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Fitch Affirms Aviva at IFS 'AA-'; Outlook Stable

Published 2018-10-22, 11:09 a/m
© Reuters.  Fitch Affirms Aviva at IFS 'AA-'; Outlook Stable
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Fitch Ratings-London-October 22: Fitch Ratings has affirmed Aviva (LON:AV) Plc's (Aviva) core insurance subsidiaries' Insurer Financial Strength (IFS) Ratings at 'AA-' (Very Strong) and Aviva's Long-Term Issuer Default Rating (IDR) at 'A+'. The Outlooks are Stable.

KEY RATING DRIVERS The ratings reflect Aviva's very strong business profile and capitalisation and strong earnings. Our assessment of business profile is reflected by the group's prominent market position in the UK, diversification by business line and geography and the group's large operational scale. Aviva is a household brand in the UK with solid market positions in life and savings and non-life lines. These rating strengths are complemented by its substantial operations in Europe and Canada, which diversify earnings. In 1H18, non-life insurance and fund management accounted for 21% of the group's operating profit and 37% of operating profit originated outside the UK. Aviva's capitalisation, as measured by Fitch's Prism Factor-Based Capital Model (Prism FBM), is 'Extremely Strong' based on end-2017 results (unchanged from 2016). At end-1H18, the group's Solvency II (S2) ratio was 187% (2017: 198%), with interest rate risk being its greatest exposure. A 50bp decline would reduce the S2 ratio by 12pp. The S2 ratio is less sensitive to credit spread and equity movements due to Aviva's effective group hedging programme. Financial leverage has been stable (1H18: 27%; 2017: 26%; 2016: 27%) as the redemption of USD650 million hybrid securities in November 2017 and EUR500 million in May 2018 was offset by around GBP900 million in share buybacks. Aviva's leverage is higher than many similarly rated European peers' and is a negative ratings factor. We view the group's significant profit diversification and resilient operating profit as rating strengths. When excluding the impact of divestitures, pre-tax operating profit grew 4% in 1H18. Strong growth of 14% in the UK life business in 1H18 was offset by operating losses in Canada. While asset origination timing differences in respect of the large bulk purchase annuity (BPA) deals in 1H18 reduced new business margins but we expect this to reverse in 2H18. Aviva's annualised net income return on equity (ROE), excluding minority interests, declined to 4% in 1H18 (2017: 8%). However, we expect Aviva's net income ROE to improve to over 6% in 2019. The weakening net income was driven by negative investment variances in the life business. Aviva's net profit is also depressed by non-cash items, such as the amortisation of acquired value of in-force (AVIF). When adjusting for these items, Aviva's ROE for 1H18 was 7% (2017: 11%). Fitch assesses Aviva's debt service capabilities and financial flexibility as 'Strong'. Its track record of accessing debt markets for long- and short-term debt is a key strength. However, financial flexibility is weighed down by the group's fixed-charge coverage (FCC) ratio, which weakened to 6.4x in 2017 (2016: 6.8x). Debt redemptions in 2018 will reduce interest costs, benefiting the group in 2019. We expect FCC to improve to over 7x in the medium term as a result. At end-July 2018 the group had a liquidity position of GBP1.4 billion, excluding amounts set aside for the GBP600 million share buyback in 2018. This is sufficient to pay for over three years of interest on its financial debt (based on end-2017 debt). The group targets sufficient liquidity based on an internally defined risk appetite. We expect this liquidity position to remain strong, supported by steady cash remittances to Aviva (GBP2.4 billion in 2017 and GBP1.8 billion in 2016).

RATING SENSITIVITIES The ratings could be downgraded if Aviva's net income ROE falls below 6% for a sustained period. Other key rating triggers that could result in a downgrade include capitalisation, as measured by Fitch's Prism FBM, falling to the low end of the 'Very Strong' category, or financial leverage increasing above 30%. A sustained improvement of both financial leverage to less than 20% and net income ROE above 12% could result in an upgrade, although Fitch views this unlikely in the short term. FULL LIST OF RATING ACTIONS Aviva Assurances --IFS Rating affirmed at 'AA-'; Outlook Stable Aviva Insurance Company of Canada --IFS Rating affirmed at 'AA-'; Outlook Stable Aviva Insurance Ltd --IFS Rating affirmed at 'AA-'; Outlook Stable; --Long-Term IDR affirmed at 'A+'; Outlook Stable. Aviva International Insurance Ltd --IFS Rating affirmed at 'AA-'; Outlook Stable Aviva Life & Pensions UK Limited --IFS Rating affirmed at 'AA-'; Outlook Stable Aviva Plc --Long-Term IDR affirmed at 'A+'; Outlook Stable --Senior debt affirmed at 'A' --Step-up tier one Insurance Capital Securities (STICS) affirmed at 'BBB+' --Other subordinated notes affirmed at 'BBB+' Aviva Plc Euro Medium-Term Note Programme --Senior debt class affirmed at 'A' --Subordinated tier 2 debt class affirmed at 'BBB+' --Subordinated tier 3 debt class affirmed at 'BBB+' Aviva Vie --IFS Rating affirmed at 'AA-'; Outlook Stable Friends Life Holdings plc --Long-Term IDR affirmed at 'A+'; Outlook Stable Friends Life Limited --IFS Rating affirmed at 'AA-'; Outlook Stable Subordinated debt of Friends Life Holdings, guaranteed by Aviva Life & Pensions UK Limited --12% GBP162 million (XS0430178961) affirmed at 'A' --8.25% GBP500 million (XS0620022128) affirmed at 'A-' --7.875% USD575 million (XS0851688860) affirmed at 'A-' Contact: Primary Analyst Willem Loots Senior Director +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 30 Nov 2017) https://www.fitchratings.com/site/re/905036 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10049073 Solicitation Status https://www.fitchratings.com/site/pr/10049073#solicitation Endorsement Policy https://www.fitchratings.com/regulatory

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