-- Following further discussions with financial services restructuring
company Resolution Ltd. and the management team at Friends Life Group, we have
reviewed our assessment of the likelihood of the different exit options from
Resolution's U.K. life insurance project, which created Friends Life Group PLC.
-- Our base-case assumption remains that the Friends Life Group will
continue to focus on both new and in-force insurance activities over the
rating horizon due to our assessment of the financial and commercial
advantages from this combination.
-- We are therefore affirming our ratings on Friends Life Group PLC and
its rated operating subsidiaries, which we continue to consider core to the
Friends Life Group. At the same time, we are removing the ratings from
-- The negative outlook predominantly reflects the downside risks to the
credit profile of the group from the potential exit options under
consideration by Resolution Ltd., its ultimate parent.
On June 29, 2012, Standard & Poor's Ratings Services affirmed its 'BBB'
long-term counterparty credit rating on Friends Life Group PLC. At the same
time, we affirmed our 'A-' long-term counterparty credit and insurer financial
strength ratings on its rated operating subsidiaries, Friends Life Ltd. (FLL;
formerly Friends Provident Life and Pensions Ltd.) and Friends Life Company
Ltd. (FLC; formerly Axa Sun Life PLC).
In addition, all ratings were removed from CreditWatch, where they were placed
with negative implications on April 2, 2012. The outlooks on all entities are
The rating actions reflect the continuation of our base-case assumption that
the Friends Life Group will focus on both new and in-force insurance
activities over the rating horizon. Resolution Ltd. announced in March 2012
that the most likely route for exiting its U.K. life insurance project,
assuming no third party is involved, would be to create and separately list
two legal entities: a closed fund consolidator (HeritageCo), and an insurer
that would seek new business (OpenCo). We have had further discussions with
Resolution regarding the strategic rationale and timescales for its six exit
options: a cash sale, together or in parts, direct listing as a stand-alone
entity, merger with another life company together or in parts, or separate
listings of HeritageCo and OpenCo.
Of these, three involve some degree of separation. Nevertheless, in our view,
there are disadvantages in separating its existing and new business
activities. We also anticipate that the synergies created by combining these
operations will grow over time as the profitability of writing new business
improves. While we recognize that shareholders gain options through the
creation of HeritageCo and OpenCo, we think that the degree of linkage between
these entities could make a separation less attractive. We also consider that
a formal separation depends in part on external factors such as the regulatory
and financial market environment that may make such a separation less likely.
Our base-case assumption, therefore, is that it is more likely that the
group's current identity will remain intact.
The rating actions also reflect our view that FLL and FLC will remain "core"
to the overall Friends Life Group according to our group methodology.
Currently, there are clear and integral linkages between these rated entities
and the wider group. In particular, FLL is the main operating entity in the
group structure and guarantees the debt issued by Friends Life Group PLC. We
understand that the existing business within FLL and FLC will ultimately form
part of HeritageCo.
While we recognize that realigning the legal entities offers some benefits
from an operational, accountability, and transparency perspective, we consider
that it also heightens the potential downside risks associated with some of
the exit options available to Resolution Ltd.
Exit options that involve the separation of new and existing insurance
activities will be easier to execute following the split of business into
HeritageCo and OpenCo. Downside risk to the ratings stems from the potential
loss or relative reduction in the levels of expected synergies between
existing and new business on the credit profile of the group. This risk has
become more of a rating consideration because Resolution seeks an exit within
our outlook horizon of two years. It will crystallize should Resolution choose
any exit option that separates HeritageCo and OpenCo such that they do not
form part of the same group. It would also arise if an internal review of
future new business viability is triggered by the group's failure to deliver
on its new business profitability targets. We consider this less likely to
occur now, because the group has made progress on its targets in the year to
Finally, downside risk would also crystallize if the profile of the group
changed significantly, making it more of a closed fund consolidator. Thiswould
reduce the effect of synergies between HeritageCo and OpenCo. In
addition, we view the business risk profile of a closed fund consolidator as
being higher risk because of the volatile and uncertain nature of the
transactions needed to sustain future cash flows. This would impair our
assessment of Friends Life Group's business risk profile.
The ratings on U.K.-based FLL and operating subsidiary FLC reflect our view of
the group's strong capitalization and strong investment profile. These
positive factors are offset by the group's operating performance. Although it
is improving, operating performance remains a relative rating weakness.
The negative outlook primarily reflects the downside risks to the credit
profile of the group from the potential exit options Resolution is
considering. While we continue to assume that it is more likely that the
group's current identity will remain intact, the negative outlook captures the
downside risks of exit options that involve separation of existing and new
We may lower the ratings if it becomes evident that:
-- The combination of new and existing insurance activities within the
Friends Life Group is less likely than we currently assume;
-- Improvements in new business profitability from the U.K. business will
not reach the target levels (in particular, GBP110 million value of new business
per year) and improvements in overall operating performance are not continuing
(see "Friends Provident Life and Pensions Ltd.," Oct. 28, 2011);
-- The profile of the group is becoming more heavily weighted toward that
of a closed life fund consolidator, causing the scale of value of new business
(SVNB; defined as value of new business divided by value-in-force) to fall; or
-- Capitalization is declining from its current strong levels.
We may revise the outlook to stable if:
-- The risk that new and existing insurance activities will be separated
becomes more remote in our view; and
-- The group continues to make progress on delivery of initiatives to
improve new business profitability, in line with our expectations and the
externally communicated targets set by Resolution.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Holding Company Analysis, June 11, 2009
-- Group Methodology, April 22, 2009
-- Interactive Ratings Methodology, April 22, 2009
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004
Ratings Affirmed; CreditWatch/Outlook Action
Friends Life Group PLC
Counterparty Credit Rating BBB/Negative/-- BBB/Watch Neg/--
Subordinated* BBB+ BBB+/Watch Neg
Junior Subordinated* BBB BBB/Watch Neg
Friends Life Company Ltd.
Friends Life Ltd.
Counterparty Credit Rating A-/Negative/-- A-/Watch Neg/--
Financial Strength Rating A-/Negative/-- A-/Watch Neg/--
*Guaranteed by Friends Life Ltd.