Fitch Ratings has affirmed Legal & General Assurance Society Ltd’s Insurer Financial Strength (IFS) rating at ‘AA-‘. Fitch 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 rating at ‘BBB’. The Outlooks on the Long-term IDRs and IFS rating are Stable. A full list of ratings actions is at the end of this release.
The affirmations and Stable Outlook reflect L&G’s robust capital position, strong brand and franchise in the UK, its liquidity and operating cash generation. Capital adequacy on a Fitch basis is strong relative to its peers. Liquidity at the holding company level is good with short-term liquidity arrangements in place and a resilient dividend stream from the operating companies.
L&G’s operating performance has been strong over the past two years. In 2010, the group reported IFRS net profit of GBP820m (GBP844m 2009). Leverage is high for the rating level on a Fitch basis at 35% and high relative compared to peers, although coverage in 2010 was strong at 12x (11x 2009).
L&G is one of the top five largest providers of retail and institutional funds by funds under management (FUM) and is the second-largest UK life and pensions provider by net premium. The company has a widely diversified product range in its main market, the UK, including protection, savings and an asset management business with over GBP350bn assets under management.
About a quarter of Legal & General’s cash generation comes from its annuity business with assets of GBP25bn. “With its leading position in annuities, L&G is well positioned to benefit from expansion in this market,” says Clara Hughes, Director in Fitch’s Insurance team. “Demand for annuities will increase, driven by employers looking to offload their defined benefit pension commitments and by the maturing of defined contribution pension savings, much of which must be annuitised. However, to write profitable business L&G will have to maintain its pricing discipline, possibly in the face of stiff competition.”
There are a number of key risks to L&G’s rating offsetting the positive factors noted above. The group has high exposure to the credit markets through its large non-linked non-profit investment portfolio and shareholder funds. As at 31 December 2010, invested assets net of derivative liabilities were GBP33bn, including approximately GBP29bn invested in corporate bonds. A default reserve of GBP1.5bn has been set up against this portfolio. Net default experience was GBP1m in 2009 and 2010 combined, which is significantly below the reserving assumptions. The annuity book, which has liabilities of over GBP23bn, also carries risks of improvements in longevity expectations. Any significant deterioration in default experience, credit migration or improvements in longevity expectations could lead to a downgrade.
In addition, damage to the group’s franchise, falling sales or margins, or a structural increase in leverage from the current level could also lead to a downgrade. An upgrade is unlikely in the near term, given the group’s concentration in the UK market and relatively high leverage.
Source : Fitch Ratings
