October 31, 2017 / 4:46 PM / a year ago

Fitch Affirms Aviva at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 31 (Fitch) Fitch Ratings has affirmed Aviva Plc's (Aviva) Long-Term Issuer Default Rating (IDR) at 'A+' and core insurance subsidiaries' Insurer Financial Strength (IFS) Ratings at 'AA-' (Very Strong). 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 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 1H17, non-life insurance accounted for 23% of the group's operating profit and 42% 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-2016 results (end-2015: Extremely Strong). At end-1H17, the group's Solvency II (SII) ratio was 193% (2016: 189%), with its greatest exposure to interest rate risk. A 50 basis point decline would reduce the SII ratio by 12 percentage points. However, hedging against other market changes is adequate. Aviva's financial leverage ratio (FLR) remained stable at 27% at end-1H17. We expect financial leverage to decline marginally by end-2017, despite a GBP300 million share buy-back. The improvement is largely due to the group's redemption of USD650 million hybrid securities in November 2017. Given surplus capital at Aviva's disposal and current surplus capital deployment priorities, we expect to see further reduction in leverage in the medium term. We view the group's significant profit diversification and steady improvement in operating profit as strengths. Aviva's pre-tax operating profit improved 11% to GBP1.5 billion in 1H17, in line with the 12% CAGR since 2012. The improvement was largely due to the addition of RBC General Insurance in 2Q16, benign weather in Europe, a higher contribution from Aviva Investors and favourable foreign exchange movements. Operating profit is beginning to translate to an improvement in net income. Aviva's annualised net income return on equity (ROE), excluding minority interests, improved to 7% in 1H17 (2016: 4%; 2015: 7%). The decline in 2016 can largely be attributed to the one-off impact of the Ogden discount rate change. Fitch expects net income to improve gradually from 2018 in line with operating profit, as non-operating items, such as integration and restructuring costs, decline. Fitch assesses Aviva's debt service capabilities and financial flexibility as 'Strong'. Its track record of accessing debt markets for long- and short-debt is a key strength. However, this is weighed down by the group's fixed-charge coverage (FCC) ratio, despite improving to 7x in 2016 (2015: 6x). We expect the ratio to gradually improve in the medium term as earnings rise relative to interest costs. The group had a liquidity position of GBP1.7 billion at end-July 2017, which is enough to pay for over three years of interest on its financial debt (based on end-2016 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 (GBP1.8 billion in 2016 and GBP1.5 billion in 2015). 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 a low level in the 'Very Strong' category, or financial leverage increasing above 30%. A sustained improvement of financial leverage to less than 20% 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 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 Senior debt of Aviva Plc affirmed at 'A' Subordinated debt of Aviva Plc - Tier 1 Notes --Step-up Tier one Insurance Capital Securities (STICS) affirmed at 'BBB+' --all other subordinated notes affirmed at 'BBB+' Subordinated debt of Friends Life Holdings, guaranteed by Friends Life Limited Tier 2 Notes --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 Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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