Financial Strength & Security
The financial strength of a life company reflects its ability to meet its obligations to its customers. Recent developments in the financial markets have intensified the focus on financial strength and increased demand for up to date information.
Financial strength, which was once a hygiene factor, is now a reason to place business with one company over another.
These pages are designed to give you information on the financial security, ratings and financial strength of Scottish Widows and Clerical Medical. We will update the site on a regular basis and add more information as and when required.
Scottish Widows Corporate Brochure
Scottish Widows and Clerical Medical
Scottish Widows and Clerical Medical now have a combined IFA sales force offering a strong and comprehensive range of products. This is the first step in a plan that will see Scottish Widows and Clerical Medical combine forces, operating under the Scottish Widows brand. During this period of transition, they remain separate companies, and you’ll continue to see Clerical Medical branding until the process is complete.
Scottish Widows and Clerical Medical operate within the insurance division of Lloyds Banking Group and at the end of 2008 had between them a reassuring total of £4.3 billion ‘free’* capital in excess of regulatory solvency requirements.
The capital underpinning both Scottish Widows’ and Clerical Medical's long term insurance business is subject to regulation by the FSA. Both companies can meet all the capital requirements required by this regulation and moreover have a policy of holding capital in addition to these requirements. The aim of this capital policy is, first and foremost, to enable each company to meet its obligations to its customers and both Scottish Widows and Clerical Medical will continue to manage its financial strength to do so.'
Free Capital Ratios
The free capital ratio for both Scottish Widows and Clerical Medical are among the highest in the life and pensions industry.
The free capital ratio shows capital resources as a proportion of liabilities, which for this purpose exclude unit-linked liabilities. We believe this exclusion provides a better indication of a company's capital strength.**
Ernst and Young’s 2008 Capital and Solvency Review: Free Asset Ratio (FAR)
The following is taken from the 2008 capital and solvency review, published in September 2009.
The most widely used measure of financial strength, particularly for with-profit companies, is the FAR. This is often used to compare the financial strength and future bonus prospects of life companies.
The FAR has been calculated as the free assets expressed as a percentage of the regulatory liabilities. The free assets are calculated as the capital resources of the company less the CRR. The capital resources are broadly the total assets (including those outside the long-term fund) plus any adjustments for alternative sources of capital (such as implicit items, subordinated debt, financial reinsurance, contingent loans and other charges on future profits), less liabilities. Liabilities are calculated as the sum of the mathematical reserves and other long-term insurance liabilities, based on the existing Prudential Sourcebook (GENPRU and INSPRU) regulations.
Care is needed when comparing FARs, as companies will have a different mix of business, and may have adopted different levels of prudence in their valuations. Trends in FARs are therefore a more reliable indicator than the absolute level. Generally, companies that write business with significant guarantees, large volumes of annuity business or large volumes of with-profit business will need more free assets. Companies writing mainly unit-linked and other non-profit business, provided they adopt an appropriate matching strategy, have historically held less free assets and will therefore operate at a lower FAR.
The graph below shows the 40 companies with the highest FAR in our review. The FAR decreased for 33 out of the 40 companies. The average shown is a weighted average across all companies, which has decreased from 4.0% at end 2007 to 2.8% at end 2008.
Financial strength ratings
Independent ratings companies assess the financial strength of life companies through in-depth detailed analysis. They are independent financial analysts who examine the financial security of institutions based on their credit ratings and assets.
Scottish Widows and Clerical Medical have been allocated the following ratings for financial strength:
| Company | Moody's | Standard & Poor's | Fitch | AKG |
|---|---|---|---|---|
| Scottish Widows plc | Aa3 Excellent |
A+ Strong |
AA- Very Strong |
B+ Very strong |
| Clerical Medical Investment Group Ltd | A1 Good |
A+ Strong |
A+ Strong |
B+ Very Strong |
| Sources: Moody's, Standard & Poor's and Fitch ratings correct at 11th June 2009. AKG ratings correct at August 09. | ||||
Financial strength Q & A
The statement below provides up-to-date information for use by financial advisers and investment professionals and answers to questions about Scottish Widows’ and Clerical Medical’s respective financial strengths.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms. This means that in the very unlikely event of Scottish Widows or Clerical Medical being unable to meet their liabilities, the FSCS can pay compensation to our customers.
To help you reassure your customers and potential customers about the security of Scottish Widows and Clerical Medical, below is a briefing on the protection provided by the Financial Services Compensation Scheme.
- Scottish Widows & the Financial Services Compensation Scheme
- Clerical Medical Offshore Investments and the Isle of Man Life Assurance (Compensation of Policyholders) Regulations
- Clerical Medical Onshore Investments and the Financial Services Compensation Scheme
Lloyds Banking Group
Lloyds Banking Group plc was formed on the 19th January 2009 following the acquisition of HBOS plc. Scottish Widows plc and Clerical Medical Investment Group ltd now form part of Lloyds Banking Group.
Lloyds Banking Group is the largest retail bank in the UK. Its main UK business activities include retail banking, commercial and corporate banking, general insurance, pensions and investments. The Group also operates an international banking business with a global footprint in over 36 countries.
With over 30 million customers, the new Group offers services through a number of well recognised brands, including Scottish Widows.
Lloyds Banking Group will continue to take a prudent approach to risk management. The Group’s intended participation in the Government Asset Protection Scheme will substantially reduce the risk profile of the organisation and significantly strengthen the capital position of the Group. The Group maintains a strong liquidity position and continued to lengthen the maturity of its wholesale funding liabilities in the first quarter of this year.
Response to market conditions
For information on market conditions, visit our Response to market conditions section, providing updates on current events and views from our investment partners.
* ‘Free’ capital is the difference between a firm’s available capital and the capital required for FSA solvency reporting purposes.
** The Free Capital Ratio formula is: Form 2 Line 42 / (Form 14 Line 11 + Form 14 Line 12 + Form 14 Line 49 – Form 50 Line 44 Column 4) of the Annual FSA Insurance Returns.
