Stable outlook for Legal & General, Prudential UK, and Royal London. Aviva and its UK subsidiaries on review for upgrade
London, 19 June 2017 -- Moody's Investors Service has today taken rating actions on four UK life
insurance groups and their associated ratings.
Moody's affirmed the ratings and changed the outlooks to stable
from negative for:
- Legal & General Group Plc
- Prudential Assurance Company Ltd
- Royal London Mutual Insurance Society Ltd.
Moody's has also placed on review for upgrade the ratings of Aviva
Plc and its main UK operating companies.
The actions reflect Moody's expectation that the impact of Brexit
on the UK life insurance sector will be moderate and operational risks
are manageable over the next 12 to 18 months. This expectation
is the main driver also behind Moody's revision of its outlook to
stable from negative on the UK life sector https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1075364.
For Aviva, the rating action also reflects continued improvements
in the Group's financial profile, and notably its profitability
and capitalisation.
Please refer to the end of this press release for a detailed list of affected
insurance ratings.
RATINGS RATIONALE
The change in outlook for selected UK life insurers is driven by our expectation
that the impact of Brexit on UK life insurers' capital and earnings
will be moderate over the next 12 to 18 months. This is given the
UK's resilient macroeconomic environment since the referendum vote and
the recovery of financial markets following an initial downturn.
This expectation reflects Moody's base case scenario that the UK
and the EU will eventually come to an agreement that broadly mimics most
— but not all— of current trading and regulatory arrangements.
UK life insurers' solvency and earnings have proved resilient since the
referendum vote. The recovery in financial markets to date -
the FTSE 100 has risen by around 20% from 24 June 2016 and UK 10
year government bond yields have almost doubled from the low point of
around 0.5 in August 2016 - and insurers' diversified
investment portfolios have protected the sector's Solvency II ratios which,
for most insurers, increased in 2H16.
The sector's profitability has also held up well, notwithstanding
increasing competition and persistent regulatory headwinds, with
the majority of UK insurers increasing their operating profit in 2016.
This resilient performance reflects certain strengths of the UK life insurance
business model which has given insurers significant asset gathering and
fee revenue generation capability, together with growing sales of
non-fee products such as protection, bulk annuities,
and equity release. Also, while low interest rates weigh
on the investment returns of UK life insurers, they are less vulnerable
than most of their European counterparts because of the nature of their
liabilities, in particular the high proportion of unit-linked
policies with no guarantees and the smaller and declining book of variable-bonus
with-profits business.
However, we recognise that there remains material uncertainty over
the impact of Brexit over the medium to long-term. There
are clear downside risks to our base case which could have negative implications
for economic growth and financial markets, resulting in possible
repercussions for the UK life sector, given its high asset leverage
and material exposure to UK financial markets.
--- ISSUER SPECIFIC ACTIONS
RATINGS AFFIRMED - OUTLOOK CHANGED TO STABLE FROM NEGATIVE
--Legal & General Group Plc
Moody's has revised the outlook to stable from negative on Legal
& General Group Plc (L&G) and associated ratings reflecting Moody's
expectation that the impact of Brexit on L&G will be moderate over
the next 12 to 18 months, and that L&G maintains its strong
competitive position, profitability and financial flexibility.
In 2016 L&G reported a good set of results, including strong
growth in 2H16. Net cash generation increased by 12% to
GBP1,411 million and IFRS operating profit was up by 11%
to GBP1,628 million, reflecting growth in the asset management
and especially retirement businesses. The group's improved
profitability also helped increase its earnings coverage to a relatively
high 9.3x (YE15: 9.2x).
Furthermore, L&G's capitalisation remained robust in 2016.
The group's shareholder Solvency II ratio improved during 2H16 to
171% (1H16: 163%) and reduced only slightly compared
to YE15 (176%), and its economic capital solvency ratio was
stable at a relatively high 230%.
Moody's has also affirmed the A2 insurance financial strength rating
(IFSR) with a stable outlook on Legal & General Insurance Limited
(LGI), L&G's non-life insurer. The rating
reflects LGI's continued good profitability and capitalisation and
continues to benefit from some implicit support from L&G. However,
the rating is not aligned with the Aa3 IFSR of L&G's main operating
entity, Legal & General Assurance Society Ltd.,
in light of LGI's relatively small size and the non-life
nature of its business.
WHAT COULD MOVE THE RATINGS DOWN/UP
Positive rating pressure for L&G could arise from: 1) A substantial
improvement in the geographic diversification of revenues and profit and/or
2) Adjusted financial leverage and total leverage consistently below 25%
and 30% respectively and earnings coverage above 10x and/or 3)
Material improvement in solvency
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
--Prudential UK
Moody's has revised the outlook to stable from negative on Prudential
Assurance Company Ltd (PAC), Prudential Public Limited Company's
(Prudential plc) main UK life operating company, reflecting Moody's
expectation that the impact of Brexit on PAC will be moderate over the
next 12 to 18 months, and that PAC will maintain its market leading
position and outperformance in UK with-profits savings business,
along with strong capitalisation and stable core profitability.
