Fitch Ratings has affirmed Friends Provident Life and Pensions Ltd’s (FPLP), Friends Life Company Limited’s (FLC) and Friends Life Assurance Society Limited’s (FLAS) Insurer Financial Strength (IFS) ratings at ‘A+’. Fitch has also assigned a Long-term IDR of A- to Friends Life Group plc (FLG). The Outlooks are Stable. A full list of rating actions is at the end of this release.
The affirmation is driven by Fitch’s expectation that the group will achieve substantial efficiencies from the synergies between the FPLP business and the acquired AXA UK Life businesses, FLC and FLAS. Fitch recognises the risks inherent in any integration process but notes management’s previous success in integrating life funds. Fitch expects the company to achieve its planned cost savings of GBP112m a year by 2013 and to improve its new business profitability.
Fitch believes the group’s cash generation will be enhanced by the acquisition of the AXA UK Life businesses. The group’s increased operating scale is a positive rating factor. Regulatory capital surplus increased to GBP2.3bn at end-2010 from GBP1bn at end-2009, driven by the acquisition.
The low profitability of much of the business that Friends Life is writing in its core UK market remains a concern. The company is seeking to improve its profitability by reducing its costs and by developing its annuity capabilities with the aim of increasing its retention of pension savings policyholders at retirement to 50%.
An upgrade is unlikely in the near term, given the company’s current credit profile relative to peers, which Fitch considers unlikely to change rapidly. The ratings may be downgraded if Friends Life is unable to improve its profitability, achieving an annual operating return on assets in excess of 0.40% as calculated by Fitch, and a material reduction in the overall payback period for new business.
Any significant new developments in Resolution’s strategy on the ownership or structure of Friends Life would trigger a review of the ratings. In the meantime, Fitch notes that the existing capital strength of Friends Life is largely safeguarded by the group’s published capital targets, which have been agreed with the FSA, and the recently announced GBP250m share buyback is not expected to deplete capital to a level below that commensurate with the ratings.
Source : Fitch Ratings
