Cazalet report states companies writing with-profits are being hurt
Up to a dozen life companies will close to new business or be taken over within six months, according to industry analyst Ned Cazalet.
Royal & SunAlliance and MGM are two groups highlighted as having a future described as 'in the balance' and a target for a player seeking to break into the UK market.
Cazalet, who has just published his latest report into the strength of life companies, said falling stock markets are adding new strains to the damaged financial strength of the sector, putting the viability of some into serious doubt.
He added: 'Life companies said they would be worried if the market fell below 5,200, now it has fallen to around 4,500. Companies that write with-profits business are being hurt very badly. Reserves are being hit and their ability to write new business is looking more questionable all the time.'
Cazalet believes the introduction of stakeholder and the changing face of distribution channels have added to the stress that life companies face. As a result, no groups in his survey have seen their credit ratings updated while many have been downgraded.
Although markets have experienced longer and more sustained downturns in the past, Stewart Ritchie, director of pensions strategy at Scottish Equitable, argued that a combination of factors meant the outlook for life companies was more uncertain now. He said: 'A combination of high guaranteed annuity rate liabilities, low yields on long-term gilts and the burden of the 1% environment, are factors that have not existed before.'
Ritchie predicted that the life market would have to restructure radically to survive. He said: 'It is likely to accelerate the trend to a situation where there are a few large companies and smaller, more specialised, niche players.
Chris O'Brien, director of the Centre for Risk and Insurance Studies at Nottingham University, pointed out that relaxed rules on solvency had taken some of the pressure off life companies but he also anticipates a lot of merger activity. He said: 'Lower solvency will accelerate the trend of mergers and takeovers.'
Cazalet believes other companies were set to go down the route of National Mutual, which was acquired by GE Life, and Scottish Amicable, which has narrowed the scope of its business so it will take very little new group business in the future.
Cazalet's with-profits ratings are designed to help intermediaries decide which companies are capable of delivering better returns over the long term. He looks beyond life companies' free asset ratio declarations because he argues these are open to manipulation and do not tell the whole picture.These figures do not measure 'orphan assets', he says, an important part of life companies' strength.
Cazalet's measures assess the financial strength of life offices. The ratings also take into account valuations bases and the mix of in-force business and new business.
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