Fitch Ratings has affirmed Legal & General Group Plc's (L&G) core operating entities at Insurer Financial Strength (IFS) Ratings 'AA-.

The core entities are Legal and General Assurance Society Limited, Banner Life Insurance Company, William Penn Life Insurance Company of New York Inc and Legal & General Reinsurance Company Limited.

Fitch has simultaneously affirmed L&G's Long-Term Issuer Default Rating (IDR) at 'A+'.

The Outlooks on the Long-Term IDR and IFS Ratings are Stable.

A full list of ratings is provided below.

Key Rating Drivers

The ratings continue to reflect our 'Very Strong' assessment of the group's business profile, capitalisation, financial performance and investment and asset risk.

Fitch's assessment of L&G's business profile reflects its operational scale and market position as one of the leading UK life insurers and asset managers with a diversified product mix. The group is one of the leaders in the fast-growing UK pension de-risking market and is also among the top UK insurers in the individual annuity market. L&G's pension de-risking and individual annuity new business premium in 2021 was GBP6.2 billion (2020: GBP7.6 billion) and GBP957 million (2020: GBP910 million) respectively. Legal & General Investment Management is a leading global asset manager with total assets under management of GBP1.4 trillion at end-2021.

L&G is also growing its North American pension de-risking, asset management and term life businesses. However, we view geographical diversification as limited relative to similarly rated European peers'.

Our assessment of L&G's capitalisation is primarily based on its 'Extremely Strong' score under Fitch's Prism Factor-Based Capital Model (Prism FBM) at end-2021, unchanged from 2020's. L&G's regulatory Solvency II (S2) solvency capital requirements (SCR) coverage ratio improved to 187% at end-2021 from 175% at end-2020, largely benefitting from net surplus generation and market movements, principally from the higher interest rates. We expect interest-rate rises to be supportive of L&G's S2 capital position in 2022, primarily due to their impact on reducing risk margin and SCR. We also deem its exposure to interest-rate risk as marginal, due to the close match of annuity assets and best-estimate liabilities cash flows.

L&G's financial leverage ratio (FLR) improved to 28% at end-2021 from 32% at end-2020, mainly owing to the redemption of GBP300 million subordinated Tier 2 notes in July 2021 and retained earnings growth in 2021. We expect FLR to remain under 30% over the next two years.

Our assessment of L&G's profitability reflects the group's very strong net income return on equity (ROE) of 20% in 2021 (2020: 17%), which compares favourably with UK-based insurance peers'.

We expect the impact of rising inflation and interest rates on L&G's profitability to offset each other. We view increasing interest rates to be moderately supportive of L&G's profitability, due to higher investment returns. Its exposure to rising inflation is contained as inflation-linked liability guarantees are largely hedged and capped. Main inflation exposure arises through increasing expenses, although we view this as moderate. Fitch expects L&G to maintain profitability at around the current level in 2022.

We assess L&G's investment and asset risk as low, given the group's very low exposure to low-rated assets and the additional buffer represented by a credit default provision of GBP3.4 billion at end-2021. However, L&G is exposed to credit risk, primarily through its holdings of 'BBB' debt securities, which represent 33% of its bond portfolio. We view this share as fairly high, although broadly in line with peers'. We see some concentration in UK sovereign bonds, but this is neutral to our view of asset risk for L&G.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A sustained improvement in FLR to below 24%, while maintaining a Prism FBM score at 'Extremely Strong'

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Prism FBM score falling to the low end of the 'Very Strong' category

FLR increasing to above 35%

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

(C) 2022 Electronic News Publishing, source ENP Newswire