Apr 05 -
Summary analysis -- Aviva Insurance (Europe) SE ------------------- 05-Apr-2012
CREDIT RATING: Country: Ireland
Local currency BBB+/Negative/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
04-Apr-2011 BBB+/-- --/--
03-Feb-2011 A-/-- --/--
The ratings on Aviva Insurance (Europe) SE (Aviva IE) reflect the company's strategic importance to the Aviva group (Aviva; core subsidiaries are rated AA-/Negative/--), as well as its good competitive position. However, negative rating factors include Aviva IE's capitalization, which has weakened to adequate from good over the past three years, and its exposure to the current adverse economic conditions, which affect the whole industry.
Standard & Poor's Ratings Services currently consider Aviva IE to be a strategically important entity within the Aviva group and our rating therefore factors in one notch of support. Under our criteria, the ratings could benefit from up to three notches of support, but are capped at one notch below the ratings on the core operating subsidiaries of the Aviva group or, in Aviva IE's case, at the level of the sovereign (Republic of Ireland; BBB+/Negative/A-2). Aviva IE's stand-alone credit profile (SACP) is 'bbb'.
Aviva IE is a leading non-life insurer in Ireland, based on 2011 market data, and contributed 4.4% of the Aviva group's total non-life net premium written in 2011 (2010: 5.1%) and 3.5% (2010: 3.8%) to non-life insurance operating profit.
The company enjoys a good competitive position, although its market share notably reduced to 16.1% in 2009 from 20.7% in 2006 (source: The Irish Insurance Federation's non-life members' gross premium written for 2006-2010, published in Irish Insurance Factfiles). This weakened its leadership position in the market and reduced its lead over its nearest competitor. The Irish market remains concentrated--the leading seven companies control about 80% of total non-life premiums.
Aviva IE's capitalization is at an adequate level, although it remains a relative weakness in the rating profile. The capital adequacy ratio, as measured by Standard & Poor's risk-based capital model, has been significantly weakened since 2007, primarily by sizable dividend payouts to the parent, a high exposure to nondomestic eurozone government bonds, and actuarial losses on defined benefit pension plans (prior to 2009).
Aviva IE operates in a difficult environment for its industry, which is weakening its underwriting and overall operating performance, as well as its competitive position. The company reported net combined ratios of 106.5% in 2010, 105.9% in 2009, 103.3% in 2008, marginally higher than its peers, particularly given that its market share fell over the period. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) The ratio was smoothed by reserve releases from prior years. Aviva IE also missed its own forecasts for two years in a row and Aviva Group's publicly reported combined operating ratio target of 97%. Aviva IE reported a EUR25 million pretax loss in 2010 for the first time in five years--it reported pretax profits of EUR314 million in 2006, at the peak of its performance. For 2011, we expect Aviva IE to report a net combined ratio below 105%.
The negative outlook reflects that on the Republic of Ireland (BBB+/Negative/A-2). Any positive or negative rating action on the sovereign will trigger a rating action on Aviva IE. Negative rating action may also follow if Aviva IE's strategic importance lessens due to a persistent weakening of capitalization and operating performance, for example, if combined ratios exceed 105% in the medium term.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Interactive Ratings Methodology, April 22, 2009
-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004