Outlook for UK life insurers remains negative – Moody’s

The fundamental credit outlook for the UK life insurance system remains negative, in line with Moody's negative outlook for the overall European insurance market. Despite recent improvements in investment markets, the rating agency expects continuing pressure on premiums and profitability for the UK market, coupled with significant strategic challenges arising from the implementation of regulatory changes in 2012.
The outlook is driven primarily by three factors: depressed business premiums, weak profitability and the strategic challenges deriving from the implementation of regulatory changes in 2012, namely Solvency II and the retail distribution review (RdR). The outlook also factors in Moody's most recent analysis of the UK's economic situation and likely developments in the next one-two years.
"Recent improvements in investment markets, which include the strong recovery of equity markets, tightening of corporate spreads and reopening of financial markets, have reduced short-term pressure on the capitalisation and financial flexibility of UK life players. Nevertheless, the investment market resurgence has meant that the industry has not surmounted the challenges arising from the sluggish UK economy and the high level of household indebtedness, which we expect to weigh on consumption and contribute to weak sales levels in 2009 and 2010," said Antonello Aquino, Moody's lead analyst for the UK life insurance sector.
In terms of profitability, Moody's believes that most groups will continue to be under negative pressure. This reflects the difficult economic climate, with its implications for the volume of new life and pension sales, combined with the rating agency's concerns about some of the systemically unprofitable business lines in the UK market.
In terms of asset quality, Moody's notes that most UK life groups have continued to de-risk their balance sheets in 2009 and considerably reduced their direct equity exposures. Nevertheless, investment in equity generally remains relatively high compared with that in other European markets and, in a period of equity market pressure and market volatility, this asset exposure increases the industry's risk profile.
Moody's expects a series of regulatory changes, namely Solvency II and the RdR, to have a long-lasting effect on the industry. Solvency II will affect the relative attractiveness of different product lines and, depending on its final implementation, may require higher capital requirements for some players. The RdR will also drive changes in the distribution landscape, particularly for independent financial advisers, and may have a detriment effect on life volumes.
Finally, Moody's expects some industry consolidation for sub-scale insurers mostly driven by its expectation that the economy will continue to be stagnant and of regulatory pressure. Consolidation may strengthen the credit quality of the UK market as a whole, particularly if the number of sub-scale providers focusing on unprofitable business lines falls and the resulting scale and profitability of the remaining players rise.