MOODY'S PLACES RATINGS OF MOST UK LIFE INSURERS ON REVIEW FOR POSSIBLE DOWNGRADE
London, 11 November 2002 -- Moody's today placed the ratings of most UK life insurance companies under
review for possible downgrade. The action affects both the insurance
financial strength ratings of operating companies and senior and subordinated
debt ratings of their holding companies. Moody's says the rating
reviews were initiated primarily because of the impact of the depressed
equity markets on the companies' capital strength and financial flexibility.
The reviews will take up to three months to complete. For a full
list of companies affected please see below.
The rating agency did not place the ratings under review at this time
of any UK life companies that are part of larger and stable banks,
but will continue to monitor their financial strength in the current harsh
environment in the context of their parent companies' financial performance
and continued implicit or explicit support for them.
Moody's will release a Special Comment report sometime during the next
two weeks providing further discussion on how Moody's views the weakening
of the sector.
Moody's rating actions follow on from its comprehensive review of the
UK life insurance sector in August 2002. At that time, Moody's
commented that it was beginning to change some outlooks and gave a clear
indication that a continued or sustained fall in equity markets would
likely lead to more review activity and possible rating changes.
Since then, markets have continued to remain depressed and volatile,
and Moody's does not foresee any sustained or significant improvement
into 2003. Recent discussions with a number of companies,
and financial information provided in interim half year results,
clearly indicate that UK life insurers, although still adequately
capitalised as an industry, continue to be under pressure from a
number of factors, including sharply reduced statutory capitalisation,
the rating agency says.
Moody's comments that the industry's level of statutory free assets has
fallen materially during the last two years as a result of the industry's
traditionally high exposure to equities. Moody's peer group average
(the August 2002 UK Life Insurance Statistical Supplement refers) declined
from the low to mid teens to single digit percentages during the course
of the same period.
Likewise, coverage of the Required Minimum Margin of solvency for
the industry has declined across the board from an average 3.5
times to around 2.0 times. Moody's acknowledges that,
on a realistic basis, solvency is still adequate and markets would
have to fall some distance further before critical levels would be reached.
However, the industry has clearly experienced a substantial reduction
in its loss absorption cushion and financial flexibility that is unlikely
to be reversed in the short-term.
In addition, Moody's believes that the quality of UK life insurers'
statutory capital has also been weakened. In particular,
some insurers' use of implicit items, subordinated debt, and
financial reinsurance has substantially increased in the last 18 months.
This development has, in Moody's view, been detrimental to
policyholder security given the lower quality and diminished level of
economic capital that such balance sheet items imply. Implementation
in the near future of EU insurance directives, in particular with
regard to implicit items, will soon force UK life insurers to present
their balance sheet on a more conservative basis, putting additional
pressure on their capital adequacy.
Moody's continues to believe that UK life insurers enjoy substantial liability
flexibility, in terms of their ability to reduce policyholder guarantees
through flexible reversionary and terminal bonuses and market value adjusters
(MVAs). In addition, there is the flexibility afforded by
the practice of adjusting actuarial valuation bases. This flexibility
has always been viewed as a credit positive in offsetting the more volatile
asset side of the balance sheet as a result of investing heavily in equities.
In particular, Moody's views positively the recent actions taken
by several companies in reducing bonus rates and implementing MVAs on
surrenders. In Moody's view, however, the UK life insurance
industry could face a substantial 'smoothing' cost in the near future
if the current low level of equity markets, and/or low growth in
equity markets, continues, due to the relatively high rates
of reversionary bonuses still currently being paid by many companies.
In addition, Moody's believes that actuarial valuation bases show
some signs of having been weakened (i.e. less conservative)
to cope with the current stressful environment. Moody's cautions
that some elements of liability flexibility can only be used once,
or up to a certain maximum point, and therefore usage has at least
temporarily reduced the strength of this liability cushion.
Profitability also continues to be under pressure as the industry moves
towards a lower margin, post-Sandler, environment in
which companies' expense bases and cost structures are becoming critically
important. Additionally, new business levels are being affected
as people move away from equity related investment products to perceived
safer investment havens. Moody's notes also that there is a trend
for insurers to switch a higher proportion of their investments into higher-yielding,
but riskier assets, which could give rise to potentially greater
Duncan Rawson, Vice President-Senior Analyst, Moody's
Insurance Team, London said: " Moody's continues to recognise
the industry's sound longer-term demographically driven fundamentals,
the value of brands, good franchises, competitively priced
quality products, and the proactive efforts of management to steer
their respective companies through difficult waters. However,
the continuing negative impact of investment markets is undoubtedly putting
pressure on ratings and downward rating changes may have to be made to
reflect the reality of the situation."
The insurance groups affected are:
Co-operative Insurance Society
Legal & General
Some other industry names are already under review (Scottish Equitable)
or have recently been downgraded (Pearl Assurance/NPI, RSA Life
& Pensions/Sun Alliance & London).
Ratings affected within each group (including non life operations) are:
Aviva Plc Aa2/Aa3/P-1
CGU Insurance Plc IFSR Aa2
CGU International Insurance Plc IFSR Aa2
CGNU Life Assurance Ltd IFSR Aa1
Commercial Union Life Assurance Company Ltd IFSR Aa1
Norwich Union Insurance Ltd IFSR Aa2
Norwich Union Life & Pensions Ltd IFSR Aa1
Norwich Union Linked Life Assurance Ltd IFSR Aa1
CGU France P-1
Co-operative Insurance Society Ltd IFSR Aa3
Eagle Star Life Assurance Company Ltd IFSR A2
Eagle Star Insurance Company Ltd IFSR A2
Friends Provident Life & Pensions Ltd IFSR Aa3
FP Finance Plc A2
Legal & General Assurance Society Ltd IFSR Aa1
Legal & General Finance Europe BV Aa3
Legal & General Group Plc Aa3/A1
Legal & General Finance Plc Aa3/P-1
Prudential Annuities Ltd IFSR Aa1
Prudential Assurance Company Ltd IFSR Aaa
Prudential Finance (UK) Plc Aa3
Prudential Retirement Income Ltd IFSR Aa2
Prudential Plc Aa3/A1/P-1
Scottish Amicable Insurance Fund IFSR Aaa
Scottish Amicable Life Plc IFSR Aa1
Scottish Amicable Finance Plc IFSR Aa2
Royal London Mutual Insurance Society Ltd IFSR A1
Scottish Life Fund IFSR A1
Scottish Life Finance Plc A3
Standard Life Assurance Company IFSR Aaa
Standard Life Assurance Co Funding Inc P-1
SL Finance Plc Aa2
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
Duncan W. Rawson
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454