In 2016 Prudential UK (Pru UK) reported good growth in its retail APE
sales and new business profit (NBP), which both increased by 33%
to GBP1,160 million and GBP268 million respectively, although
overall NBP fell by 16% as a result of Pru UK's withdrawal
from bulk annuities. Following the 60% increase in 2015,
IFRS operating profit reduced by 32% to GBP799 million in 2016,
negatively affected by a GBP175 million (gross of any reinsurance recovery)
provision related to a regulatory review concerning non-advised
annuity sales, and by reduced profits from annuity new business
following its withdrawal from the bulk annuity market. Moody's
views Pru UK's core in-force profit, which reduced
by 7% in 2016 to GBP601 million, as resilient and will enable
Pru UK to continue to up-stream meaningful and stable dividends
to Prudential plc.
Capitalisation improved during 2016, with the shareholder Solvency
II ratio increasing to 163% (1H16: 138%, YE15:
146%), and the with-profit ratio increasing to 179%
(1H16: 176%, YE15: 175%). The regulatory
Solvency II ratio of PAC, which maintains one of the financially
strongest life funds in the UK with a GBP9 billion inherited estate,
was lower at 139% but excludes around GBP3.9 billion of
with-profits surplus because of restrictions on ring-fenced
funds which apply to all insurers.
Following its Part VII transfer into PAC in October 2016 and its subsequent
deauthorisation by the UK regulator, Moody's has withdrawn
its IFSR on Prudential Retirement Income Ltd.
WHAT COULD MOVE THE RATINGS DOWN/UP
Positive rating pressure could arise from: 1) Meaningfully increased
product diversification without compromising profitability and/or 2) Meaningfully
increased profitability on both an operating profit and new business profit
basis and/or 3) Substantially reduced levels of equities and diminished
volatility in capitalisation.
Negative rating pressure could arise from: 1) Depressed levels of
sales with a consequent impact on profitability and/or 2) capitalisation
falls materially.
--Royal London Mutual Insurance Society Ltd.
Moody's has revised the outlook to stable from negative on Royal
London Mutual Insurance Society Ltd. (RL) reflecting Moody's
expectation that the impact of Brexit on RL will be moderate over the
next 12 to 18 months, and that RL maintains a strong capitalisation.
Profitability and financial flexibility remain commensurate to its financial
strength rating.
In 2016 RL reported a good set of results characterised by good growth.
New business (PVNBP basis) of Life & Pension operations increased
by 28% to GBP8.7 billion (YE2015: GBP6.8 billion),
particularly reflecting double-digit growth in its group and individual
pension proposition. RLAM, the asset management business,
also reported growing net inflows of GBP2.3 billion and funds under
managements rising by c.18% to GBP100 billion (YE2015:
GBP85 billion). IFRS result before tax and transfers to unallocated
divisible surplus grew materially to GBP325 million (2015: GBP143
million), primarily reflecting a positive investment performance
which more than offset a GBP165 million one-off charge resulting
from a change in the rate curve used to discount technical provisions.
Furthermore, capitalisation remained robust in 2016. As at
31 December 2016 RL's open fund, which includes the capital
requirements on new business, reported a relatively high 206%
Solvency II coverage ratio (1 January 2016: 239%),
with an year-on-year decrease primarily reflecting a lower
10 year swap rate.
The Solvency II ratio of RL's closed funds was also relatively high
at 249% when including c.GBP2.6 billion of with-profits
surplus (1 January 2016: GBP1.7 billion). However
this surplus is ring-fenced within the closed funds and not fully
fungible under Solvency II rules applying to all insurers. As a
result the regulatory Solvency II coverage ratio ("regulatory view")
was 153% (1 January 2016: 169%).
WHAT COULD MOVE THE RATINGS DOWN/UP
Positive rating pressure for RL could arise from a material increase in
market share within the UK life and pensions market with no deterioration
in its profitability and capital adequacy fundamentals.
Negative rating pressure could arise from 1) a substantial deterioration
in the group's economic capitalisation due to market disruption events
or active M&A, or 2) a Sharpe ratio consistently below 100%
and/or new business margin on Life & Pension business consistently
below 1%, or 3) an adjusted financial leverage in excess
of 30%
RATINGS PLACED ON REVIEW FOR UPGRADE
--Aviva Plc
The review for upgrade on Aviva Plc and its subsidiaries reflects continued
improvements in Aviva group's financial profile, notably in its
profitability and capitalisation. According to Moody's,
these improvements result from the substantial de-risking and business
re-focusing that Aviva undertook in recent years. Moody's
review will focus on the sustainability of this enhanced operating performance
and improved capital position. The review for upgrade also reflects
Moody's expectation that the impact of Brexit on Aviva will be moderate
over the next 12 to 18 months.
