At the same time, A.M. Best has lowered L&G's debt ratings to "aa-" from "aa" (see list below). A negative outlook has been assigned to all ratings.
These rating actions reflect L&G's superior business profile in the United Kingdom and its excellent financial flexibility. Offsetting factors are the deterioration--but commensurate with the current rating level--of L&G's risk-based capitalisation and the weakening of financial performance.
Superior business profile--L&G continues to have a well-established position and strong brand recognition in the U.K. life and pensions market. L&G successfully leverages its distribution partnerships with well known U.K. banks and benefits from the current flight to quality trend in the U.K. life market. Total new life and pension business in the United Kingdom (based on annualised premium equivalent) has grown by 4% to GBP 608 million (USD 973 million) in 2002, which is excellent relative to L&G's peers, especially in these difficult business conditions.
Excellent financial flexibility--L&G has excellent financial flexibility as demonstrated by its successful raising of approximately GBP 790 million (USD 1264 million) in equity and GBP 200 million (USD 324 million) in long dated senior debt in 2002. Various financial enhancement options are still available to strengthen its capitalisation if necessary. These include leveraging its strong emerging surplus, which was worth GBP 2.5 billion (USD 4 billion) of value in-force as at June 2002. However, pressure could arise from further increases in consolidated financial leverage (at approximately 30%).
Deteriorating risk-based capitalisation--A.M. Best believes that L&G's risk-adjusted capitalisation--strengthened by the rights issue and despite a significant deterioration in 2002 due to the poor performance of the assets backing its long-term liabilities--is commensurate with the current rating level. A.M. Best believes that L&G's with-profits life fund is sufficiently buffered by the resilience reserves held and the conservative assumptions inherent in the statutory reserves.
Weakening financial performance--L&G recorded an after tax loss of GBP 191 million (USD 306 million) (on the Modified Statutory Solvency basis) in 2001 largely due to poor investment performance. A.M. Best expects weak financial performance to continue as a result of requirements to strengthen reserves and the persistent poor equity market conditions in the short term. However, this will be partly mitigated by the focussed and proactive management approach to product and surplus distribution relating to L&G's life business.
The negative outlook reflects A.M. Best's concerns that the risk-based capitalisation for L&G may further deteriorate in the event of a further fall in asset values and a decrease in the long-term yields, which will heighten the assets and liabilities' gap risk.
The financial strength rating of A++ (Superior) has been affirmed for the following U.S. subsidiaries of L&G and a negative outlook has been assigned:
-- William Penn Life Insurance Co of NY
-- Banner Life Insurance Company
The following debt ratings have been lowered to "aa-" from "aa":
-- USD 2,000,000,000 Euro Medium Term Note Programme issued by L&G Finance Plc and L&G Finance Europe BV and guaranteed by L&G Group Plc
-- GBP 525,000,000 2.75% Convertible Bonds due 2006 issued by L&G Group plc
A