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Rating Action:

Moody's downgrades Legal & General ratings (IFSR to Aa3). Stable outlook.

18 May 2010

London, 18 May 2010 -- Moody's Investors Service today downgraded the insurance financial strength rating (IFSR) for Legal & General Assurance Society Ltd. (LGAS) to Aa3 from Aa2 and the IFSR for Legal & General Insurance Limited to A2 from A1. Moody's also downgraded the ratings of Legal & General Group (L&G) Plc (senior unsecured debt to A3 from A2, subordinated debt to Baa1 from A3 and preferred securities to Baa2 from Baa1). Moody's also downgraded the short term rating for commercial paper of Legal & General Finance PLC to Prime-2 from Prime-1. All the long-terms ratings carry a stable outlook. A complete list of ratings follows below.

Moody's downgrade of the Group's ratings primarily reflects our negative view on the UK life market and L&G's reliance on this market for the vast majority of its business.

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 level 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 profitability growth. 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. With its strong focus on the UK life market (92% of total APE in 2009), Moody's regards L&G as particularly exposed to these risks, although we expect the impact of RDR for L&G to be partially mitigated by its strong brand reputation, its agreements with banks and already decreasing reliance on up-front commission with IFAs.

"Compared to other Aa rated European insurance groups, L&G is less well diversified both in terms of geography and business lines, with a focus on UK life & pension business. Despite its strong brand in the UK Life market and consistent growth in market share, its dependence on the UK life market makes business growth opportunities and profitability improvements for the company more challenging than many of its peers" said Vice President Senior Credit Officer Antonello Aquino.

Moody's added however that L&G's ratings continue to reflect very strong financial metrics with respect to profitability and financial flexibility. The group reported a profit after tax of GBP844 million in 2009 versus a loss of GBP1,130 million in 2008 on an IFRS basis and net cash was up 118% at GBP699 million (GBP320 million in 2008). The improvement in profit after tax was helped by the rebound of capital markets but also by management focus on writing capital efficient new business and the very strong margin from its annuity line.

In terms of solvency capital, the group also improved its position after the sharp decline reported in 2008; the Insurance Groups Directive (IGD) surplus was estimated at GBP3.4 billion in 1Q2010 (2.3x cover) versus GBP1.8 billion in 2008 and GBP4.1 billion in 2007. MASC (Moody's Adjusted Solvency Capital) ratio also improved to 2.0x at year-end 2009 from 1.7x at year-end 2008 and 3.3x in 2007.

Moody's continues to consider L&G's financial flexibility as strong. Earnings coverage remains at a very strong level on a 5 years average although has trended down in most recent years. Refinancing risk is also low as the company does not have any bonds that mature or have a call date before 2015.

The stable outlook on the Group's ratings reflects Moody's view that both profitability and leverage will remain broadly at levels reported in 2009, although we expect both top and bottom lines' growth to be constrained over the near term. With regard to rating drivers going forward, Moody's says that a material reduction in solvency, in particular after the implementation of the forthcoming Solvency II capital regime, and/or a material deterioration in the group's financial flexibility (e.g. financial leverage of over 30% or interest coverage below 8 times on a long term basis) would contribute to negative rating pressure. A rating upgrade is unlikely in the near term.

RATINGS AFFECTED

The following ratings were downgraded with a stable outlook:

Legal & General Assurance Society Limited: Insurance Financial Strength Rating to Aa3 from Aa2

Legal & General Insurance Limited: Insurance Financial Strength Rating to A2 from A1

Legal & General Group Plc: senior debt A3 from A2

Legal & General Group Plc: subordinated debt Baa1 from A3

Legal & General Group Plc: perpetual preferred securities Baa2 from Baa1

Legal & General Finance PLC guaranteed senior debt A3 from A2

Legal & General Finance PLC commercial paper P-2 from P-1

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 GBP297 billion at year-end 2009.

Moody's most recent rating action on this issuer was on March 30, 2009, when the IFSR for Legal & General Assurance Society Ltd. was downgraded to Aa2 from Aa1. The principal methodology used in rating LGAS 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.

London
Antonello Aquino
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Legal & General ratings (IFSR to Aa3). Stable outlook.
No Related Data.
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