Standard & Poor’s Ratings Services has revised its outlook on Aviva PLC, the holding company of the U.K.-based global multiline insurance group Aviva, and the majority of its operating entities, to stable from negative.
S&P also affirmed its ‘A’ long-term counterparty credit rating on Aviva PLC and its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on Aviva’s core operating insurance subsidiaries.
“The outlook revision reflects our view that Aviva has made strong progress during 2010 in strengthening its balance sheet and that it can sustain this improvement based on improved capital generation and strong risk controls,” explained credit analyst Mark Button. “Consequently, we believe the risk that Aviva will fail to meet our expectations relating to the strength of its balance sheet has reduced, although capitalization remains a relative weakness in Aviva’s credit profile and the key sensitivity for the rating.”
S&P noted that “Aviva has made strong progress during 2010 in rebuilding capital adequacy to levels firmly in the ‘A’ range. We estimate that the strength of retained earnings, coupled with initiatives to materially reduce the staff pension scheme deficit, have significantly exceeded the increase in asset risk charges. We also believe Aviva will be able to sustain the level of underlying capital generation it achieved in 2010, because we expect general insurance to contribute more to profitability and we anticipate that Aviva will continue to focus on managing the capital efficiency of new life business.
Button added: “Aviva’s rolling equity-hedge program and conservative provisions for credit risk increase the resilience of its balance sheet to investment stresses, although risks relating to the staff pension scheme remain an area of concern.”
In addition S&P noted that the ‘AA-‘ ratings on the core operating entities of Aviva “reflect the group’s very strong competitive position, positive strategic management, diversified earnings profile, and very strong liquidity. Offsetting factors are the relative weakness of its capitalization and the difficult operating environment in its key markets.
“The stable outlook incorporates our assumption that Aviva will continue to improve capital adequacy and capital quality. We believe the risk that Aviva will fail to meet our expectations relating to the strength of its balance sheet has reduced, although capitalization remains the key sensitivity for the rating.
“In particular, we are likely to lower the ratings if we believe Aviva is unlikely to achieve a capital redundancy relative to our ‘A’ benchmarks under our capital model, or if financial leverage is not managed down and maintained below 30 percent.
“Based on current information, we see no upside potential for the ratings over the near term.”
Source: Standard & Poor’s
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