MOODY'S PLACES RATINGS OF MOST UK LIFE INSURERS ON REVIEW FOR POSSIBLE DOWNGRADE
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 credit losses.
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
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