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Rating Action:

Moody's affirms the Baa2 (hyb) subordinated debt ratings of Scottish Widows and Clerical Medical following GBP1.6 billion dividend payment

24 Jun 2013

London, 24 June 2013 -- Moody's Investors Service has today affirmed the A2 insurance financial strength ratings (IFSRs) of Scottish Widows plc (Scottish Widows) and Clerical Medical Investment Group Limited (Clerical Medical) and the Baa2 (hyb) subordinated debt ratings of both insurers. The outlook on all these ratings remains stable.

RATINGS RATIONALE

The affirmation follows the recent announcement of a proposed dividend payment of GBP1.6 billion from Scottish Widows Group Ltd, the holding company of Scottish Widows, to its parent Lloyds TSB Bank plc (senior rating: A2 negative, BCA: baa2 stable) by the end of June 2013. This transaction, while weakening the capitalisation of the insurer, has no impact on the IFSRs of Scottish Widows and Clerical Medical as these ratings already reflected the possibility of capital repatriation to the banking parent, and are already constrained by the ownership by Lloyds TSB Bank plc.

As concerns the subordinated debt ratings of Scottish Widows and Clerical Medical, these ratings remain three notches below their respective IFSRs. The wider notching than the standard two notches from insurance financial strength rating reflects the fact that these ratings are partially constrained by the ratings on the subordinated debt of the banking companies within Lloyds Banking Group.

Following the transaction, Moody's views the insurance group capitalisation as good although weakened, with the IGD cover of Scottish Widows Group Ltd deteriorating to an estimated 1.5x post-transaction from 1.9x at year-end 2012. This transaction is the latest of a long series of capital repatriations started in 2005 which demonstrates the high level of centralization of capital within the banking group. This centralisation of capital, which has reduced the quantity and quality of the capital of the insurance operations over the last few years, is one of the reasons why the insurance ratings are constrained by those of the banking parent.

The A2 IFSRs of Scottish Widows and Clerical Medical benefit from the consolidated insurance group's (i) very strong brand name and market position in the UK life market -- with leadership presence in the pension and protection lines and (ii) strong and diversified distribution through both IFAs and Lloyds Banking Group's bank branches.

Financial flexibility remains good with an adjusted financial leverage of 20% at year-end 2012. However, when we include the GBP1.5 billion subordinated debt issued by Scottish Widows Group Limited to the banking parent in 2011, which is not consolidated in Scottish Widows plc, financial leverage increases to 29% at year-end 2012. The subsequent issuance of GBP1.5 billion subordinated debt in the 2Q2013 by Scottish Widows plc will only marginally impact this ratio as part of the proceeds were used to repay part of the existent GBP1.5 billion subordinated debt between the insurance and the banking operations.

Outlook

The outlook is stable and is aligned with the stable outlook of Lloyds TSB Bank's baa2 BCA. Commenting on what could lead to potential negative rating pressure in the future at Scottish Widows, Moody's noted these would include a downgrade of Lloyds TSB Bank's BCA, a material deterioration in the capitalisation and/or quality of the capital of the consolidated group with a MASC below 2.0 times (Moody's metric for UK life insurer solvency), earnings coverage consistently below 6 times, a return on capital consistently below 4.0% and a material reduction in market share in the UK Life & Pension market.

Conversely positive rating pressure could occur from an upgrade of Lloyds TSB Bank's BCA, a MASC ratio consistently above 3.5x with an excellent quality of capital and sustained interest coverage of over 8 times.

The principal methodology used in these ratings was Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The following ratings were affirmed with a stable outlook:

Scottish Widows plc -- Insurance Financial Strength Rating A2

Scottish Widows plc - Subordinated notes Baa2 (hyb)

Scottish Widows plc -- Junior Subordinated notes Baa2 (hyb)

Clerical Medical Investment Group Limited -- Insurance Financial Strength Rating A2

Clerical Medical Finance plc -- Backed Subordinated notes Baa2 (hyb)

Clerical Medical Finance plc -- Backed Junior Subordinated notes Baa2 (hyb)

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.

Antonello Aquino
Senior Vice President
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 - Financial Institutions
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 the Baa2 (hyb) subordinated debt ratings of Scottish Widows and Clerical Medical following GBP1.6 billion dividend payment
No Related Data.
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