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Fitch downgrades L&G

Credit rating agency Fitch has downgraded Legal & General blaming depletion of the firm’s capital as a result of steep declines in equity and credit markets.

The insurer’s long-term issuer default rating has been downgraded to A+ from AA- and senior unsecured debt issued and guaranteed by L&G has been downgraded to A from A+.

The firm’s subordinated debt rating has dropped to A- from A and the firm’s insurer financial strength rating to AA from AA+. All of the ratings have been placed on negative watch.

Last month, L&G announced an estimated IGD capital surplus in excess of £1.6bn for the year-end – a substantial fall from the £2.9bn surplus estimated at September 30, 2008. This was partly due to strengthening of its credit default reserves.

But Fitch says the firm has higher shareholder equity exposure than many of its peers so its IGD surplus has been relatively adversely affected and is likely to have been further eroded by equity falls in the first quarter of 2009.

Senior director David Prowse says: “While the IGD surplus indicates that L&G’s capital has weakened, it is unsatisfactory as a basis for assessing the true capital position of the group. IGD surplus is an incomplete measure for companies such as L&G that have large with-profits funds because it excludes surplus capital held within these funds from the calculation. We will not know how L&G’s with-profits fund – which was £19bn at the end of 2007 – fared through Q4 2008 until the company publishes its results on March 25.”

Fitch expects to resolve the negative watch after L&G publishes its full 2008 results, when the agency will update its assessment of the group’s capital strength.

This assessment will include analysis of L&G’s realistic balance sheet and benchmarking of L&G’s recently strengthened credit default assumptions, taking into account updated disclosures on the quality of L&G’s corporate bond portfolio.


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