implications

June 7, 2012

A.M. Best Europe – Rating Services Limited has reviewed and maintained the under review status of the financial strength ratings of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of the insurance subsidiaries of the UK’s AVIVA plc, as well as the under review status of the ICR of “a-” of AVIVA and all debt securities. All of the ratings are under review with negative implications.

As Best announced in conjunction with these current rating actions, they follow a series of actions taken last December to address the implications for euro zone insurers. Generally it changed the outlook on the ratings, including AVIVA’s, to negative from stable, while it carried out a more extensive review.

Best explained that following its review, it has “developed more confidence in AVIVA’s capital position in relation to its euro zone exposure; however, the ratings remain under review due to the recently announced strategic evaluation of its businesses and changes to its senior management, especially the departure of the chief executive officer.”

AVIVA, however, ” is exposed to peripheral euro zone sovereign and financial institutions debt and is affected by recessionary conditions through material business operations in markets where consumer demand for life products has been sharply curtailed (e.g., Italy and Spain),” Best said. But the rating agency also indicated that despite these pressures, it “believes that AVIVA’s business profile remains well diversified, with the United Kingdom and France being its main European markets.”

Also, AVIVA’s profit after tax at the end of 2011 suffered a significant decline to £584 million ($902 million) compared to £1.9 billion ($2.9 billion) in the prior year. This decline was driven largely by adverse investment variances and impairments, predominantly in Europe. The pressure on profits has, in turn, impacted AVIVA’s risk-adjusted capitalization, which although still supportive of its ratings, has declined from prior years. AVIVA’s decision to extend its deleveraging timetable is also likely to put pressure on its financial metrics.”

The organization 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.”

A complete listing of AVIVA plc and its subsidiaries’ FSRs, ICRs and debt ratings is available.

Source: A.M. Best

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