Index will have to reach 5,250 before companies can regain their financial strength
The FTSE will have to rise above 5,250 if UK life offices are to regain their financial strength, according to SchroderSalomonSmithBarney.
Andrew Crean, who carried out the research for the group, believes that unless markets rally to the end of the year, the life industry will be in a weakened state and unable to write new business freely.
Stronger life companies could take advantage of this to increase market share, but if markets remains weak they are unlikely to be able to afford the expense of pursuing the opportunity.
The FTSE now stands at around the 4,800 mark and, in the wake of the events of 11 September in the US, reached a low of 4,433 on 21 September.
The free asset ratios of life companies have been affected by the falling stock markets. This is reducing their ability to function effectively in the future, according to Crean.
SchroderSalomon believes a life office needs to have a free asset ratio of more than 10% to be secure.
Its research suggested that Norwich Union, National Mutual, Friends Provident and Scottish Mutual are among the offices falling below this threshold.
Analysis by the group revealed that if the FTSE finished the year at its current level, many companies would find themselves 'financially stretched'.
Crean said: 'We calculate that 10 of the 35 companies in our review would have negative free asset ratios. A further 10 would have free asset ratios below 5% and would be constrained in their freedom of action.'
Crean believes falling markets will further marginalise weaker life companies.
He said: 'The hurdle, in terms of financial strength, for being seen as a credible player in the IFA market is rising and this is leading to the weaker and fringe players either selling out or having to switch their portfolios more towards fixed interest stocks.'
He argued that this would lead to cuts in bonus rates which would further constrict their ability to attract new business.
The report also suggests that there will be a significant shift from equities to bonds, regardless of regulatory changes that have relaxed the rules on the levels of equities life companies are required to hold.
If markets remain low, the prospects for listed life companies remain poor, according to Crean.
He said that inherited estates have shrunk and bonus declarations will come under increasing pressure. This will mean that statutory profits will be hit, he added, and dividend growth will have to be reassessed.
Crean predicted that future sales could be hit by a dent to the 'equity culture'.
But it is not just falling equity markets that have harmed life offices. SchroderSalomon has highlighted a range of other factors.
These include the impact of guaranteed annuity rates, which Crean estimates will cost £10bn. The pensions transfer review will cost the industry a further £15bn, according to SchroderSalomon.
Demographics have also been an important factor in weakening life companies as longer life expectancy had led to increased annuity payments. Falling interest rates were also flagged as an outside influence, damaging insurance companies.
A more serious factor directly affecting the life industry comes from the shape of the products on offer.
Crean said: 'The additional new business strain imposed by a shift from products with high initial charges to products with level or even fund-based charges is also an important pressure.'
‘Important to have an anchor’
Lack of innovation for solutions
Some 2,000 consumers affected
Achievements, charity work and other happy snippets