Wesleyan Assurance and Liverpool Victoria top an Ernst & Young review of the financial strength of UK life offices, respectively taking first place in rankings according to realistic and statutory free asset ratios.
The UK Life Insurance Companies: 2003 Capital and Solvency Review report also lays out in significant detail the overall strength of the sector, and the challenges facing firms with smaller margins of assets over liabilities.
The review covers 88 life offices, of which 33 are with-profits, defined as having at least 40% of liabilities being in with-profits as opposed to non-profits or unit linked products, leaving the other 57 offices defined as non-profit, with liabilities “predominantly” unit linked.
With profits policyholders may be pleased to hear the 33 with-profits offices improved their regulatory free asset ratios overall in 2003, and have reduced reliance on “alternative capital”, including subordinated debt, contingency loans, alternative reinsurance and implicit items.
However, the £519bn with-profits sector’s overall regulatory free assets of £30bn, as of the end of 2003, must be taken with a pinch of salt in regards to individual firms, because of varying degrees of reliance on alternative capital, the report states.
”As in previous years, free asset ratios vary significantly between offices and the degree to which each uses alternative capital also varies,” it states.
”The comparison of offices’ ratios should therefore be treated with caution. Ratios based on the current regulatory rules are crude and not very risk responsive. Some offices used ‘Tiner waivers’, which may have allowed them to reduce liabilities and some did no. This leads to differences between offices.
”When the new realistic rules come fully into force at the end of 2004, the realistic ratios should become more comparable”.
Still, the review admits just half the with-profits offices actually reported on a realistic basis for last year, and many used accounting techniques they may yet be forced to drop in order to meet all the rules when they come into effect covering 2004 results.
”There are significant differences,” the review notes, between guidelines from the ABI and the FSA on how to report realistic numbers, with the latter particularly likely to affect the ability of providers to use additional capital from non-profit funds to pad out the realistic FAR.
”The FSA rules [outlined in CP 195] are likely to restrict some of the assets from being counted and increase the size of the Risk Capital Margin leading to a reduction in the realistic free assets,” the review states.
Managers of the companies affected are also likely to be in the process of “derisking” their funds, for example, by better matching bond portfolios to liabilities and “obtaining hedge assets”.
”These actions are designed to reduce the volatility of the fund and will improve the realistic results.”
Policyholders should benefit from such moves, however, because they imply more prudent management of risks, enhancing the security of guaranteed benefits, E&Y says.
The downside of such prudence will be increasing consolidation of the UK marketplace, although this will take place slowly, the review adds.
”There is a shortage of willing buyers, nervousness about the risk still remaining in the funds, and over-optimistic price expectations on the part of vendors.”
”While offices have taken steps to mange their market risk exposures, the issues of annuitants living longer and how much credit risk to retain as offices move increasingly into corporate bonds will need increasingly careful management.
”Offices with brand, scale, distribution and access to capital have a promising future. They will capture the majority of new business and the UK market will finally consolidate as we have already seen in some of the European markets.”
According to E&Y’s figures, Legal & General tops the list of groups by all assets, while Barclays tops the list according to group net earned premiums – defined as gross premiums paid less reinsurance premiums paid.
Prudential Assurance tops E&Y’s list of with-profits offices by size of assets, with no change in the list of top four on the previous year, 2002, meaning Standard Life, L&G Assurance and NU Life & Pensions follow PA on the list.
Equitable Life takes 10th place on the list just mentioned, however its assets have been cut in half since 1999, estimated at £16bn at the end of 2003 against £33bn some four years earlier.
For copies of the full review, contact Geraldine Moloney on 020 7951-2804, or email [email protected].IFAonline
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