OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'AA-' long-term counterparty credit and insurer financial strength ratings on the core subsidiaries within the Legal & General group (L&G). At the same time, we affirmed our 'A/A-1' long - and short-term counterparty credit ratings on the group's holding company, Legal & General Group PLC. We also affirmed our 'A+' rating on highly strategic group subsidiary Legal & General Reinsurance Co. Ltd. The outlook on the long-term ratings is stable.

The affirmation is based on our view of L&G's very strong competitive position as a leading annuity, protection, savings, and asset management solutions provider in the U. K., which is one of the more developed life insurance markets in Europe. Additional credit strengths include L&G's strong capital and earnings generation and ability to source capital and liquidity, should the need arise.

We consider that L&G has improved its management effectiveness and its focus on its strengths in recent years. In our view, this will help L&G to limit the potential turmoil following the U. K.'s vote to leave the EU ("Brexit"). L&G's ability to anticipate regulatory changes to maintain profitable growth, utilizing its insurance and asset management units, also testifies to the strength of management. We have therefore revised our assessment of the group's management and governance to strong from satisfactory.

We combine our views on L&G's financial and business risk profiles to derive an anchor of 'aa-' or 'a+'. We choose the higher of these anchors because, in our view, L&G's strong earnings performance, growing share of asset management profits (over 20% of total), and strong financial flexibility should maintain its capital adequacy at the 'AA' benchmark over the next three years.

We assess L&G's competitive position as very strong. In our opinion, L&G has one of the most favorable business risk profiles in the U. K. life sector because of its expertise across products--including its market-leading risk products and asset management operations. It also has a multichannel distribution model and a widely recognized brand. The EU's Solvency II Directive is a business constraint for L&G due to high longevity risk requirements (risk margin of 6%) but it also presents an opportunity, as Solvency II has led competitors such as Prudential PLC and Aegon to exit the annuities market, leaving L&G as the clear U. K. leader.

L&G's capital and earnings are strong, in our opinion. Capital adequacy exceeded our expectations in 2015, supported by the following:Hybrid debt issuance, Lower life deferred acquisition costs following transfers to shareholder net worth, Asset sales (LG France, LG Egypt, LG Ireland, and Suffolk life), and Significantly increased longevity reinsurance. We expect L&G to maintain its capital adequacy at the 'AA' benchmark over the next three years, based on strong earnings, managed recourse to reinsurance of longevity risk, and cautious growth of direct investments.

That said, the quality of the group's capital weighs on our assessment of capital and earnings. Available capital includes sizable proportions of value-in-force and hybrid instruments, which we view as softer forms of capital. In addition, we believe that the high Solvency II requirements of longevity risk make L&G reliant to a certain extent on the reinsurance market in order to maintain satisfactory regulatory ratios.

We consider that Brexit turmoil has had a limited impact on L&G's Solvency II ratio, which has reduced to 156% as of June 27 from 159% after a dividend and the purchase of Aegon's annuity portfolio in May. We expect a good 2016 for L&G as the new bulk and individual annuity business of ?4.5 billion as of July 19, 2016 already exceeds the total for 2015. L&G also has limited exposure to the U. K. banking sector.

In 2015, L&G continued to deliver a market-leading 17% return on equity. In our base-case scenario for the next three years, we assume that L&G will maintain its above-average operating performance for the U. K. life market. Our ratings factor in our assumptions of an annual return on equity of no lower than 13% in 2016-2018 (under International Financial Reporting Standards), new business margins of about 4%, and growing annual net income above ?1.1 billion.

The stable outlook on Legal & General Group PLC (L&G) and the group's core operating entities reflects our view that the group will manage growth in annuity capital requirements at levels commensurate with its capital generation, allowing it to maintain very strong capital adequacy.

We also anticipate that the group will maintain a highly resilient business risk profile in the U. K. life insurance sector, thanks to market-leading platforms in annuities and index-driven asset management, which we expect will enable L&G to successfully adapt to an uncertain regulatory and legislative environment.

We may lower the rating on L&G if:The group's growth, investment strategy, or changes in its capital management plans weaken our view of its capital adequacy to levels below the 'AA' level of confidence for a sustained period;Operating performance, particularly as demonstrated by its earnings and new business profitability, deteriorates below our current expectations; orThe group's competitive position is unexpectedly impaired by regulatory and legislative changes in the U. K. life insurance market, or constrained by lack of cost-effective solutions to implement its strategy in risk products. We view the possibility of an ugprade as remote over the next 18-24 months, as it would likely depend on L&G achieving unexpected significant and profitable diversification outside of the U. K., coupled with an improvement in capital adequacy.