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30 Mar 2009
London, 30 March 2009 -- Moody's Investors Service today downgraded the insurance financial strength
rating for Legal & General Assurance Society Ltd. (LGAS) to
Aa2 from Aa1 and the insurance financial strength rating for Legal &
General Insurance Limited to A1 from Aa3. Moody's also downgraded
the senior unsecured debt rating to A2 from A1, subordinated debt
to A3 from A2 and preferred to Baa1 from A3 of Legal & General Group
(L&G). In the same rating action, Moody's affirmed the
Prime-1 short term rating for commercial paper of Legal & General
Finance PLC. These companies carry a negative ratings' outlook.
These actions conclude the review on these ratings. A complete
list of ratings follows below.
Moody's downgrade of the Group's ratings follows the release of
2008 results and reflects the reduction in the group's capital position
and lower operating and bottom line profitability under international
financial reporting standards.
"Legal & General's capital position has fallen materially
as the result of the extreme market conditions of the last quarter of
2008, which persisted into the first few months of 2009,"
said Vice President Senior Credit Officer Antonello Aquino. "The
Group's surplus capital has been almost halved between September
2008 and late March 2009."
The group reported a GBP1.8 billion Insurance Groups Directive
(IGD) surplus capital - after accounting for GBP120 million
for the final dividend -- at year-end 2008 compared to GBP4.1
billion at year-end 2007, representing a decline of over
55%. The IGD surplus continued deteriorating in the first
part of 2009 and stood at an estimated GBP1.5 billion at March
23, 2008. The reduction in the IGD surplus in 2008 was mostly
the result of the negative equity market movements (GBP0.9bn)
and the strengthened default reserves (GBP0.6bn pre tax) but
also a consequence, among others, of the share buy-back
program (GBP0.5bn). The extent of the decline in IGD
capital in 2008 reflected the strong correlation of the surplus to investment
market movements. Nonetheless, IGD coverage, at approximately
170% at year-end 2008, still remains relatively robust
and compares favorably with many European peers.
Surplus capital on the realistic Pillar 1 peak in the with-profit
fund also deteriorated by over 65% and was GBP268 million in
2008 compared to GBP785 million in the previous year. MASC
(Moody's Adjusted Solvency Capital) ratio also declined to an estimated
1.7x at year-end 2008 from 3.3x at year-end
The Group's profitability has also been, and is likely to
remain, under pressure as the result of negative global economic
conditions, equity market volatility and low government interest
rates. The group reported an operating loss in 2008 of GBP189
million under international financial reporting standards, compared
to an operating profit of GBP658 million in 2007 mostly as a consequence
of the strengthening of credit reserve for GBP650 million.
Nevertheless, even when excluding the reserve strengthening,
operating profit deteriorated by 30%.
"Moody's views the UK life market as one of the most competitive
in Europe and the possibility of a relatively prolonged period of slowdown
in the economy will continue to put pressure on life insurers' profitability,
including on L&G, due to the Group's concentration on
the UK market" adds Mr. Aquino.
Moody's notes that, more recently, the Group has taken
steps to lessen the future volatility of its capital by reducing equity
and property exposures and increasing equity hedging in the with-profit
fund. In addition, over 90% of the Group's policyholder
liabilities on an IFRS basis relate to unit-linked contracts,
where all asset risk is passed on to policyholders. The Group has
also halved the final dividend amount for 2008.
Moody's continues to consider L&G's financial flexibility
as strong. Financial leverage has weakened as a result of decreasing
IFRS shareholder's equity, but remains strong given the relatively
low level of senior and subordinated debt outstanding for the group.
Refinancing risk is also low as the company does not have any bonds that
mature or have a call date before 2015. Liquidity and operational
cash flow remained robust in 2008, with the company producing a
positive net cash flow of GBP320m.
Moody's also believes that the Group's policyholder liability
profile is relatively stable. The majority of unit-linked
contracts present limited liquidity risk to the Group in the event of
policyholder surrender, and for with-profit contracts substantial
exit penalties remain in place to preserve fund capitalization and liquidity.
The negative outlook on the Group's ratings reflects Moody's view
that both capitalization and earnings will remain under pressure,
given the Group's still reasonable level of equity-market
correlation and exposure to the UK life insurance market. With
regard to rating drivers going forward, Moody's says that a material
reduction in solvency and/or a material deterioration in the group's financial
flexibility (e.g. financial leverage of over 30%
on a long term basis) would contribute to negative rating pressure.
The following ratings were downgraded with a negative outlook:
Legal & General Assurance Society Limited: Insurance Financial
Strength Rating to Aa2 from Aa1
Legal & General Insurance Limited: Insurance Financial Strength
Rating to A1 from Aa3
Legal & General Group Plc: senior debt A2 from A1
Legal & General Group Plc: subordinated debt A3 from A2
Legal & General Group Plc: perpetual preferred securities Baa1
Legal & General Finance PLC guaranteed senior debt A2 from A1
The following rating was affirmed:
Legal & General Finance PLC commercial paper 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 GBP256.7 billion at year-end
Moody's most recent rating action on this issuer was on December 08,
2008, when the ratings of this issuer were put under review for
possible downgrade. The principal methodology used in rating LGAS
was "Moody's Global Rating Methodology for Life Insurers", which
can be found at www.moodys.com in the Credit Policy &
Methodologies directory, in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Legal & General ratings; negative outlook
VP - Senior Credit Officer
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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