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Rating Action:

Moody's affirms Legal & General's ratings (A3 senior unsecured) and changes outlook to stable from negative

30 Sep 2015

London, 30 September 2015 -- Moody's Investors Service has today affirmed the debt ratings of Legal & General Group Plc (L&G or Group; senior unsecured at A3). Moody's also affirmed the Aa3 Insurance Financial Strength Rating (IFSR) of Legal & General Assurance Society Ltd. (LGAS). The short term rating for guaranteed commercial paper of Legal & General Finance PLC was also affirmed at Prime-2. The outlook on all long-term ratings has been revised to stable from negative.

The previous negative outlook was assigned on 1 April 2014, following the pension changes set out in the March 2014 UK budget and reflected the Group's exposure to the changes in the UK annuity and life insurance markets more broadly.

A list of all affected ratings is available at the end of this press release.

RATINGS RATIONALE

Moody's affirmation of L&G's ratings reflects the Group's strong competitive position and excellent brand in the UK life and savings market, its excellent product diversification, and strong profitability.

The change in outlook to stable from negative reflects Moody's view that L&G is well-positioned to combat the prevailing headwinds within the UK life industry. L&G benefits from its significant presence in a number of growing product lines including bulk annuities and corporate pensions, as well as significant capabilities in a broad range of established protection and savings products. The Group also benefits from owning a sizeable asset-manager, Legal & General Investment Management Limited (LGIM). Although L&G, like its peers, has seen a significant decline in its individual annuity sales, it was less exposed to this market than some of its peers. Furthermore, the Group's competitive advantages in several product lines should enable it to more than off-set the lost contribution from individual annuities and to maintain strong earnings and cash generation. This is notwithstanding the profitability headwinds and increasing competition which currently face the UK life sector.

L&G has consistently grown its market share in the UK life sector and notwithstanding a 54% decline in individual annuities in 2014, its overall new business sales on an APE basis grew by 16%, driven by strong growth in bulk annuities. Furthermore, its contribution from new business increased by 31% to GBP850 million in 2014 (YE13: GBP651 million), although 2014 was an exceptional year in terms of bulk annuity sales. In the bulk annuity market, the Group has built high entry barriers thanks to its experience in underwriting, ability to process significant corporate premiums and very strong relationship with its reinsurers. As an established leader, L&G is therefore very well-positioned to take advantage of the significant demand for pension scheme de-risking.

As well as having a strong market position in UK protection business, the Group is also enhancing its scale to take advantage of the growing, but low margin defined contribution pension market. L&G charges 0.5% which is already below the pension charge cap of 0.75% which positions the Group relatively strongly to absorb any future pricing pressures. As an alternative product to individual annuities, L&G has also established a foothold in the growing lifetime mortgage market where it expects to write around GBP200 million of new business during 2015.

L&G also benefits from the diversification in asset management via LGIM which had assets under management of GBP499 billion at YE14. As a result, the Group is well-positioned to benefit from the increasing shift towards asset management products, mitigating somewhat the pressures on its traditional business, notwithstanding the fierce competition within the asset management industry. In addition to its cash generative nature, LGIM provides advantages to L&G in (i) competing for bulk annuity business given its expertise in liability driven investment, (ii) growing its defined contribution business, and (iii) in assessing the quality of alternative assets such as infrastructure as L&G further seeks illiquidity premiums via its illiquid annuity liabilities.

In growing its lifetime mortgage business, which Moody's regards as having inherent mis-selling risk, and especially bulk annuities, L&G will increase its liability risk profile. Moody's views the Group's significant exposure to longevity risk as a credit challenge although L&G is currently ceding much of this risk on new bulk deals to reinsurers to help reduce its capital requirements especially under Solvency II. L&G expects the final outcome on Solvency II to result in a lower Group capital surplus and solvency ratio than its economic capital basis, although the Group's economic capital solvency at H1 15 remained strong at 220%.

Moody's also expects the Group's competitive advantages and diversified product mix discussed above to enable strong earnings and cash generation to be maintained notwithstanding the profitability headwinds, operational and reputational risks, and increasing competition faced by the UK life sector. Political and regulatory intervention has already had a profound impact on the industry recently and Moody's expects this to continue to some degree.

During 2014 and H1 15, L&G's net cash generation increased by 10% and 11% respectively, and IFRS operating profit increased by 10% and 18%. The Group's YE14 return on capital (Moody's definition) was high at around 10% and the 5-year average Sharpe Ratio, which measures return volatility, was a very strong 1,292%. On an embedded value ("EV") basis, new business margins were 5.8% in 2014 (5.1% in 2013) and remained one of the highest in the UK Life industry. Going forward, margins are likely to remain relatively high although constrained by the significant use of longevity reinsurance which reduced the margin at H1 15 to 3.9% (H1 14: 5.4%).

RATING DRIVERS

In terms of rating drivers going forward, Moody's said that positive rating pressure could arise from: 1) A substantial improvement in the geographic diversification of revenues and profit and/or 2) Adjusted financial leverage consistently below 25% and earnings coverage 10x and/or 3) sustained improvement in profitability with return on capital (Moody's definition) of at least 10%. Conversely, negative rating pressure could arise from: 1) Material deterioration in solvency and/or 2) adjusted financial leverage consistently above 30% and earnings coverage below 6x 3) a material deterioration of bottom line earnings and underlying profits.

The following ratings were affirmed with a stable outlook:

Legal & General Assurance Society Ltd.: Aa3 IFSR

Legal & General Group Plc: A3 issuer rating

Legal & General Group Plc: Baa1(hyb) subordinated debt

Legal & General Group Plc: Baa1(hyb) junior subordinated debt

Legal & General Group Plc: Baa2(hyb) perpetual preferred securities

Legal & General Group Plc: (P)A3 senior unsecured MTN

Legal & General Group Plc: (P)Baa1 subordinate MTN

Legal & General Group Plc: (P)Baa1 junior subordinate MTN

Legal & General Finance PLC: A3 issuer rating

Legal & General Finance PLC: A3 guaranteed senior unsecured debt

Legal & General Finance PLC: (P)A3 guaranteed senior unsecured MTN

The following rating was affirmed:

Legal & General Finance PLC: P-2 guaranteed commercial paper

Legal & General is a UK based life assurance group which writes a full range of life assurance products. The company is headquartered in London and had total assets of around GBP400 billion at year-end 2014.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Global Life Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Simon Harris
MD-Gbl Ins and Mgd Invests
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Legal & General's ratings (A3 senior unsecured) and changes outlook to stable from negative
No Related Data.
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