TEXT-S&P cuts Aviva's U.S. insurance subs to 'A-'

Mon Nov 12, 2012 2:42pm EST

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. Use the Ratings search box located in the left 
column.
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