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Rating Action:

Moody's changes outlook to negative for selected UK life insurers

01 Apr 2014

Negative outlook for Prudential UK, Legal & General and Aviva Life & Pensions UK. Stable outlook for Prudential Plc, Aviva Plc, Standard Life Plc, Scottish Widows Plc and Friends Life Ltd

London, 01 April 2014 -- Moody's Investors Service has today taken actions on six UK life insurance groups to reflect the rating agency's views on the implications of the announcements related to individual annuities in the March 2014 UK budget. Please refer to the end of this press release for a detailed list of the affected ratings.

At the same time, Moody's has revised its sector outlook for the UK life insurance industry to negative from stable. The negative outlook reflects Moody's view of the fundamental credit conditions that will affect UK life insurers and indicates that, on average, negative rating actions are more likely than positive ones over the next 12-18 months.

RATINGS RATIONALE

The change of outlooks to negative for some of the UK insurers follows the pension changes set out in the March 2014 budget, which, in Moody's view, could drive individual annuity new business sales down by between 50%-75% of their current level over the near-to-medium term. Moody's expects that life insurers will face considerable challenges in retaining maturing pension assets as explained in its report https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_166426 published on 24 March 2014.

Whilst the changes introduced in the budget may ultimately encourage future savings into pension products, the short-term impact will likely be a significant reduction in sales volumes and margins in the UK individual annuity market, a key driver of future profitability for many insurers.

For those insurers where Moody's has changed outlooks to negative, the rating agency recognises that in many cases, to replace the value of lost annuity business these companies have the ability to sell additional volumes of existing or new insurance or asset-management products (e.g. bulk annuities, income drawdown products) over time.

In addition, Moody's expects the impact of lost annuity sales on IFRS profits to be small for the next few years, as profits from the in-force book of annuities are not impacted. Nonetheless, there remains considerable uncertainty with respect to both the volumes and margins on replacement products, given:

(1) the already high and, after the budget changes, increasing level of competition within the insurance industry in many of these product lines

(2) the usually lower margins that such products have, relative to individual annuities; and

(3) the expected increase in competition for retirement products from asset managers and banks, and the possibility for consumers to increase consumption levels and divert pension funds away from retirement products.

We expect to revisit our negative outlooks within the next 12-18 months, focusing broadly on how consumers and firms have adapted to the new retirement product market. A stabilisation in outlooks could occur for those firms who (1) are able to show progress in successfully developing/selling products that are likely to replace the value lost from lower individual annuity sales and (2) maintain their credit strength notwithstanding the political and regulatory headwinds facing the industry.

--- STABLE OUTLOOKS

Maintaining the stable outlooks for the remaining UK players reflects Moody's expectation that the negative effects of the 2014 Budget are likely mitigated by these companies' product diversity and balance-sheet strength. Typically, these companies already show only a modest reliance on value creation from individual annuity products, and/or are already well established in providing alternative asset-management style solutions to pensioners, somewhat insulating these companies from the expected reduction in the individual annuity market.

--- ISSUER SPECIFIC ACTIONS

- Prudential Public Limited Company: PAC, PAL, PRIL and SAIF IFSR affirmed at Aa2, outlook changed to negative from stable. Prudential Plc senior debt affirmed at A2 with a stable outlook

The change of outlook to negative for Prudential Plc's UK operations reflects their significant exposure to the individual annuity market. Prudential in the UK is the second largest individual annuity writer with a new business market share of c.17% in 2012 and individual annuities represented almost 60% of 2012 UK Value of New Business (VNB) and around half of the UK IFRS operating profit in 2012, of which only a modest portion comes from new business. Moody's expects that Prudential UK will be able to diversify towards other product lines in the future, such as bulk annuity and corporate pensions, to partially offset the loss of contribution from individual annuities.

However, Moody's expects that the company's profitability will deteriorate over the medium term given (1) the contribution of individual annuities new business to the UK operating profit; (2) the often lower margins on replacement products; and (3) Moody's expectations of increasing competition in many of these replacement product lines.

The affirmation of Prudential Plc's ratings reflects that the group benefits from its significant diversification to the Asian and US markets, reducing the reliance on the UK life insurance market. The contribution of UK individual annuities is estimated to represent around 5% of the group's VNB and a smaller proportion of the group's total IFRS profits. A further mitigating factor at the group level includes the presence of a large asset management arm (M&G) in the UK, which Moody's expects will benefit from the 2014 budget.

- Legal & General Group Plc: Legal & General Assurance Society Limited (LGAS) IFSR affirmed at Aa3; Legal & General Group Plc (L&G) senior rating affirmed at A3; both outlooks changed to negative from stable

The outlook change to negative for LGAS and L&G's debt rating reflects Moody's view that L&G's concentration in the UK life and pensions market (over 80% of VNB in 2013) significantly exposes the group's main operating entity (LGAS) and holding company to the changes in the UK annuity and life insurance markets more broadly. Moody's estimates that individual annuities contributed around 17% of VNB to the Group in 2013, indicating the Group's important exposure to the UK individual annuity line of business.