Commenting on 2016 profitability, Moody's mentions that,
despite the lower reported net results of GBP859 million (GBP1,097
million in 2015), the group's operating profits increased
significantly by 12% (GBP3,010 million versus GBP2,688
million in 2015). Aviva's 2016 reported net results were
negatively impacted by a revaluation of reserves triggered by the change
in the regulatory rate (known as Ogden rate) used to discount motor insurance
annuity reserves in the UK, that Moody's considers a one-off
item and which impacted the entire motor insurance sector in the UK.
Aviva's operating profits benefitted from increased synergies following
the acquisition of Friends Life in 2015 and from lower restructuring costs,
which Moody's expects to continue in 2017.
In addition, Moody's believes that, whilst maintaining its
leading position in the UK insurance market, Aviva's aggregate risk
profile has improved following the group's restructuring over the last
five years, notably through a series of disposals and de-risking
of its assets and liabilities. Moody's adds that Aviva's geographic
and business diversification (with 62% of the group's premiums
related to life insurance and 38% related to P&C insurance),
as well as the group's focus on retail business, will help the company
to report a low volatility in its operating profits.
Going forward Aviva's profitability could further benefit from synergies
from bolt-on acquisitions, such as the acquisition of RBC
General Insurance Company in Canada in 2016, from continued growth
in asset management and from a successful implementation of its composite
digital offering to its customers.
Commenting on Aviva's capitalisation, Moody's says that Aviva
reported a solvency ratio, based on its internal model and excluding
the with-profit business, of 189% in 2016, up
from 181% in 2015. The regulatory Solvency II ratio (including
with-profit business, with a surplus for this business capped
at zero) was 172% in 2016. Moody's says that the increase
in solvency ratio was driven by model changes but also by good capital
generation (earnings generated by the group represented GBP1.7
billion in 2016 when including holding costs and interest expenses,
equivalent to 13 percentage points of the solvency ratio) and by low sensitivity
to financial risks. Moody's expects Aviva's economic capital
to prove resilient and show low levels of volatility thanks to the group's
low risk profile.
In 2017, Aviva's solvency ratio will further improve with
the sale of the majority of its Spanish operations. Nonetheless,
this improvement combined with expected organic growth will be partly
offset by Aviva's intention to redeploy capital. On 25 May
2017, Aviva announced a GBP300 million share buy-back and
is also considering debt repayment and bolt-on acquisitions.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's review will focus on the sustainability of the improvements
that Aviva reported in profitability and capitalisation.
Aviva Plc's ratings could be upgraded if 1) the group reported consistently
good profitability, as evidenced by a return on capital of 7%
or above (on a normalized basis, notably excluding amortisation
of intangibles) and Moody's concluded that such level of profitability
would be sustainable and 2) the group maintained a strong level of capital.
SUMMARY PROFILES OF AFFECTED GROUPS
Aviva Plc, headquartered in London, United Kingdom,
had consolidated total assets of GBP440.4 billion and total equity
of GBP19,551 million at year-end 2016 under IFRS.
Legal & General Group Plc, headquartered in London, United
Kingdom, had consolidated total assets of GBP468 billion and total
equity of GBP7,283 million at year-end 2016 under IFRS.
Prudential Assurance Company Ltd, headquartered in London,
United Kingdom, had total assets of GBP186 billion and shareholders'
funds of GBP13,623 million at year-end 2016 under UK GAAP.
Royal London Mutual Insurance Society Ltd., headquartered
in London, United Kingdom, had consolidated total assets of
GBP91 billion and unallocated divisible surplus of GBP3,292 million
at year-end 2016 under IFRS.
