Standard & Poor's Ratings Services has revised the outlook on the 'A+' rating on Scottish Equitable(SEPLC) to negative from stable. At the same time, they affirmed the 'A+' counterparty credit and insurer financial strength ratings.
The rating agency said "The outlook revision reflects our view that SEPLC will face significant execution risks in repositioning its business in light of regulatory changes. Our assessment of SEPLC's competitive position within the UK market and its operating performance are both under pressure, in our opinion. We consider that the current environment makes it more difficult for SEPLC to reach the targets its parent company(AEGON) set, which include a return on equity of 8% by 2015 and operational free cash flow of £200-£250m by the same date. Furthermore, we anticipate that SEPLC's 2012 return on capital will be somewhat lower than the 5% return on capital that we previously expected.
Over the past few years, SEPLC has typically been one of the top five or so UK life insurance providers, as measured by gross premium written; i.e., it has typically had approximately 10% or so of the market. In our view, SEPLC has relied significantly on commission-based segments of the market for its sales. Following the Retail Distribution Review, commission-based sales will be prohibited from 2013 onward. We therefore expect SEPLC to find it difficult to maintain its capacity to generate new business with the product offering and distribution capacities that it has had up to now.
SEPLC plans to focus more on its platform and investigating partnerships with banks and, in the longer term, direct distribution to sustain its market position. In our view, these developments, if successfully implemented, would support SEPLC's competitive position and enable the company to generate stronger returns. However, we think this plan carries significant execution risk because SEPLC are using a new and untested platform strategy in a competitive market. Currently, there are more than 20 other platform providers. SEPLC's plan also involves diversifying its distribution capabilities, which requires it to establish new distribution mechanisms.
The rating on SEPLC currently benefits from three notches of support from its parent as a strategically important entity in the AEGON group under our group rating methodology. Thus, it has a 'bbb+' stand-alone credit profile, but an 'A+' financial strength rating.
We would revise the outlook to stable if we consider that SEPLC has successfully executed its strategy to reposition the business, as demonstrated by resilient market share at acceptable levels of profitability and if SEPLC's plans to achieve group targets are, in our view, on track.
We view the possibility of an increase in the rating over the rating horizon as remote.
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