Aviva's UK subsidiaries' IFSRs upgraded to Aa3, stable outlook
London, 20 October 2017 -- Moody's Investors Service has today upgraded Aviva Plc's senior
unsecured debt rating to A2 from A3 and Aviva Plc's commercial paper
rating to P-1 from P-2. At the same time, Moody's
upgraded the insurance financial strength ratings (IFSR) to Aa3 from A1
of Aviva International Insurance Limited, Aviva Insurance Limited
and Aviva Life & Pensions UK Limited. The outlooks of all entities
changed to stable from Ratings under Review. The rating action
concludes the review initiated on 19 June 2017.
A list of all affected ratings is available at the end of this press release.
RATINGS RATIONALE
The upgrade of Aviva Plc's ratings with a stable outlook reflects
the recent improvements in the group's profitability, capital
and financial flexibility and Moody's expectations that these improvements
are sustainable. In particular, Moody's expects the
volatility of Aviva's results to be low, given the substantial
de-risking and business re-focusing that the group initiated
in 2013. The stable outlook reflects Moody's expectation
that low interest rates and Brexit will only have a moderate negative
impact on Aviva's credit profile over the next 12 to 18 months.
The Aa3 IFSRs of Aviva's UK operations are also underpinned by the
group's sustained market-leading positions in the UK life and P&C
markets.
Commenting on profitability, Moody's notes that Aviva reported
continued growth in operating profits in the last four years. More
recently, operating profits increased by 11% to GBP1,465
million in the first half of 2017 and by 12% to GBP3,010
million in 2016, driven by improving results in nearly all regions
where the group operates. Results also improved across all segments,
as evidenced by the decline in the P&C combined ratio to 94.5%
in the first half of 2017 (1H16: 95.7%) and the increase
in life new business margin to 3.0% in the first half of
2017 (1H16: 2.7%). When including the strengthening
of reserves (GBP385 million after tax) triggered by the change in the
regulatory rate, known as the Ogden rate, used to discount
motor insurance annuity reserves in the UK, Aviva's net result
declined by 22% to GBP859 million in 2016. However,
Moody's considers this change a one-off item which is likely to
be partly reversed in coming years and which impacted the entire motor
insurance sector in the UK.
Moody's expects Aviva to further improve or at least sustain its
current level of profitability. In part, this is due to new
distribution agreements, such as the one signed with HSBC Bank plc
(Aa3 long-term debt rating, negative outlook, a2 adjusted
baseline credit assessment) in the UK in August 2017, and by expected
continued growth in asset management. Moody's also believes that
a successful implementation of Aviva's strategy of developing and strengthening
a composite digital offering to customers could gradually enable Aviva
to show further growth through cross-selling and to improve profitability
through synergy benefits.
Moody's also expects Aviva's profits to be less volatile in 2017 and beyond,
compared with earlier years. For example low interest rates have
a very limited impact on Aviva's results. According to Moody's,
Aviva has one of the lowest exposures to interest rate risk amongst European
composite insurers, reflecting its liability profile and asset mix.
The low exposure to interest rate risk is evidenced by the low sensitivity
of Aviva's Solvency II ratio to a change in interest rates (a decline
in interest rates by 25bps would result in a decline of the Solvency II
ratio by 6 percentage points). Moody's adds that Aviva's geographic
and business diversification (with 62% of the group's premiums
related to life insurance and 38% related to P&C insurance
in 2016), as well as the group's focus on retail business,
contributes to a relatively low business risk profile and should support
stable earnings going forward.
Commenting on Aviva's capitalisation, Moody's says that Aviva's
solvency ratio improved significantly since year-end 2015.
Aviva reported a solvency ratio, based on its internal model and
excluding with-profit business (shareholders' view),
of 193% as of end June 2017, up from 189% in 2016
and 181% in 2015. The regulatory Solvency II ratio,
which does not account for surplus capital in the with-profit business,
was 172% in 2016. Aviva's solvency ratio benefitted
from model changes in 2016 and from asset disposals but strong capital
generation was also a key driver of this improvement. In fact earnings
generated by the group represented GBP1.7 billion in 2016 (when
including holding costs and interest expenses), equivalent to 13
percentage points of the solvency ratio, and GBP1.1 billion
in the first half of 2017.
Moody's mentions that Aviva seeks to operate with a Solvency II
ratio (shareholders' view) between 150% and 180%.
