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Global Credit Research - 24 May 2010
Outlook remains stable.
London, 24 May 2010 -- Moody's Investors Service today affirmed the insurance financial strength
rating (IFSR) of Standard Life Assurance Limited. (SLAL) at A1
with a stable outlook. At the same time, Moody's also
affirmed the A3 guaranteed subordinated debt issued by Standard Life Plc
(SL) and the Baa1 guaranteed junior subordinated debt.
Moody's affirmation reflects a combination of SL's robust
financial performance over recent years, notwithstanding the challenging
operating environment. "In comparison to a number of other
UK and Continental life insurers, SL's regulatory capital
position has remained broadly stable over the crisis reflecting,
in our view, the Group's attitude to risk management and the
extensive de-risking exercises undertaken both as part of the IPO-process
and subsequently" said David Masters, Moody's analyst
and lead analyst for Standard Life.
Conversely, Mr. Masters noted that SL remains heavily exposed
to the UK operating environment (UK life & pensions sales accounted
for approximately three-quarters of SL's new business premiums
in 2009, on an annual premiums equivalent basis) and that SL's
particular product strengths (group and individual pensions business)
remain lower margin than certain lines of business (e.g.
As reflected in our negative industry outlook, Moody's views the
UK life market as one of the most competitive in Europe, as well
as being one of the insurance markets most affected by a relatively prolonged
period of weak economic growth. We expect that likely sluggish
UK economic growth and high levels of household indebtedness will weigh
on consumption and limit life insurance market growth opportunities in
the near term, negatively impacting UK life insurers' business and
SL has maintained its market leading position within the UK life insurance
market, at around 11.6% market share for 2009.
Standard Life has, in recent months, announced the sale of
two of its non-core business divisions, namely the sale of
Standard Life Bank to Barclays, completed for an expected total
consideration of GBP 245m and the announcement two weeks ago that SL was
to sell its UK healthcare business to Discovery for GBP 138m, somewhat
reducing its diversification within the UK. Moody's understands
that the Group intends to retain the proceeds for corporate purposes (i.e.
to invest in its existing infrastructure).
As mentioned, SL's regulatory capital position has remained
broadly stable over the crisis and remains comfortable for the current
rating level. SL's FGD (Financial Groups Directive) surplus
of GBP 3.6bn equates to an FGD coverage of 230% (2008:
GBP 3.5bn/219%). Having sold SL Bank, Moody's
anticipates that SL will calculate IGD (Insurance Groups Directive) ratios
in subsequent years, which we do not expect to differ materially
in outcome following the sale of the Bank. Moody's MASC (Moody's
Adjusted Solvency Capital) Ratio has steadily improved since 2006 (2.06x)
to 2.63x at year-end 2009 (2008: 2.42x).
We also note there are default reserves which exist to support shareholder
exposure to debt securities backing annuity liabilities in the UK and
Europe and the liability in respect of longevity risk reinsured from SLAL's
Heritage With Profits Fund (HWPF) exist. However, there were
no corporate bond defaults in 2009 in respect of assets backing UK and
In addition the Retail Distribution Review (RDR) -- which
is set for implementation in 2012 -- despite its long-term
industry benefits, is expected to bring some disruption in the short-to-medium
term to distribution structure in the UK market overall. We expect
the effect for Standard Life to be partially mitigated by its leading
market position and strong brand reputation and the diversification of
its distributions channels such that IFA's now account for only
approximately half of SL's distribution network (2005: 79%).
Whilst positive under IFRS reporting, the Group's profitability
has been, and is likely to remain, under pressure as a result
of weak global and UK economic conditions, SL's focus on lower-margin
pension business and currently low government interest rates. SL
reported an IFRS post tax profit of GBP 180 million in 2009, compared
to GBP 17m in 2008. This improvement was helped by the rebound
of capital markets but also by management's focus on writing capital
efficient new business, albeit in the less profitable pensions line.
However, new business margins, declined to 1.5%
in 2009 from 1.7% in 2008, mirroring similar declines
in payback periods and internal rates of return during 2009.
Moody's continues to consider SL's financial flexibility as consistent
with its current A-rating. Financial leverage remains at
around 30%, although earnings coverage remains a credit challenge,
with the five year average of 2.6x as at year-end 2009,
driven primarily by the relatively low levels of profitability.
Moody's noted that positive rating pressures could arise if SL were
to deliver post-tax new business margins in excess of 2%,
sustained returns on capital above 8%, if leverage remains
below 30% and earnings coverage exceeded 8x or if the MASC ratio
was consistently above 2.5x. Conversely, negative
rating pressure could arise if post tax margins and return on capital
fell below 1% and 4% respectively, if the MASC ratio
fell below 2x or if leverage exceeded 40% with sustained earnings
coverage below 4x in the medium term.
The following ratings were affirmed with a stable outlook:
Standard Life Assurance Limited: A1 Insurance Financial Strength
Standard Life Plc: A3 GBP 500m guaranteed subordinated debt
Standard Life Plc: A3 EUR 750m guaranteed subordinated debt
Standard Life Plc: Baa1 GBP 300m guaranteed junior subordinated
Standard Life Plc: Baa1 EUR GBP 360m guaranteed junior subordinated
Standard Life is a UK based life assurance group which predominantly writes
group and individual pensions products. The company is headquartered
in Edinburgh and had total assets of GBP 146.6 billion as at year-end
Moody's most recent rating action on this issuer was on November 19,
2007, when the ratings of this issuer were affirmed and the outlook
revised to stable. The principal methodology used in rating SLAL
was "Moody's Global Rating Methodology for Life Insurers", published
in May 2010, which can be found on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating these issuers can also be found in
the Rating Methodologies sub-directory on Moody's website.
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Standard Life's ratings (A1 IFSR).
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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