LIST OF AFFECTED RATINGS
Issuer: Aviva Plc
..Placed on Review for Upgrade:
....Senior Unsecured Regular Bond/Debenture,
currently A3
....Senior Unsecured Medium-Term Note
Program, currently (P)A3
....Subordinate Regular Bond/Debenture,
currently Baa1(hyb)
....Subordinate Medium-Term Note Program,
currently (P)Baa1
....Junior Subordinated Regular Bond/Debenture,
currently Baa1(hyb)
....Tier III debt Regular Bond/Debenture,
currently Baa1(hyb)
....Tier III Debt Medium-Term Note
Program, currently (P)Baa1
....Preferred Stock, currently Baa2(hyb)
....Commercial Paper, currently P-2
..Affirmation:
....Backed Commercial Paper, affirmed
P-1
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Aviva International Insurance Limited
..Placed on Review for Upgrade:
....Insurance Financial Strength Rating,
currently A1
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Aviva Insurance Limited
..Placed on Review for Upgrade:
....Insurance Financial Strength Rating,
currently A1
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Aviva Life & Pensions UK Limited
..Placed on Review for Upgrade:
....Insurance Financial Strength Rating,
currently A1
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Friends Life Limited
..Placed on Review for Upgrade:
....Insurance Financial Strength Rating,
currently A1
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Friends Life Holdings plc
..Placed on Review for Upgrade:
....Backed Junior Subordinated Regular Bond/Debenture,
currently Baa1(hyb)
....Backed Senior Subordinated Regular Bond/Debenture,
currently A3(hyb)
..Outlook Action:
....Outlook changed to Ratings under Review
from Stable
Issuer: Prudential Assurance Company Ltd
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Scottish Amicable Insurance Fund
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Prudential Retirement Income Ltd
..Withdrawal:
....Insurance Financial Strength Rating,
withdrawn, previously at Aa3
..Outlook Action:
....Outlook changed to Rating Withdrawn from
Negative
Issuer: Scottish Amicable Finance Plc
..Affirmations:
....Backed Subordinate Regular Bond/Debenture,
affirmed A2(hyb)
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Royal London Mutual Insurance Society Ltd.
..Affirmation:
....Insurance Financial Strength Rating,
affirmed A2
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Scottish Life Fund
..Affirmation:
....Insurance Financial Strength Rating,
affirmed A2
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: RL Finance Bonds No. 2 plc
..Affirmation:
....Backed Subordinate Regular Bond/Debenture,
affirmed Baa1(hyb)
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: RL Finance Bonds No. 3 plc
..Affirmation:
....Backed Subordinate Regular Bond/Debenture,
affirmed Baa1(hyb)
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Legal & General Group Plc
..Affirmations:
....Long-term Issuer Rating,
affirmed A3
....Senior Unsecured Medium-Term Note
Program, affirmed (P)A3
....Subordinate Regular Bond/Debenture,
affirmed Baa1(hyb)
....Subordinate Medium-Term Note Program,
affirmed (P)Baa1
....Junior Subordinated Regular Bond/Debenture,
affirmed Baa1(hyb)
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Legal & General Assurance Society Ltd.
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Legal & General Insurance Limited
..Affirmation:
....Insurance Financial Strength Rating,
affirmed A2
..Outlook Actions:
....Outlook remains Stable
Issuer: Legal & General Finance plc
..Affirmations:
....Long-term Issuer Rating,
affirmed A3
....Backed Senior Unsecured Regular Bond/Debenture,
affirmed A3
....Backed Senior Unsecured Medium-Term
Note Program, affirmed (P)A3
....Backed Commercial Paper, affirmed
P-2
..Outlook Action:
....Outlook changed to Stable from Negative
PRINCIPAL METHODOLOGIES
The methodologies used in rating Aviva Plc were Global Life Insurers published
in April 2016, and Global Property and Casualty Insurers published
in May 2017. The principal methodology used in rating Aviva Insurance
Limited, Aviva International Insurance Limited and Legal & General
Insurance Limited was Global Property and Casualty Insurers published
in May 2017. The principal methodology used in rating Aviva Life
& Pensions UK Limited, Friends Life Limited, Friends Life
Holdings plc, Prudential Assurance Company Ltd, Scottish Amicable
Insurance Fund, Scottish Amicable Finance Plc, Royal London
Mutual Insurance Society Ltd., RL Finance Bonds No.
2 plc, RL Finance Bonds No. 3 plc, Scottish Life Fund,
Legal & General Group Plc, Legal & General Assurance Society
Ltd. and Legal & General Finance plc was Global Life Insurers
published in April 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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 rating analyst and the Moody's legal entity that has issued
the ratings.
The person who approved Aviva Plc, Aviva Insurance Limited,
Aviva International Insurance Limited, Aviva Life & Pensions
UK Limited, Friends Life Limited, Friends Life Holdings plc,
Prudential Assurance Company Ltd, Scottish Amicable Insurance Fund,
Prudential Retirement Income Ltd, Scottish Amicable Finance Plc,
Royal London Mutual Insurance Society Ltd., RL Finance Bonds
No. 2 plc, RL Finance Bonds No. 3 plc and Scottish
Life Fund credit ratings is Antonello Aquino, Associate Managing
Director, Financial Institutions Group, JOURNALISTS:
44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454. The
person who approved Legal & General Group Plc, Legal & General
Assurance Society Ltd., Legal & General Insurance Limited
and Legal & General Finance plc credit ratings is Simon Harris,
MD-Gbl Ins and Mgd Invests, Financial Institutions Group,
JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772
5454.
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.
Benjamin Serra
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Giovanni Meloni
Analyst
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
