TEXT-S&P cuts Aviva's U.S. insurance subs to 'A-'
Overview -- Based on Aviva PLC's announcement on Nov. 8, 2012, that the U.S. operations were being tendered for sale, we have removed the one notch of implied parental support to our published ratings on Aviva USA and lowered our ratings on Aviva USA by one notch to the stand-alone credit profile of 'A-' from 'A'. -- Our uncertainty around future ownership was demonstrated on July 9, 2012, when we changed our view of the group status of the U.S. operations to nonstrategically important to Aviva PLC, from strategically important and lowered the ratings by one notch to 'A' from 'A+'. This rating action followed our assessment that these operations were likely to be disposed of based on Aviva PLC's revised strategic plans. -- The one notch of implied support that was previously included was due to the demonstrated financial and management support historically provided by Aviva PLC. The increased level of uncertainty around the U.S. operating subsidiaries' future ownership was reflected in the negative outlook. We are removing this notch of parental support given our belief that there is an increased probability that the U.S. operations will be sold. -- In addition, we placed the ratings on Aviva USA on CreditWatch developing to reflect the uncertainty regarding the future ownership of Aviva USA and our understanding of Aviva PLC's statement that a change in ownership could occur in the short term. Rating Action On Nov. 12, 2012, Standard & Poor's Ratings Services lowered its counterparty credit and financial strength ratings on Aviva PLC's U.S. insurance subsidiaries (Aviva Life and Annuity Co., and Aviva Life and Annuity Co. of New York; collectively referred to as Aviva USA) to 'A-' from 'A'. At the same time we placed the ratings on Aviva USA on CreditWatch Developing to reflect the uncertainty regarding the future ownership of Aviva USA and our understanding of Aviva PLC's statement that a change in ownership could occur in the short term. Rationale Based on Aviva PLC's Nov. 8, 2012 announcement that the U.S. operations were being tendered for sale, we have removed the one notch of implied parental support to our published ratings on Aviva USA and lowered our ratings on Aviva USA by one notch. Our published ratings now reflect only the stand-alone credit profile of the U.S. operations. On July 9, 2012, we changed our view of the group status of the U.S. operations to nonstrategically important to Aviva PLC, from strategically important and lowered the ratings by one notch. This rating action followed our assessment that these operations could to be disposed of based on Aviva PLC's revised strategic plans. The one notch of implied support that was previously included was due to the demonstrated financial and management support historically provided by Aviva PLC. The negative outlook on Aviva USA reflected the increased level uncertainty around the future ownership of the U.S. operating subsidiaries. We are removing the notch of support given our belief that there is an increase probability that the U.S. operations will be sold. The insurer financial strength ratings Aviva USA are based on the stand-alone credit fundamentals given we view these subsidiaries as "nonstrategically important" to the Aviva group under our group ratings methodology criteria. The ratings reflect what we view as Aviva USA's strong competitive position in the U.S. supported by its effective multichannel distribution network, focused and leading product suite in the indexed products market, strong prospective core operating performance, and capitalization. Over the past year, Aviva USA's management team has made progress in maintaining or improving the strength of its business franchise, its enterprise risk management infrastructure, and its key financial metrics. In our opinion, offsetting these positive factors are the earnings concentrations in two product lines (indexed annuity and indexed life), capital strain created by AXXX/XXX reserve requirements, and the relatively high proportion of life products sold with no-lapse guarantees that could be adversely affected in a prolonged low interest rate environment. Aviva USA has a strong competitive position in the indexed annuity and indexed life market with about 80% of its liabilities related to accumulation products and 20% to life insurance products. New sales have remained concentrated in two product lines. Indexed annuity products accounts for about 95% of the accumulation product segment sales and indexed life products account for about 90% of the protection product segment sales. Given Aviva USA relies on AXXX/XXX solutions for its life business, its product design and pricing remain exposed to market risk. The senior secured debt rating on General Repackaging ACES SPC's series 2007-4 and 2007-5 notes is linked to the rating on the funding agreement provider, Aviva Life and Annuity Co. CreditWatch The developing CreditWatch placement reflects the uncertainty associated with the future ownership of Aviva USA, and what this organization may look like in future. For Aviva USA to maintain the current stand-alone ratings, we expect the company to maintain its very strong franchise position in equity indexed products in the U.S. with sales that remain in line with industry trends and International Financial Reporting Standards pretax operating earnings of at least $250 million in 2012, and $260 million in 2013. Operating results will continue to be correlated to the relative level of long-term interest rates and net interest margins, given the high proportion of fixed products sold. We expect capitalization to remain supportive of the 'A' category published financial strength rating, liquidity to remain strong, and losses within the investment portfolio to remain manageable. Standard & Poor's could lower the ratings if the U.S. operations experience a sharp drop in earnings, asset performance or capital adequacy, or if these operations are acquired by a parent with a lower credit profile. Related Criteria And Research -- Principles Of Credit Ratings, Feb. 16, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Holding Company Analysis, June 11, 2009 -- Group Methodology, April 22, 2009 -- Interactive Ratings Methodology, April 22, 2009 -- Counterparty Credit Ratings And The Credit Framework, April 14, 2004 Ratings List Downgraded; CreditWatch/Outlook Action To From Aviva Life and Annuity Co. Aviva Life & Annuity Co. of New York Counterparty Credit Rating Local Currency A-/Watch Dev/-- A/Negative/-- Financial Strength Rating Local Currency A-/Watch Dev/-- A/Negative/-- General Repackaging ACES SPC Series 2007-4 notes A-/Watch Dev A Series 2007-5 notes A-/Watch Dev A Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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