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Fitch Affirms Legal & General's IFS at 'AA-'; Outlook Stable
June 20, 2017 / 12:45 PM / 3 months ago

Fitch Affirms Legal & General's IFS at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 20 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Legal & General Group Plc's (L&G) core rated operating entities, Legal & General Assurance Society Ltd, Banner Life Insurance Company and William Penn Life Insurance Company of New York, at 'AA-'. Fitch has also affirmed Legal & General Reinsurance Company Limited's (L&G Re) IFS rating at 'A+.' Fitch has simultaneously affirmed L&G's 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 IDR and IFS Ratings are Stable. KEY RATING DRIVERS The ratings reflect L&G's strong capitalisation, operational scale and market position as one of the leading UK life insurers. However, its concentration in the UK market is an offsetting factor, as is its high financial leverage. The company's diversification benefit from other markets is limited relative to peers in the 'AA' category. L&G's high capital buffer is a major positive rating factor, allowing the group to withstand volatile investment markets. The group's score on Fitch's Prism factor-based capital model (Prism FBM) is 'extremely strong' on end-2016 results and IFRS with-profits surplus of GBP0.7 billion (2015: GBP0.9 billion). We believe L&G will be resilient to the negative effects of recent pension reforms on the UK annuity market, as it is a large group with a diverse product range. In particular, it has a market-leading bulk-purchase annuity business and the capability to take on more bulk annuities to fill the gap from reduced individual annuity sales. L&G's bulk annuity business is already larger than the group's individual annuity business and the company entered into a number of significant bulk deals during 2016, taking on business from Aegon and the Vickers Group pension scheme. Bulk annuities accounted for GBP6.6 billion of the GBP8.5 billion annuity premiums written by the group in 2016. L&G's earnings are well diversified by product type in the group's main market. In addition, L&G owns one of the UK's leading asset managers, Legal & General Investment Management (LGIM), which adds to the group's earnings diversification and cash generation. In 2016, 19% of L&G's operating profit came from LGIM. L&G generates around 11% of its profit internationally, predominantly in the US. L&G's net profitability grew steadily during 2011-2016, increasing to GBP1.3 billion from GBP0.7 billion. Fitch expects L&G to maintain profitability around the current level, which supports the ratings. L&G's financial leverage was 30% at end-2016 and end-2015. This is high for the ratings and a negative rating driver. The group issued USD850 million and USD500 million of new debt in March and April 2017, and called GBP600 million of debt in May 2017. Fitch estimates that this will have increased L&G's financial leverage to around 33% on a pro-forma basis, but that leverage remains within our rating trigger and will decrease over time as the company grows. The group's fixed-charge coverage of 10x at end-2016 is in line with the ratings, and Fitch views the group's financial flexibility and liquidity as strong. Under our insurance rating methodology, we consider Banner Life and William Penn (together, Legal & General America (LGA)) as core to L&G and therefore align their IFS ratings with that of Legal & General Assurance Society Ltd, the other core rated operating entity in the group. Their core status reflects their long ownership by L&G; their importance to L&G's growth strategy; and the diversification benefit for L&G between mortality risk in LGA and the longevity risk in the UK business. It also factors in L&G's long history of direct capital funding to support LGA's growth; the material share of LGA in L&G's business; shared management between LGA and L&G; and consistency of branding. We consider L&G Re, the group's Bermuda-based longevity reinsurance arm, as 'very important' to the group based on its alignment with the group's pensions de-risking strategy; shared management; and consistency of branding. We therefore set L&G Re's IFS rating one notch lower than the core entities, at 'A+'. RATING SENSITIVITIES The ratings could be downgraded in the event of the group's Prism FBM score falling to low in the 'very strong' range, financial leverage increasing to 35% or interest cover decreasing to below 5x for a sustained period. Banner Life, William Penn and L&G Re's ratings could also be downgraded if their profitability or market position deteriorates to such an extent that we view them as less important to L&G. An upgrade is unlikely in the medium term, given the group's concentration in the UK market and high financial leverage for the ratings. However, over the long term, an increase in international diversification could lead to an upgrade. Contacts: Primary Analyst Sam Mageed Director +44 20 3530 1704 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Willem Loots, Senior Director +44 20 3530 1808 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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