CreditWatch Placement on Scottish Provident Revised to Negative from Positive.

Business Editors

LONDON--(BUSINESS WIRE)--Standard & Poor's

June 4, 2001-- Standard and Poor's today revised the CreditWatch implications on its single-'A'-plus long-term counterparty credit and insurer financial strength ratings on Scottish Provident Institution (SPI) to negative from positive, where they were placed on Sept. 7, 2000. At the same time, Standard & Poor's revised the CreditWatch implications to negative from positive on the single-'A'-minus subordinated debt rating on related entity Scottish Provident Finance PLC, which is guaranteed by SPI.

The original positive CreditWatch implications reflected Standard & Poor's expectation that the existing business of SPI would be transferred into the long-term business fund of Scottish Mutual Assurance (SMA; AA/Stable/--) upon the completion of Abbey National PLC's acquisition of SPI. Policyholders of SPI, therefore, would have benefited from the greater financial strength of the acquiring entity.

The articles of association of SPI did not, however, permit this transfer to be carried out directly. Under the revised proposals for the acquisition of SPI, all existing business will be transferred to a separate subsidiary of Abbey National Plc -- Scottish Provident Ltd. (SPL) -- which will be closed to new business (except for increments on existing contracts). All new U.K. Scottish Provident-branded business will be written within SMA's long-term business fund. In the future it is Abbey National's intention that the business be transferred to SMA from SPL, but this is currently not certain.

In Standard & Poor's opinion the financial strength of SPI as an independent entity has deteriorated in the past 12 months. The negative implications, therefore, reflect the small possibility that the acquisition may not be completed, in which case the rating would likely be lowered to single-'A'-minus. Assuming that the acquisition proceeds as proposed (which appears more likely) then SPL will benefit from a capital injection and cost synergies with SMA, which should restore its previous level of financial strength. In the absence of any further explicit financial support from SMA or its parent Abbey National PLC (AA/Stable/A-1+), Standard & Poor's no longer considers that there is any potential for the rating on SPL to be higher than the existing rating on SPI.

The expected ratings on SPL would be based on its very strong capitalization, strong operating performance and modest capital requirements as a closed fund. The lowering of ratings on SPI as a stand-alone entity would be based on its increasingly challenged (although still strong) business position in the U.K. broker protection market, reduced statutory capitalization, and weakened management if the SMA transaction were to fail. Capital adequacy and operating performance remain strong. Partly offsetting these strengths are SPI's over-reliance in the U.K. on a single product range and distribution channel.

Standard & Poor's expects to resolve the CreditWatch status following the Scottish Court of Session hearing, which is expected to take place in July 2001. ---CreditWire

Credit Profile:

ISSUER CREDIT RATING
Scottish Provident Institution
Counterparty credit rtg           A+/Watch Negative/--
Insurer financial strength rtg    A+/Watch Negative/--
Scottish Provident Finance PLC
Subordinated debt rtg             A-/Watch Negative