Negative outlook for UK life insurance

The fundamental credit outlook for the UK life insurance industry is negative, in particular reflecting concerns about insurers' still strong but depressed capitalisation, weakening profitability and substantial exposure to equities, as well as the deteriorating economic environment, Moody's Investors Service said in its new UK Life Insurance Industry Outlook.
"The UK life insurance industry continues to maintain a robust capital position, despite the impact of falling equity markets, and the position of the strongest players remains very strong. However, the industry has clearly experienced some deterioration in capital over the past six to 12 months. Furthermore, if the economy does enter a relatively prolonged period of slowdown, with an associated depressed equity market, capitalisation levels are unlikely to improve markedly in the short-to-medium term, and further downside risk may remain material," said Simon Harris, co-author of the Moody’s report.
In terms of profitability, Moody's believes that most UK life groups are under considerable pressure. This reflects the difficult economic climate, with its implications for the volume of new life and pensions sales, combined with concerns about some of the systemically unprofitable business lines in the UK market
The rating agency does not expect these pressures to relent soon. Product risk also remains as a negative pressure as, despite new business sales increasingly focussing on low or no-guarantee products, the industry's historical focus on with-profits policies continues to dominate balance sheets in most cases.
"In terms of equity exposure, Moody's notes that most UK life groups have taken steps to physically reduce and/or hedge their equity exposures, compared with the positions they found themselves in during the previous market downturn. However, equity exposure generally remains high and, during a period of equity market pressure and market volatility, this asset exposure increases the risk profile of the industry," added Harris.
More positively, Moody's notes that the industry maintains very strong liquidity, such that companies are unlikely to be forced to crystallise current unrealised asset losses. In addition, asset-liability management techniques have improved substantially in recent years, improving the sector's ability to manage its risks during times of economic stress.