Best Affirms AVIVA & Subs Ratings

A.M. Best Co. has affirmed the financial strength rating (FSR) of 'A' (Excellent) and issuer credit ratings (ICR) of "a+" for the subsidiaries of the UK-based non-operating holding company, AVIVA plc. Best also affirmed the ICR of "a-" and the ratings on the debt securities issued by AVIVA.

In addition Best noted that it has "withdrawn the FSR of 'A' (Excellent) and ICR of "a+" for AVIVA Courtage (France) after its business was merged into AVIVA Vie (France) in 2008. The outlook for all ratings is stable."

The ratings reflect AVIVA's "improving risk-adjusted capitalization and financial performance, resulting from improving market conditions, management initiatives and its diversified business model." However Best also cited the "increase in financial leverage, as well as operational risks associated with AVIVA's ongoing restructuring of its European operations" as offsetting factors.

AVIVA strengthened its risk-adjusted capital position in 2009 through a number of initiatives, including "the sale of its Australian business for £452 million [$754 million], issuance of hybrid debt amounting to £900 million [$1.5 billion] over the 12 months to July 2009, as well as increased use of hedges to protect its equity portfolio," best explained.

"However, the debt issuance has significantly increased the group's financial leverage." In Best's opinion "the group's increasing focus on efficient capital usage in the writing of new business should also be able to mitigate any impact on risk-based capitalization levels."

Best said it based its conclusion on the group's Netherlands business, Delta Lloyd N.V., which "continues to have a higher investment risk appetite than the rest of the AVIVA group, despite having suffered a significant portion of the group's total investment losses in 2008."

Best added that it "believes that AVIVA's recently completed initial public offering of 42 percent of the shareholding of Delta Lloyd N.V. will lead to a significant reduction in the group's risk exposure from this operation while improving its financial flexibility.

"As part of its "One AVIVA" strategy, the group is currently going through a restructuring of its European operations, which will see transformation of some of its 12 separate businesses across Europe into branches, with one pan European holding company based in Ireland."

Best said it "expects the anticipated improvements in governance and operational control, as well as simplification of products and processes will lead to enhanced risk management, financial performance and fungibility of capital in the medium term. However, this exposes the group to additional operational challenges in the short term. In addition, the impact of these changes on AVIVA's business profile is uncertain."

Best also indicated that "in line with the rest of the market, AVIVA's investment performance will remain subdued but positive in 2009, following the absence of investment losses in the company's third quarter 2009 year-to-date results (£2 billion [$3.336 billion] loss for full year 2008)."