20th Jul 2018 11:42
LONDON (Alliance News) - S&P Global Ratings revised its outlook for Aviva PLC to Positive from Stable while affirming its A+ rating for the FTSE 100-lited insurer, due to a balance sheet less vulnerable to interest rates and credit risk.
"The outlook revision reflects our view Aviva's financial risk profile has improved, and is likely to remain robust. We consider a combination of strong retained earnings, effective risk management, and a lower risk profile could enable Aviva to maintain its risk-adjusted capital adequacy position to a level that supports a higher rating," said Credit analyst David Masters.
S&P took on the view that on a Solvency II basis, Aviva's balance sheet looked less sensitive to interests rates, credit spreads, and equity market volatility than other UK-domiciled life insurers and European global multiline insurers.
However, it was also noted Aviva has a weaker quality of capital than its peers, due to being more reliant on value of in-force and hybrid capital than the peer group average.
Value of in-force is the present value of the profits that will emerge from a block of life insurance policies over time.
S&P said the insurer has made progress with its strategic plan, first announced in 2012 to narrow its focus and rebuild its balance sheet, through the sale of underperforming and higher risk business, and cost reduction work.
This has led to improved operating profitability, the reduction of reduced capital and earning volatility and a more resilient financial risk profile.
However, S&P said it believes Aviva's future growth of its capital base will be hindered by the insurer's decision to increase its payout ratio to 50% in 2017 and further plans to raise this.
Also, Aviva has said it has targeted the reduction of capital by GBP2 billion during 2018 through a combination of hybrid retirements, capital returns to shareholders, and bolt-on merger & acquisition activity.
S&P said it could upgrade Aviva group further over the next 12 to 24 months if earnings continue to show signs of future growth, and if the insurer builds on its strategic risk management principles with a higher contribution from asset management, or continues to outperform peers based on a Solvency II ratio basis.
Shares in Aviva were down 1.2% at 488.90 pence on Friday.
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