Nearly 40% of the UK life sector now has a negative outlook on its long term ratings with L&G and NU Life and Pensions facing recent downgrades, according to S&P.
In its latest review of the sector, S&P lowered the counterparty credit and insurer financial strength ratings on the insurance giants although Standard Life Assurance's was raised.
It found around 40% of insurers were on a 'negative' outllook, which means there is a greater than one in three chance they may face a ratings downgrade over the next two years.
NU has already been downgraded in the review from AA to AA- for CULAC and CGNU, which make up NU Life, with the future outlook for the group 'stable'.
"This action reflects S&P's view that the current financial market conditions have led to a weakening in NU Life's capitalisation, albeit remaining very strong," according to the report.
It expressed concern the £2.1bn special distribution of part of the CGNU and CULAC with-profits funds estate during 2008, and the adverse impact of the financial market conditions on the remaining estate, have led to a relative weakening of NU Life's capitalisation.
Meanwhile, L&G's ratings were downgraded from AA+ to AA, on S&P's views regarding capitalisation and risk profile.
However, it raised its ratings on Standard Life Assurance from A to A+ reflecting its view that "strong execution of tactical initiatives over the past three years, repositioning the business model in the UK places the group in a relatively strong position in the current downturn and beyond".
S&P says the weakening economic outlook and heightened financial risks have added to the downward pressure on ratings throughout the sector.
It adds new sales for the sector are likely to be down by 5% to 15% this year for the sector, while the new business outlook for 2010 remains 'highly uncertain'.
Life insurers also face a number of strategic challenges relating to pension reform and regulatory-driven changes to distribution, according to the review.
"Although we view favourably the proposals to end commission bias in product sales, we are concerned about the potential impact on the IFA sector and sales volumes."
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