As a result, Moody's expects the group to redeploy capital,
either through additional share buy-backs (Aviva already completed
a GBP300 million share buy-back programme in 2017), debt
repayments, bolt-on acquisitions or business growth.
Nonetheless, given the group's capital generation, Moody's
expects Aviva to maintain a strong level of capital in the next two to
three years. In addition, thanks to a low sensitivity to
financial risks, Moody's expects Aviva's capital to show low levels
of volatility.
Moody's adds that improving profitability and capitalisation will
benefit Aviva's financial flexibility. The rating agency
expects Aviva's financial leverage to decrease to around 26%
at year-end 2017 from 28.3% following the repayment
of debt in 2017 (GBP500 million) while capital continues to improve.
Moody's also says that given Aviva's good cash position and
strong capital, the group has the flexibility to repay more debt
in the next two years. Improving profitability and a reduction
in interest costs will also support improvements in the group's
earnings coverage.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's says that positive rating pressure could arise from (1) improvements
in profitability as evidenced by a return on capital consistently above
8% across the underwriting cycle, (2) a sustained decrease
in financial leverage to below 20%, and (3) further sustainable
improvements in capitalisation.
Conversely, negative rating pressure could arise from (1) deterioration
in profitability as evidenced by a return on capital below 6% across
the underwriting cycle or (2) a sustained rise in adjusted financial leverage
beyond 30%, or (3) a decline in capitalisation resulting
for example in a solvency II ratio (shareholders' view) consistently
below 170%.
LIST OF AFFECTED RATINGS
Issuer: Aviva Plc
..Upgrades:
....Senior Unsecured Regular Bond/Debenture,
upgraded to A2 from A3
....Senior Unsecured Medium-Term Note
Program, upgraded to (P)A2 from (P)A3
....Subordinate Regular Bond/Debenture,
upgraded to A3(hyb) from Baa1(hyb)
....Subordinate Medium-Term Note Program,
upgraded to (P)A3 from (P)Baa1
....Junior Subordinated Regular Bond/Debenture,
upgraded to A3(hyb) from Baa1(hyb)
....Senior Subordinate Regular Bond/Debenture,
upgraded to A3(hyb) from Baa1(hyb)
....Senior Subordinate Medium-Term
Note Program, upgraded to (P)A3 from (P)Baa1
....Preferred Stock, upgraded to Baa1(hyb)
from Baa2(hyb)
....Commercial Paper, upgraded to P-1
from P-2
..Affirmations:
....Backed Commercial Paper, affirmed
P-1
..Outlook Action:
....Outlook changed to Stable from Ratings
under Review
Issuer: Aviva International Insurance Limited
..Upgrade:
....Insurance Financial Strength Rating,
upgraded to Aa3 from A1
Outlook Action:
....Outlook changed to Stable from Ratings
under Review
Issuer: Aviva Insurance Limited
..Upgrade:
....Insurance Financial Strength Rating,
upgraded to Aa3 from A1
..Outlook Action:
....Outlook changed to Stable from Ratings
under Review
Issuer: Aviva Life & Pensions UK Limited
..Upgrade:
....Insurance Financial Strength Rating,
upgraded to Aa3 from A1
..Outlook Action:
....Outlook changed to Stable from Ratings
under Review
Issuer: Friends Life Limited
..Upgrade:
....Insurance Financial Strength Rating,
upgraded to Aa3 from A1
..Outlook Action:
....Outlook changed to Stable from Ratings
under Review
Issuer: Friends Life Holdings plc
..Upgrades:
....Backed Junior Subordinated Regular Bond/Debenture,
upgraded to A3(hyb) from Baa1(hyb)
....Backed Senior Subordinated Regular Bond/Debenture,
upgraded to A2(hyb) from A3(hyb)
..Outlook Action:
....Outlook changed to Stable from Ratings
under Review
PRINCIPAL METHODOLOGIES
The principal methodologies used in rating Aviva Plc were Global Life
Insurers published in April 2016, and Global Property and Casualty
Insurers published in May 2017. The principal methodology used
in rating Aviva International Insurance Limited and Aviva Insurance Limited
was Global Property and Casualty Insurers published in May 2017.
The principal methodology used in rating Aviva Life & Pensions UK
Limited, Friends Life Limited and Friends Life Holdings plc was
Global Life Insurers published in April 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of these
methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Benjamin Serra
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
