OREANDA-NEWS. December 15, 2015. Fitch Ratings has assigned Aviva Plc's (Aviva) core insurance subsidiaries Insurer Financial Strength (IFS) ratings of 'AA-'. The agency has also assigned Aviva a Long-term Issuer Default Rating (IDR) of 'A+'.

At the same time, Fitch has upgraded Friends Life Holdings' (Friends Life) core insurance subsidiary, Friends Life Limited, to an IFS rating of 'AA-' from 'A+'. This reflects Friends Life's status as a "Core" subsidiary of the Aviva group, following the completion of Aviva's acquisition of Friends Life earlier this year.

The Outlooks on the group's Long-term IDRs and IFS ratings are Stable. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS
The ratings reflect Aviva's strong position in the group's key markets, diversification by business line, robust capital position and operational scale. Aviva's ratings also benefit from the group's geographical diversification across the UK, Europe, Canada and Asia.

In the UK, Aviva is the largest non-life insurer and a leading life insurer. In France, it has a strong market position and is 10th in the market in both non-life and life. In Italy and Spain it is also among the top 10 largest life insurers. In Canada, Aviva is the second-largest non-life insurer and has been able to leverage against this position into a consistently low combined ratio. Asia, Turkey and Poland are seen by Aviva to be growth markets and in 1H15 contributed 12% of the group's operating profit.

Aviva's capitalisation, as measured by Fitch's Prism factor-based capital model, is 'extremely strong' based on end-2014 results. At end-1H15, the group's Insurance Groups Directive (IGD) regulatory solvency ratio was estimated at 210%. Aviva's financial leverage was 25% at end-1H15, in line only with the 'A' median, and is seen by Fitch as being high for the rating.

The acquisition of Friends Life in 2Q15 has improved the Aviva group's capitalisation and leverage and also, due to economies of scale, its cost base. At end-3Q15 GBP91m of run rate synergies had been achieved of a predicted GBP225m. Fitch expects total synergies resulting from the acquisition to exceed the original prediction.

Fitch takes a positive view of Aviva's improved earnings power and cash generation under the current CEO. Profitability has steadily been improving from a low in 2012: at end-2014 the Fitch-calculated return on equity (ROE) was 15.2% in line with the 'AA' median. Additionally Aviva is able to write non-life business to a consistently low combined ratio (1H15: 93%). While Fitch expects Aviva's short-term profitability to be pressured by integration costs associated with its acquisition of Friends Life, synergies resulting from the acquisition should provide long-term support to Aviva's already strong profitability.

In addition to Aviva's UK & Ireland businesses Fitch considers Aviva's Canadian and French subsidiaries as "Core" to the group under its insurance rating methodology, based on a history of supporting group objectives; centralised risk, capital and decision-making functions and the diversification benefit of exposure to different markets and product lines. All entities are material in size, with France representing 20% of the group's assets at end-1H15 and Canada representing 24% of group non-life net written premium.

RATING SENSITIVITIES
Key rating triggers that could result in a downgrade include: capitalisation, as measured by Fitch's Prism Factor Based Model, falling to a low level in the 'very strong' category, or financial leverage increasing above 30%.

Fitch views an upgrade as unlikely in the near term, but a sustained improvement of financial leverage to below 20% could result in an upgrade.

FULL LIST OF RATING ACTIONS

Aviva Assurances
--IFS rating assigned at 'AA-'; Outlook Stable

Aviva Insurance Company of Canada
--IFS rating assigned at 'AA-'; Outlook Stable

Aviva Insurance Ltd
--IFS rating assigned at 'AA-'; Outlook Stable;
--Long-term IDR assigned at 'A+'; Outlook Stable.

Aviva International Insurance Ltd
--IFS rating assigned at 'AA-'; Outlook Stable

Aviva Life & Pensions UK Limited
--IFS rating assigned at 'AA-'; Outlook Stable

Aviva Plc
--Long-term IDR assigned at 'A+'; Outlook Stable

Aviva Vie
--IFS rating assigned at 'AA-'; Outlook Stable

Friends Life Holdings plc
--Long-term IDR upgraded to 'A+' from 'A'; Outlook Stable

Friends Life Limited
--IFS rating upgraded to'AA-' from 'A+'; Outlook Stable

Subordinated debt of Aviva Plc, guaranteed by Friends Life Limited
--XS0181161380 upgraded to 'BBB+' from 'BBB'

Subordinated debt of Friends Life Holdings, guaranteed by Friends Life Limited
--XS0430178961 upgraded to 'A' from 'A-'
--XS0620022128 upgraded to 'A-' from 'BBB+'
--XS0851688860 upgraded to 'A-' from 'BBB+'