Fitch: UK Life Outlook Negative Post New Legislation, Regulation

Mon Mar 31, 2014 10:17am EDT

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(The following statement was released by the rating agency) LONDON, March 31 (Fitch) The sector outlook for UK life insurers has turned negative from stable due to threats to the sector's profitability from three recently announced initiatives on pensions and savings, Fitch Ratings says. In a climate with a marked increased focus on insurance customers, we believe there is a risk that further changes to legislation and regulation may be disruptive for UK life insurers and negative for their credit profiles. The three initiatives are the ending of compulsory annuitisation and a 0.75% cap on charges for pension auto-enrolment default funds, both from April 2015, and a Financial Conduct Authority investigation into whether insurers are managing business in closed funds in customers' best interests. We believe their combined effects will put increased strain on insurance companies' profitability. This is already a relative weakness for the UK life sector as insurance companies are competing for business in a highly regulated, saturated market. But we still consider rated UK life insurers' capital positions strong - an important factor underpinning their credit ratings. The UK Budget announcement that customers will no longer have to use their pension pots to buy an annuity could significantly reduce the GBP15bn-a-year UK annuity market, as many savers will choose to access their pensions as cash or via drawdown products instead. Annuities are a large and relatively profitable business for many life insurance companies, so any significant shrinking of this market would be negative for their operating scale and earnings. Some of the main annuity providers are large insurance groups with diverse businesses, which could absorb the negative effects of the proposed reforms. The insurers most exposed are those with a concentrated focus on annuities, such as Just Retirement and Partnership. The government's announcement last week that there would be a 0.75% cap on charges applied to pension auto-enrolment default funds is a threat to the profitability of UK life insurers with significant amounts of corporate pensions with charges above this level. Leading corporate pension providers include Standard Life and Friends Life. But many funds already have charges below the cap, and it applies only to funds that are default selections for auto-enrolment. The FCA investigation into the management of closed funds, announced last Friday, could cause significant administrative costs for insurers. They may have to investigate in detail how business was managed 20 or more years ago - a potentially costly exercise. A further risk is that the investigation, and the publicity surrounding it, could lead policyholders to withdraw business as they become more aware of their ability to access their funds and search for more attractive investments elsewhere. A large withdrawal of business would be negative for insurers' long-term profitability and cash generation in a market where assets under management are already shrinking year on year. The potential consequences of these initiatives will vary from one insurer to another. The crucial factor determining relative exposure is the business mix. We are analysing the likely consequences for each rated insurer, and will update the market as part of our regular review cycle - or sooner where any negative rating actions appear likely. Contact: David Prowse Senior Director Insurance +44 20 3530 1250 Fitch Ratings Limited 30 North Colonnade London E14 5GN Clara Hughes Senior Director Insurance +44 20 3530 1249 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: UK Life Insurance here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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