Fitch Ratings has affirmed Aviva plc's (Aviva) core insurance subsidiaries' Insurer Financial Strength (IFS) Ratings at 'AA-' (Very Strong) and Aviva's Long-Term Issuer Default Rating (IDR) at 'A+'.

The Outlooks are Stable.

The affirmation reflects Aviva's 'Very Strong' company profile, and capitalisation and leverage, as well as 'Strong' financial performance, and investment and asset risk.

Key Rating Drivers

Very Strong Business Profile: Our assessment of Aviva's company profile is driven by its position as one of the largest insurance groups in the UK with a strong franchise and diversification across the life and non-life segments.

Fitch assesses Aviva's business profile as very strong, and ranks it as 'Favourable' compared with all other UK and European life insurance companies' (as defined by Fitch's criteria). This reflects Aviva's most favourable competitive positioning, scale and diversification, and favourable business risk profile. Given this ranking, Fitch scores Aviva's business profile at 'aa' under its credit factor scoring guidelines.

Very Strong Capitalisation: Fitch assessment of Aviva's capital strength is driven by a Prism Factor-Based Capital Model (Prism FBM) score of 'Extremely Strong' at end-2022, unchanged from 2021's. It also considers Fitch-calculated Solvency II (S2) solvency capital requirement (SCR) ratio of 214% at end-2022, unchanged from end-2021's, which includes full credit for the surplus in its with-profits fund. Fitch continues to view the S2 level as supportive of the rating. Aviva's S2 ratio on a shareholder basis, which fully excludes with-profits funds, remained very strong at 200% at end-September 2023.

Strong Financial Leverage: Aviva's Fitch-calculated financial leverage ratio (FLR) increased to 28% at end-2022 (end-2021: 22%). This largely reflects a reduction in shareholder equity following a capital return and dividend payments in 2022, which were partially offset by a subordinated debt redemption and issue of GBP500 million restricted tier 1 (RT1) notes, which we treat as 100% equity in the FLR calculation.

The issuance of GBP500 million of subordinated Tier 2 notes in November was largely FLR-neutral as Aviva redeemed the outstanding amounts of its 0.625% EUR500 million senior notes in October 2023 and its EUR650 million 6.125% Tier 2 notes in July. The redeemed amounts marginally exceeded the new Tier 2 notes issuance.

Strong Operating Performance: Aviva's financial performance is strong, in Fitch's view. Operating profit strengthened 8% yoy to GBP715 million in 1H23. The improvement was driven by strong performance in UK & Ireland General Insurance and Canada General Insurance.

Aviva's Fitch-calculated net income return on equity (ROE), excluding minority interests, was a negative 7% in 2022 (2021: 10%). This reflects an IFRS loss for the period of GBP1.1 billion (2021: GBP2.0 billion profit), as higher operating profit was more than offset by the loss driven by the significant increase in UK interest rates, which resulted in a reduction in the value of fixed-income securities that was not fully offset by a reduction in the valuation of long-term insurance liabilities from the increase in the valuation interest rate.

Strong Fixed-Charge Coverage: Aviva's fixed-charge coverage (FCC) based on reported operating profit improved to 7x in 2022 from 5x in 2021, largely benefitting from lower interest costs and higher earnings. We expect FCC to remain commensurate with the ratings.

Low Exposure to Risky Assets: Fitch assesses Aviva's investment and asset risk as strong. Investment risk arises mainly through its credit risk exposure via its sizable annuity portfolio and equity risk in its UK with-profit funds. Aviva's risky assets ratio increased at end-2022 to 54% (end-2021: 43%), largely reflecting the shareholder equity reduction. Fitch includes 25% of the UK with-profit fund's risky assets in its calculation of the risky assets ratio.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A significant decline in Aviva's operating performance for a sustained period

Weakening in capitalisation as measured by Fitch's Prism FBM score falling to the low end of the 'Very Strong' category

A significant increase in the FLR from current level on a sustained basis

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A sustained improvement in both the FLR and operating performance while maintaining 'Very Strong' capitalisation

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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