OREANDA-NEWS. Fitch Ratings has affirmed Scottish Widows plc's (SW) and Clerical Medical Investment Group Ltd's (CMIG) Long-term Issuer Default Ratings (IDR) at 'A+' and their Insurer Financial Strength (IFS) ratings at 'AA-'. The Outlooks on the ratings are Stable.

The agency has also affirmed SW's and Clerical Medical Finance plc's subordinated debt, which is guaranteed by CMIG, at 'A-'.

KEY RATING DRIVERS
The ratings of SW and CMIG are based on the credit quality of Scottish Widows Group Ltd (SWG), the holding company consolidating all insurance operations of Lloyds Banking Group plc (LBG, Long-term IDR A+/Stable) as the agency views the rated entities as core to SWG under its insurance group rating methodology.

SW's and CMIG's IDRs are aligned with Lloyds Bank plc's IDR of 'A+' to reflect Fitch's view of SWG's importance to LBG, the integration of its operations and management with those of LBG, and its strong position in the UK life and pensions market. This approach implies a single-notch uplift from Fitch's assessment of SWG's standalone creditworthiness.

Although SWG's geographical diversification is limited by its UK focus, the group benefits from product diversification not just within its life, pensions and investment businesses, but also through its sizeable non-life insurance business. SW's and CMIG's Outlooks are aligned with Lloyds Bank plc's Outlook as a rating change of Lloyds Bank plc is likely to be reflected in SW and CMIG.

Fitch views SWG's capitalisation as "extremely strong" based its risk-adjusted Prism factor-based capital model, despite dividend payment of GBP1.0bn (including the proceeds of the sale of Heidelberger Leben) in 2014 to LBG. SWG's regulatory capital was also strong with Insurance Groups' Directive (IGD) surplus of GBP3.1bn at end-1H15 (end-2014: GBP3.0bn). SWG's financial leverage at 27% and fixed-charge coverage at 6.7x in 2014, both based on Fitch calculations, are in line with a rating in the IFS 'A' range.

SW's underlying profit (excluding general insurance operations) was strong at GBP666m in 2014 (2013: GBP791m) and GBP461m in 1H15 (1H14: GBP331m). The improvement in 1H15 was driven by an internal bulk annuity transaction which lifted underlying income by GBP130m. However, margins on new business sales declined to 1.2% in 2014 (2013: 2.6%), reflecting a higher proportion of lower premium auto-enrolment business , SW adjusting prices for standard annuities in 2H13 and lower sales of protection and annuities.

SWG announced in July 2015 that it will merge its eight life insurance entities into CMIG at end-2015 via a legal process known as a Part VII transfer and this has now received the necessary sanction by the High Court. After the transfer, CMIG will be renamed Scottish Widows Limited (SWL). Fitch expects to rate SWL at the same level as CMIG as the overall business and financial profile (including capital and dividend policies) will remain unchanged.

RATING SENSITIVITIES
Any change in Lloyds Bank plc's rating is likely to lead to a corresponding change in SW's and CMIG's ratings. The ratings could be downgraded if Fitch no longer sees SWG as integral to LBG.