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The Actuary The magazine of the Institute & Faculty of Actuaries

Aviva comes to market

Aviva, the UK’s biggest insurer, is issuing subordinated debt worth £1.2bn to bolster its capital position. Analysts welcomed the announcement, which they said removed any lingering doubts that the group would make a rights issue, as Legal & General, its rival, did last autumn. Subordinated debt counts as capital for solvency purposes and is used to boost the capital position of banks and insurers to fund new business and future payments to customers. Aviva said it would use the capital to fund growth in the group’s life assurance business, and restructure some existing debt. Life assurers and other companies are raising money to take advantage of low interest rates and strong demand for corporate debt as investors bet on economic recovery but remain wary of stock markets. Prudential, another rival life office, raised $1bn ( £658m) from Asian debt markets in June. Aviva has invested £1.6bn in European bancassurance deals since 2000, and its most recent results showed a 56 per cent growth in sales through that channel in the first half of the year.

Barrie Cornes, insurance analyst at Cheuvreux, said changes in the international and UK regulatory regimes concerning solvency meant capital was going to be a key differentiator between companies. ‘We anticipate only those insurers with significant capital strength will prosper under the new rules to be introduced’, he said. ‘We thus see Aviva’s move to lock in “cheap” capital from a position of strength as an excellent strategic move.’ Roman Cizdyn, insurance analyst at Commerzbank, said: ‘Capital is tight because they are growing and because of the various regulatory changes to do with solvency, and this deals with it.’ Aviva has mandated the investment banks Barclays Capital, Goldman Sachs, Lehman Brothers, and Société Genérale to act as joint bookrunners for the subordinated debt issue, which will be targeted at investors in the sterling and euro markets. Analysts said the move seemed well timed because the next move in UK interest rates is expected to be upward, and the spread is likely to be only 120 basis points above Libor, compared with up to 300bp that insurers were paying last year.