Aviva upgraded on balance sheet strengthening, well-positioned for growth

UK insurer  Aviva has secured a rating upgrade from  AM Best, thanks to its “strengthening” balance sheet and a “significant reduction” in sensitivity to interest rate risk following the disposal of several international subsidiaries last year to focus on its core markets.

AM Best has upgraded the financial strength rating (FSR) to A+ from A, with the outlook of its credit ratings revised to stable from positive.

The rating upgrades reflect the strengthening of  Aviva’s balance sheet position, according to the agency. In particular,  AM Best noted the significant reduction in the group’s balance sheet sensitivity to interest rate risk following the disposal of several non-core life insurance subsidiaries over 2021.

In addition,  Aviva has reduced its financial leverage in recent years in line with its strategic objectives. The group’s risk-adjusted capitalisation (RAC), as measured by Best’s Capital Adequacy Ratio (BCAR), remained at the strongest level at year-end 2021 and was bolstered by the effect of the disposals, which resulted in lower asset risk requirements.

While  Aviva’s RAC may diminish from its 2021 level, it is expected to be maintained well above the minimum requirements for the strongest assessment, AM Best said, noting that the group’s reliance on softer capital elements is largely in line with its peers.

AM Best assesses the insurer’s balance sheet as “very strong”, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management.

Aviva’s operating performance in recent years showed a five-year weighted average return on equity (2017-2021) of 11.4%, as calculated by  AM Best, benefiting from a “well-diversified portfolio” by product across the life and non-life segments.

The group is taking actions to withstand the impact of inflationary pressures and more difficult macroeconomic conditions; for example, through pricing actions, robust asset-liability management, leveraging on its own motor repair network and optimising its cost base.  AM Best said it will continue to monitor how the group responds to external operational challenges.

Following the disposal of several international subsidiaries,  Aviva’s business is now focused on its core markets of the UK, Ireland and Canada.  AM Best noted the group’s considerable scale and strong competitive position in these markets and therefore considers  Aviva to be well-positioned to continue to grow in these markets.

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