LONDON--(BUSINESS WIRE)--AM Best has affirmed the Long-Term Issuer Credit Rating (Long-Term ICR) of “a” of the non-operating holding company, Legal & General Group Plc (L&G) (United Kingdom). Concurrently, AM Best has affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term ICR of “aa-” of Legal and General Assurance Society Limited (United Kingdom), the largest operating insurance company in the L&G group. The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect L&G’s very strong balance sheet strength, strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).
L&G has maintained its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), at the strongest level, underpinned by robust retained earnings. Financial leverage is conservative, and there is good interest coverage. Offsetting factors include the increasing proportion of illiquid assets in L&G’s investment portfolio, which increases the company’s exposure to valuation uncertainties and volatility, as well as the longer-term uncertainties associated with the group’s exposure to longevity risk through its annuity product. AM Best has investigated the effect of investment stress scenarios on the group’s risk-adjusted capitalisation, with a focus on elevated levels of realised defaults and permanent reductions in value, in addition to spread widening. AM Best considers the group’s balance sheet strength to be robust in these scenarios, significantly assisted by the contribution from subordinated debt, and also by agreement to sell the mature savings business announced in December 2017.
L&G has a strong earnings record, as demonstrated by a five-year average return on equity (ROE) of 19.3% (as per AM Best’s calculations) over the period 2014 to 2018. The 2018 ROE of 22.3% was assisted by approximately 4-5 points from longevity releases, which also were a feature in 2017. AM Best expects these releases to continue in 2019, albeit at a lower rate. The group’s ROE also benefits from asset management earnings. In 2018, L&G’s profit before tax increased by 3% to GBP 2.05 billion, as a 14% advance in operating profit was offset mostly by investment variances from equities held within group capital funds. AM Best expects performance to remain strong, supported by the group’s excellent market positions within its product range in the United Kingdom, growth outside the U.K. and careful management of its investment portfolio, including the close matching of liabilities.
L&G is one of the U.K.’s largest providers of individual life insurance products, with a well-established business model focused on activities with good medium-term sales prospects in which it holds leading positions. The group offers protection, retirement and investment products. However, a narrow active product range and a concentrated geographic footprint increase the company’s sensitivity to U.K. regulatory changes, although non-U.K. sales are growing. L&G has defended its leading position in the pension risk transfer market successfully in recent years through some of the largest transactions completed in the segment to date. In addition, Legal & General Investment Management (Holdings) Limited, L&G’s asset management business, has continued its international expansion successfully in the United States and Asia, thus providing an increasing degree of geographical diversification to the group’s activities whilst extending an impressive record of growth in assets under management.
L&G’s well-developed and sophisticated ERM is sufficient to meet the challenge of the credit and longevity risks inherent to the group’s annuity product.
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