TEXT-Fitch affirms Legal & General's IFS at 'AA-'
Aug 8 - Fitch Ratings has affirmed Legal & General Assurance Society Ltd's Insurer Financial Strength (IFS) rating at 'AA-'. Fitch has simultaneously affirmed Legal & General Group Plc's (L&G) Long-term Issuer Default Rating (IDR) at 'A'. The agency has also affirmed the senior unsecured debt issued by Legal & General Finance PLC and guaranteed by L&G at 'A-' and L&G's subordinated debt ratings at 'BBB'. The Outlooks on the Long-term IDRs and IFS rating are Stable. The affirmations reflect L&G's strong franchise in the UK, robust capital position and strong operating cash generation. L&G's regulatory capital position is strong with an insurance groups directive surplus of GBP3.8bn and surplus in the with-profits fund of GBP1.0bn at end-H112. Fitch also considers capital to be strong on a risk-adjusted basis and relative to peers. Liquidity at the holding company level is solid with short-term liquidity arrangements in place and a resilient dividend stream from the operating companies. L&G is one of the UK's leading life insurance groups, with a widely diversified product range including savings, protection and annuities, and an asset management business with more than GBP370bn of assets under management. L&G's sales have remained strong throughout the past three years, despite adverse market conditions. Two key risks to L&G are credit risk and longevity risk. L&G has high exposure to the credit markets through the large portfolio of corporate bonds that backs its annuity business. However, the company maintains a credit default reserve of GBP1.6bn against the assets backing its main GBP30bn UK annuity business, equivalent to 60bps of defaults over the life of the portfolio, even though net default experience remains negligible (only GBP1m since end-2008). The annuity business also carries risks of higher-than-expected increases in longevity. The ratings could be downgraded in the event of significant deterioration in credit default experience, worsening credit quality in L&G's bond portfolio, a significant increase in expected longevity for annuity policyholders, an increase in financial leverage to more than 35% or a sustained fall in interest cover to below 5x. An upgrade is unlikely in the near term, given the group's concentration in the UK market and relatively high financial leverage of 31%.
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