Fitch Ratings has affirmed Scottish Widows (SW) Insurer Financial Strength (IFS) rating at ‘A’ and Long-term Issuer Default Rating (IDR) at ‘A’, both with Stable Outlooks. Fitch has also affirmed Clerical Medical Investment Group Ltd’s (CMIG) IFS rating at ‘A’ and upgraded its Long-term IDR to ‘A’ from ‘A-‘, both with Stable Outlooks. The agency has also affirmed SW’s subordinated debt rating at ‘BBB+’ and upgraded the ratings of Clerical Medical Finance plc’s subordinated debt, which is guaranteed by CMIG, to ‘BBB+’ from ‘BBB’.
The ratings of SW and CMIG are constrained by the Long-term IDR of their ultimate parent, Lloyds Banking Group (LBG; ‘A’/Stable). The upgrade of CMIG’s Long-term IDR and Clerical Medical Finance plc’s subordinated debt reflects Fitch’s decision to align the ratings of CMIG with those of SW, driven by the full integration of the management and operations of CMIG with that of SW. This follows a decision by LBG to manage all of its insurance operations as a single group from 2011. The ratings also take into account that CMIG does not benefit from any form of explicit capital support from SW or LBG.
The affirmation of SW’s ratings reflects the strength of its franchise and the strong capital position of LBG’s insurance operations (the regulatory solvency ratio was 190% at end-2011).
The rating action is also based on the insurance operations’ relatively strong and improving new business profitability, driven by a shift towards higher-margin protection business and the closure of some low-margin product lines.
Fitch considers the fixed-charge coverage ratio for SW and CMIG, which declined to 3.9x in 2011 (2010: 6.1x), to be low for their rating level. However, the decline was partly due to the impact of one-off restructuring costs, and the agency expects the ratio to improve for 2012 and 2013.
Fitch views the impact of Basel III on bank-owned insurance entities cautiously, with the tougher capital requirements for banks that own insurance operations likely to weigh on groups’ allocation of capital and potentially decreasing the attractiveness of owning insurance subsidiaries. However, LBG continues to consider its insurance operations as an important part of its business and the group benefits from the successful bank distribution of SW products, with a large proportion of SW’s business being sold through LBG’s bank branches. Fitch does not expect LBG to divest its insurance operations in the near term.
An upgrade of SW or CMIG is unlikely, given that the ratings are constrained by LBG’s Long-term IDR, which is at its Support Rating Floor and unlikely to be upgraded in the near term.
SW and CMIG could be downgraded if LBG was downgraded, or if Fitch considered that their combined credit profile had worsened as indicated by a sustained decrease in regulatory solvency to below 1.4x, a fall in fixed-charge coverage to below 3x or a significant deterioration of market position indicated by a material decline in the value of new business.
