Standard & Poor's Ratings Services has placed its ratings on Friends Life Group and its rated operating subsidiaries, Friends Life Ltd and Friends Life Company Ltd. (FLC; formerly Axa Sun Life PLC, which was acquired from AXA UK), on CreditWatch with negative implications.
The CreditWatch placement follows Resolution's announcement of a change in strategic focus from the current operational separation of existing business and new business activities and accountability, which occurred over the course of 2011, to a more distinct legal entity separation. This would create two separate legal entities, a closed fund consolidator (HeritageCo) and an insurer that would continue to seek new business (OpenCo).
The rating agency comments We understand that OpenCo would consist of the UK new business activities, the overseas businesses (i.e., predominantly Friends Provident International Ltd. and Lombard International Assurance), Sesame Bankhall Group Ltd., and associated support businesses. Meanwhile, HeritageCo would consist of the UK existing business and associated support businesses, including Friends Life Investments, Friends Life's listed debt, and the UK pension fund. We understand that business held within the rated entities-FLL and FLC-and the group's existing outstanding debt would form part of HeritageCo.
We have placed our ratings on Friends Life Group, FLL, and FLC on CreditWatch negative to reflect our perception of the potential transforming impact of this announcement on the group's financial and business risk profiles. Combining new and existing business activities has financial and commercial advantages, which may be lost. The separate businesses, with different business strategies, may have different credit profiles. In our view, the business risk profile of a closed fund consolidator is higher risk because of the volatile and uncertain nature of the transactions needed to sustain future cash flows. Furthermore, the financial profile of, and financial policies for, each business are uncertain at this stage.
When we rated the group, we had assumed that the Friends Life Group would retain its current identity and strategic focus on both new and in-force business within the same group. While management retains a full range of exit options for late 2013/early 2014, the announcement increases Resolution's ability to relatively rapidly transform the credit profile of the Friends Life Group by separating OpenCo from HeritageCo.
We expect to update the CreditWatch placement before the end of June 2012 following discussions with the company about the business and financial risk profile of the separate businesses. We will also discuss the strategic plans, market outlook, and financial conditions for various exit options and for future acquisitions by HeritageCo. Our review will address the key financial policies of HeritageCo for supporting the interests of policyholders and debtholders, and the group status and role of the various rated entities.
Based on current information, the ratings could be affirmed at current levels or lowered by one or two notches. The CreditWatch with negative implications indicates that, in our view, there is a one-in-two chance of a downgrade within the next three months."
|
