Best Affirms Aviva USA, Subsidiaries Ratings; Outlook Revised to Positive

December 3, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of Iowa-based Aviva Life and Annuity Company (ALAC) and its wholly owned subsidiary, Aviva Life and Annuity Company of New York (ALACNY), together, known as Aviva USA. These companies are the principal insurance subsidiaries of Aviva USA Corporation, which is an indirect, wholly owned subsidiary of Aviva plc, a global diversified financial services company based in the United Kingdom.

Best also affirmed the ICR of “bbb+” of Aviva USA Corporation and its remaining senior debt of “bbb+” that was assumed with the acquisition of AmerUs Group Co., as well as the debt rating of “a-” on $25 million 8.66 percent surplus notes, due 2011 of ALAC.

Best said the “outlook for all ratings has been revised to positive from stable.” The revision reflects the “improved financial performance and risk-adjusted capital of its ultimate parent, Aviva. Because Aviva USA’s ratings are inherently tied to those of its ultimate parent, the positive outlook reflects the rating outlook for Aviva.

Aviva USA is the result of the acquisition of the former life insurance subsidiaries of AmerUs in late 2006 (along with the former Aviva U.S. operations based in Boston, Mass.) Aviva has since consolidated the various life insurance companies into two entities: ALAC and ALACNY. The amalgamation has substantially expanded Aviva’s footprint within the U.S. life/annuity markets as Aviva USA doubled its sales from 2006 to 2008, one year ahead of Aviva’s stated target.

To facilitate this growth, Aviva has provided the U.S. life companies with approximately $900 million in capital contributions since the acquisition. Best said it “believes this explicit support demonstrates Aviva’s commitment to the U.S. operations and that the business is strategically important to the group.

“The ratings for Aviva USA reflect the group’s leading market positions in indexed life insurance and fixed indexed annuities, innovative product development, multiple distribution networks and adequate stand-alone risk-adjusted capitalization. The ratings also recognize the strategic and financial benefits derived from Aviva.”

Best summarized the Group’s activities as follows: “Aviva USA markets a wide array of life and fixed annuity products through multiple distribution channels, which include personal producing general agents, career agents and independent marketing organizations. The group is a market leader for both indexed universal life insurance and fixed indexed annuities. Aviva USA’s risk-adjusted capitalization remains adequate for its current insurance and investment risks and is enhanced by the financial support from Aviva. In addition, Aviva USA has established two Vermont-domiciled reinsurance captives (Aviva Re USA, Inc. & Aviva Re USA II, Inc.) to provide funding for Regulation AXXX and XXX reserve requirements. Lastly, having achieved the target to double sales a year ahead of schedule, Aviva USA’s strategy in 2009 and 2010 has been to focus on greater capital efficiency by moderating the pace of growth in fixed indexed annuities. This strategy is in line with the group’s initiatives to alter the business mix and grow its life insurance business.”

As offsetting factors Best cited the group’s “recent statutory losses and its modest exposure to equity risk. Aviva USA has experienced statutory net losses in recent years due to new business strain, Regulation AXXX and XXX reserving requirements, investment impairments and the impact of option contracts associated with the company’s hedging programs.”

However, Best also noted that “statutory net income has been positive in 2010. During the current credit cycle, Aviva USA’s investment impairments peaked at $493 million in 2008, although subsequent impairments have declined significantly. Also, Aviva USA’s focus on indexed life insurance and annuities subjects its earnings to some equity market risk. In a declining equity market, Aviva USA will generally experience lower earnings on its indexed product portfolio as option contracts (that are purchased to hedge its indexed products) expire out of the money.”

Source: A.M. Best

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