TEXT-Fitch affirms Legal & General's IFS at 'AA-'

Wed Aug 8, 2012 10:50am EDT

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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