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.