Best Lowers Legal & General Rating; Outlook Stable

November 15, 2004

A.M. Best Co. announced that it has downgraded the financial strength rating to “A+” (Superior) from “A++” (Superior) and assigned an issuer credit rating (ICR) of “aa” to the U.K.’s Legal & General Assurance Society Ltd.

Best also noted that the ICR of the non-operating holding company, Legal & General Group Plc (L&G), has been downgraded to “a+” from “aa-” and “accordingly, the financial strength ratings of L&G’s U.S. subsidiaries and the ratings of L&G’s debt issues have been downgraded.” The outlook for all ratings has been revised to stable from negative.

“These rating actions reflect the potential for deterioration in the quality of consolidated economic capital and the pressures on financial performance due to lower new business margins for some products, albeit average profitability remains at a relatively high 40 percent,” said Best. “L&G is likely to take full advantage of the consolidation trends perceived in the UK life market while retaining its superior business profile.”

Best said it “believes that L&G’s total economic capital is likely to remain unchanged during the next two years, supporting business growth. However, the overall quality of the capital will weaken with increased reliance on value of in force (VIF).”

The rating agency also indicated that L&G could experience rapid growth as its “superior business profile will most likely enable it to take advantage of market consolidation trends while continuing to change its business mix. L&G reported strong new premium growth of 12 percent for the first nine months of 2004. The balance of new business continues its shift further toward annuities, protection and unit-linked lines with approximately 70 percent of business originating from these products.”

Best also said it “anticipates new business margins to continue to decrease due to the move toward more competitive and commoditised protection products. A.M. Best believes that these margins could be further reduced in the future if L&G needs to further revise its reserving assumptions with negative effects on profitability. This is particularly relevant following the reserve strengthening actions experienced over the last three years. New business volume growth is likely to deliver increased consolidated operating profits, the majority of which, in A.M. Best’s opinion, is likely to be distributed as dividends.”

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