Feb 19 - LONDON - 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.
KEY RATING DRIVERS
The affirmations reflect L&G's strong positioning and franchise in the UK, its
robust capital position and its strong operating cash generation. Liquidity at
the holding company level is solid with short-term liquidity arrangements in
place and a resilient dividend stream from the operating companies. Fitch also
considers capital to be strong on a risk-adjusted basis and relative to peers.
L&G is one of the UK's largest life insurance groups, with a widely diversified
product range including savings, protection and annuities, and an asset
management business with GBP391bn of assets under management at end-Q312. L&G's
sales have remained strong throughout the past three years, and increased by 6%
(on an annual premium equivalent basis) in 9M12 relative to 9M11, despite
adverse economic 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, at H112 the company credit default reserve was at
GBP1.6bn against the assets backing its main UK annuity business (GBP31bn at
end-2011), equivalent to 60bps of defaults over the life of the portfolio, even
though net default experience remains negligible with no defaults in the past
two years. The annuity business also carries risks of higher-then-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 financial leverage of 27%, which is high for L&G's rating level.
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