S&P Affirms Royal London's 'A-1+' CP Rating.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 8/20/98-- Standard & Poor's today affirmed its 'A-1'-plus commercial paper rating of The Royal London Mutual Insurance Society Ltd. (RL). The rating is based on the society's extremely strong capitalization, which in turn helps it to generate very strong investment performance and excellent policyholder returns. Offsetting factors are RL's relatively high expense base which contributes to RL's difficulties in growing its market share.

MAJOR RATING FACTORS: -- Extremely strong capitalization: RL has the strongest solvency in the U.K. life peer group with 10.8 times (x) coverage of the statutory minimum margin. This is supported by a conservative valuation basis and a strategy focused on maintaining this level of strength.

-- Very strong investment performance: RL's capital strength supports its high exposure to real assets; while with-profit liabilities are backed predominately by equities (99% equity backing ratio in 1997), investment leverage is low at 294%. In 1997, RL earned a 20.2% return on its investments, comfortably ahead of peers.

-- Excellent policyholder returns: RL frequently tops the tables for endowment performance. This is a key marketing strength and will help RL in its plans to enter the IFA market in the next millennium. Bonuses are supported by the returns earned on the free estate which more than outweigh the reduction in yield from high expense levels.

-- RL has a high expense ratio (36%), reflecting the costs associated with home service distribution. Expenses are also adversely affected by non-recurring items related to restructuring and the high costs incurred in resolving cases of pensions mis-selling. Excluding non-recurring items, the expense ratio was 28.1% in 1997, against 26.7% in 1996.

-- RL has a modest business position with a 1% share of the U.K. life and pensions market. It operates in a highly competitive financial services market that is becoming increasingly based on price, which hinders RL's efforts to grow its book. However, the seemingly loyal customer base and very strong returns to policyholders compensate for this, and are likely to support the present market position of RL. 1997 new business fell by 7.5% due to the effects of restructuring and the loss of sales staff who failed the industry's sales competency standards (FPC). 1998 half year figures show new business recovering somewhat.

EXPECTATIONS: -- Capitalization will remain extremely strong and will continue to be a key competitive advantage;

-- New business growth will be moderate in the medium-term; and -- Standard & Poor's believes expenses will remain high relative to the U.K. life industry, although expense efficiency will improve as a result of better use of technology in the field and back office, and once the pensions mis-selling review winds down. ---CreditWire

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