Moody's expects that L&G will be able to partially mitigate the lost contribution from individual annuities by increasing its sales in bulk annuities, where the insurer is market leader, and in asset management (via Legal & General Investment Management Limited) and pension platforms (via Cofunds). Nonetheless, in Moody's view L&G faces challenges in ensuring that it successfully replaces the value it will lose from lower individual annuities sales given Moody's expectation of significant increases in competition and margin pressure in many of these replacement product lines. In addition, given the insurer's predominant focus on the UK market, the increasing pressure and scrutiny on profit margins, as a result of political and regulatory headwinds, imply that the group faces more challenges than some of its more geographically diversified peers.

- Aviva Plc: Aviva Life & Pensions UK Ltd IFSR affirmed at A1, outlook changed to negative from stable; Aviva Plc subordinated debt rating affirmed at Baa1(hyb) with a stable outlook

The outlook change to negative for Aviva Life & Pensions reflects its exposure to the changes in individual annuities. Aviva was the largest individual annuity writer in the UK with a c.20% market share in 2012, albeit Aviva's UK individual annuity volumes reduced in 2013, and individual annuities represented around 51% of 2013 UK Value of New Business, including a meaningful proportion of enhanced and guaranteed annuity option business. Furthermore, Aviva's UK business has, in Moody's view, a less mature asset management proposition compared to certain peers, given the more recent launch of the Aviva Wrap Platform.

The affirmation with a stable outlook of Aviva Plc's debt ratings reflects the Group's significant international diversification and the presence of a significant general insurance/health business, which contributed close to 40% of total operating profit before tax from continued operations in 2013, together with the recent improvements in economic capital adequacy, the reducing levels of internal leverage, the 40% improvement in cash remittances from business units and a significant reduction in the Group's operating cost base. The A1 IFS ratings on Aviva Insurance Limited and Aviva International Insurance Limited are unaffected by today's rating actions.

-Standard Life plc: Standard Life Assurance Ltd affirmed at A1 with a stable outlook ; Standard Life plc subordinated debt rating affirmed at Baa2(hyb) with a stable outlook

The affirmation of Standard Life's ratings reflects the group's limited exposure to annuities, representing less than 2% of new business premiums in the UK at year-end 2013, and the Group's already well developed strategy towards asset accumulation products. Although the contribution of individual annuities to the group's underlying IFRS operating profit is relatively material at 16% in 2013, most of these profits come from the legacy in-force annuity businesses which are unaffected by budget reforms. In addition, we believe Standard Life is strongly positioned to benefit from stronger inflows given its focus on accumulating products. Furthermore, Standard Life maintains a leading position in Defined Contribution workplace schemes and has strong positions in income drawdown, asset management (via Standard Life Investments) and a solid distribution capability.

-Scottish Widows Plc (SW) and Clerical Medical Investment Group Limited (CMIG): IFSRs and subordinated debt ratings affirmed at A2 and Baa2(hyb) respectively with a stable outlook

The affirmation of SW and CMIG's A2 IFSRs with a stable outlook reflects that these ratings are already constrained from the ownership by Lloyds Bank Plc (baa2 BCA) and, as a result, are already one notch lower than the unconstrained rating indicated by the Moody's insurance financial strength rating scorecard.

The relatively significant exposure to individual annuity market places downward pressure on the stand-alone credit profile of this group. While the contribution of annuities is relatively modest in terms of sales (Moody's estimate at around 7% of new business premiums in the first half of 2013), the contribution to VNB is more significant at an estimated (by Moody's) 20% at year-end 2013. The affirmation of SW and CMIG's A2 IFSRs with a stable outlook reflects that these ratings are already constrained from the ownership by Lloyds Bank.

Regarding 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.

- Friends Life Group plc: Friends Life Limited (FLL) IFSR affirmed at A3 with a stable outlook; Friends Life Group plc (FLG) guaranteed senior subordinated debt rating affirmed at Baa2(hyb) with a stable outlook

The affirmation of the ratings with a stable outlook of FLL and FLG reflects the current rating level and the marginal contribution of individual annuity in terms of IFRS operating profit at 7% in 2013 and in terms of free surplus generation at 1% in 2013. In addition, Friends Life has a lower overall market share of UK individual annuities (c.6%) than most of its peers. A further mitigating factor for Friends Life is its position in the pension market - number 2 player in workplace Defined Contribution - which is set to benefit from higher pension flows in the future.

--- UK LIFE INSURANCE SECTOR OUTLOOK REVISED TO NEGATIVE FROM STABLE

In addition to the pressures on volumes and value creation described above due to the changes in the UK individual annuity market, Moody's change to negative for the sector outlook reflects two elements:

(1) the continuous and increasing negative pressure on profitability for most product lines because of increasing regulatory and political headwinds. Examples include the confirmation last week of an initial 75bp cap on auto-enrolment pension fees, and Moody's also notes that the FCA will be looking into how customers in closed funds are being treated.

