Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From CreditWatch; Outlook Stable

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1 Research Update: Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From CreditWatch; Outlook Stable Primary Credit Analyst: Oluwatosin S Adesiyan, London (44) ; oluwatosin.adesiyan@standardandpoors.com Secondary Contact: Mark Button, London (44) ; mark.button@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 9,

2 Research Update: Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From Overview On June 9, 2015, we affirmed our ratings on Lloyds Banking Group PLC (LBG) and removed them from CreditWatch. We are therefore removing from CreditWatch, and affirming our 'A' ratings on LBG's life insurance operations, Scottish Widows PLC and Clerical Medical Investment Group Ltd. (collectively SWPLC). The stable outlook reflects that on LBG and our expectation that SWPLC will maintain the strength of its financial profile through controlled asset risk tolerances, and its business profile through defendable market positions in chosen products. Rating Action On June 9, 2015, Standard & Poor's Ratings Services affirmed its 'A' insurer financial strength and counterparty credit ratings on U.K.-based Lloyds Banking Group's (LBG) life insurance operations--scottish Widows PLC and its subsidiary, Clerical Medical Investment Group Ltd. (collectively, SWPLC). At the same time, we removed the ratings from CreditWatch, where they had been placed with negative implications on Feb. 3, The outlook is stable. Rationale The rating affirmation follows a similar rating action on the ultimate parent, Lloyds Banking Group (LBG) (see "Lloyds Banking Group Upgraded To 'BBB+', OpCo Ratings Affirmed On Government Support And ALAC Criteria; Outlook Stable," published June 9, 2015). We consider SWPLC to be strategically important to LBG. As such, the ratings on SWPLC are limited by the 'a' group credit profile of LBG. The rating affirmation also incorporates our unchanged views on the strengths of SWPLC's business and financial risk profiles. Its strengths include: a diversified product strategy with leading positions in the U.K. pension market, and prudent capital management, as defined in our criteria. Our overall assessment of SWPLC's credit strengths leads to an anchor of 'a+' or 'a'. We apply the lower outcome based on our view of risks relating to the competitive position and general business environment. For example, new business margins fell below our previous expectations due to the effects of JUNE 9,

3 Research Update: Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From political reforms in U.K. pensions and lower volumes of protection business. We forecast that the margin will remain below 2% in the next two years, but improve to over 2% as the group delivers profitable growth in risk products. We assess SWPLC's capital and earnings as very strong. According to Standard & Poor's risk-adjusted capital model, we view the capital as being in the 'AAA' range and anticipate that it will remain so over our two-year forecast horizon. Our overall assessment is constrained by the quality of capital. In common with many U.K. life peers, a significant proportion of total adjusted capital comprises softer items, such as future profits and hybrid equity. In addition, we believe that SWPLC invests more heavily than most of its U.K. life insurance peers in illiquid assets, such as social housing loans, as a proportion of annuity liabilities, and we expect further investment in such assets. Although we view these asset classes as bearing less credit risk than a typical loan portfolio, we consider that this investment strategy could ultimately weigh on SWPLC's capital buffers, depending on the developing profile of these loans in SWPLC's portfolio. We expect SWPLC to generate International Financial Reporting Standards (IFRS) profit before tax of about 400 million- 500 million a year in 2015 and We expect distributions of dividends will be constrained by the risk appetite governing the dividend policy and do not expect dividends to dilute capital adequacy below its current 'AAA' level per our criteria. We expect financial leverage to remain below 30%. Outlook The stable outlook reflects that on LBG and our expectation that SWPLC will maintain the strength of its financial profile through controlled asset risk tolerances, and its business profile through defendable market positions in chosen products. Downside scenario If we revised down the Lloyds Banking Group's group credit profile, then we would likely lower the ratings on SWPLC. We could also lower the ratings on SWPLC by up to one notch if we considered that: Shareholder distribution risks could increase, and that this would weaken capital and earnings to levels lower than very strong. Further debt issuance, or earnings weakness was likely to reduce fixed-charge coverage to below 4x. The underlying risks in the illiquid loan portfolio were likely to deviate from our current low risk assumptions. Upside scenario An upgrade is considered unlikely given limited rating upside potential both at the parent level and at SWPLC's level. JUNE 9,

4 Research Update: Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From Ratings Score Snapshot Financial Strength Rating SACP Anchor Business Risk Profile IICRA Competitive Position Financial Risk Profile Capital & Earnings Risk Position Financial Flexibility A/Stable a a Strong Low Risk Strong Very Strong Very Strong Intermediate Risk Adequate Modifiers 0 ERM and Management 0 Enterprise Risk Management Strong Management & Governance Satisfactory Holistic Analysis 0 Liquidity Exceptional Support 0 Group Support 0 Government Support 0 IICRA--Insurance Industry And Country Risk Assessment. Related Criteria And Research Related Criteria Group Rating Methodology, Nov. 19, 2013 Insurers: Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Related Research How Standard & Poor's Applied Its Government Support And ALAC Criteria To U.K., German, Austrian, And Swiss Banks, June 9, 2015 Lloyds Banking Group Upgraded To 'BBB+', OpCo Ratings Affirmed On JUNE 9,

5 Research Update: Lloyds Banking Group Life Insurance Operations 'A' Ratings Affirmed And Removed From Government Support And ALAC Criteria; Outlook Stable, June 9, 2015 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Scottish Widows PLC Clerical Medical Investment Group Ltd. Counterparty Credit Rating A/Stable/-- A/Watch Neg/-- Financial Strength Rating A/Stable/-- A/Watch Neg/-- Scottish Widows PLC Junior Subordinated BBB+ BBB+/Watch Neg Clerical Medical Finance PLC Junior Subordinated* BBB+ BBB+/Watch Neg *Guaranteed by Clerical Medical Investment Group Ltd. Additional Contact: Insurance Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JUNE 9,

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