February 1, 2013 / 2:56 PM / 4 years ago

TEXT - Fitch comments on Aviva and Legal & General

2 Min Read

Feb 1 - Prudential, Aviva and Legal & General are the most exposed life
insurers to the risk of falling annuity profits if a Financial Services
Authority investigation leads to a major shake-up of the industry, Fitch Ratings

As market leaders in annuities and also providers of pension savings vehicles, 
these firms benefit significantly from the tendency of clients who buy an 
annuity at retirement to stick with the provider they built their savings with. 
FSA steps to make consumers more aware of their right to choose a different 
annuity provider would be likely to reduce either the volume of business these 
insurers do, or the margins on that business.

Annuities represent around 30% of UK sales at Prudential and Aviva and more than
15% at L&G. Moreover, this business generates higher margins than most of the 
other products the companies sell in the UK.

But annuities also carry significant risk for the provider, principally from 
increasing life expectancy and the difficulty of matching assets and liabilities
for a product that can continue to pay out for more than 30 years. Strong risk 
management and pricing discipline are therefore essential for a successful 
annuity business and we would closely monitor pricing developments in the event 
of changes in the industry.

We rate Prudential and L&G and would not expect any change to these ratings 
because the companies have well-diversified business portfolios by product or 
geography. Annuities can also serve as a partial hedge to traditional term life 
assurance business.

The FSA is conducting a review of the annuities market, which will continue 
during the second half of this year. The review will initially examine the 
detriment to consumers from not shopping around and whether there are firms or 
particular groups of consumers where this is likely to arise.

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