(2) the increasing competition the industry faces in terms of business volumes and margin levels, given the continued move away from guaranteed or 'insurance' products towards asset management type products, exposing the sector to high levels of competition from banks and asset managers. In addition, the UK life insurance industry has been experiencing negative outflows in recent years, which Moody's believes are structural in nature and are likely to rise given the increasing negative perception of the industry.

SUMMARY PROFILES OF AFFECTED GROUPS

Prudential Plc, headquartered in London, United Kingdom, had consolidated total assets of GBP 326 billion and shareholders' equity excluding non-controlling interests of GBP 9,650 million at year-end 2013 under IFRS.

Legal & General Group plc, headquartered in London, United Kingdom, had consolidated total assets of GBP 363 billion and shareholders' equity excluding non-controlling interests of GBP 5,642 million at year-end 2013 under IFRS.

Aviva Plc, headquartered in London, United Kingdom, had consolidated total assets of GBP279 billion and shareholders' equity excluding non-controlling interests of GBP 8,164 million at year-end 2013 under IFRS.

Standard Life plc, headquartered in Edinburgh, United Kingdom, had consolidated total assets of GBP185 billion and shareholders' equity excluding non-controlling interests of GBP 4,227 million at year-end 2013 under IFRS.

Scottish Widows plc, headquartered in Edinburgh, United Kingdom, had consolidated total assets of GBP131 billion and shareholders' equity excluding non-controlling interests of GBP 5,921 million at year-end 2012 under IFRS.

Friends Life Group plc, headquartered in London, United Kingdom, had consolidated total assets of GBP130 billion and shareholders' equity excluding non-controlling interests of GBP 5,065 million at year-end 2013 under IFRS.

RATINGS AFFECTED

The following ratings were affirmed and outlook changed to negative from stable:

Prudential Assurance Company (PAC): insurance financial strength rating at Aa2

Prudential Annuities Limited (PAL): insurance financial strength rating at Aa2

Prudential Retirement Income Limited (PRIL): insurance financial strength rating at Aa2

Scottish Amicable Insurance Fund (SAIF): insurance financial strength rating at Aa2

Scottish Amicable Finance plc: backed subordinated debt rating at A1(hyb)

Legal & General Assurance Society Limited: Insurance Financial Strength Rating at Aa3

Legal & General Group Plc: issuer rating A3

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

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

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

Legal & General Group Plc: subordinated MTN at (P)Baa1

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

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

Legal & General Finance PLC: issuer rating at A3

Legal & General Finance PLC: guaranteed senior rating at A3

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

Aviva Life & Pensions UK Limited: Insurance Financial Strength Rating at A1

The following ratings were affirmed with a stable outlook:

Prudential plc: senior unsecured debt at A2

Prudential plc: senior subordinated debt at (P)A3

Prudential plc: subordinated debt at A3(hyb)

Prudential plc: junior subordinated debt at Baa1(hyb)

Prudential plc: senior unsecured MTN at (P)A2

Prudential plc: subordinated MTN at (P)A3

Prudential plc: junior subordinated MTN at (P)Baa1

Legal & General Insurance Limited: Insurance Financial Strength Rating at A2

Aviva Plc: subordinated debt at Baa1(hyb)

Aviva Plc: junior subordinated debt at Baa1(hyb)

Aviva Plc: senior subordinated debt at (P)Baa1

Aviva Plc: guaranteed senior unsecured debt at A2

Aviva Plc: preferred securities at Baa2(hyb)

Aviva Plc: junior subordinated MTN at (P)Baa2

Aviva Plc: subordinated MTN at (P)Baa1

Aviva Plc: senior unsecured MTN at (P)A3

Aviva Plc: guaranteed senior unsecured MTN (P)A2

Aviva Plc subordinated shelf at (P)Baa1

Standard Life Assurance Ltd: Insurance Financial Strength Rating at A1

Standard Life plc: guaranteed senior unsecured MTN at (P)A2

Standard Life plc: guaranteed subordinated MTN at (P)A3

Standard Life plc: senior unsecured MTN at (P)Baa1

Standard Life plc: subordinated MTN at (P)Baa2

Standard Life plc: guaranteed subordinated at A3(hyb)

Standard Life plc: guaranteed junior subordinated at Baa1(hyb)

Standard Life plc: subordinated at Baa2(hyb)

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 Junior Subordinated notes Baa2 (hyb)

Friends Life Limited: Insurance Financial Strength Rating at A3

Friends Life Group Plc: guaranteed senior subordinated debt at Baa2(hyb)

Friends Life Group Plc: guaranteed junior subordinated debt at Baa3(hyb)

The following ratings were affirmed:

Prudential plc: commercial paper at P-1;

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

Aviva Plc: guaranteed commercial paper P-1

Aviva Plc: commercial paper P-2

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings, except for Aviva Plc and Legal & General Insurance Limited and Legal & General Insurance Limited, was Global Life Insurers published in December 2013. The principal methodologies used in rating Aviva Plc were Global Life Insurers published in December 2013 and Global Property and Casualty Insurers published in December 2013. The principal methodology used in rating Legal & General Insurance Limited was Global Property and Casualty Insurers published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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 changes outlook to negative for selected UK life insurers
No Related Data.
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