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Rating Action:

Moody's downgrades Legal & General ratings; negative outlook

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 2007.

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.

RATINGS AFFECTED

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 from A3

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 2008.

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 directory.

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

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

Moody's downgrades Legal & General ratings; negative outlook
No Related Data.
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