Outlook 'subdued' for UK life companies

The UK life insurance sector still faces a tough future as sales slump across the board, but there are signs the bottom is in sight.

New research from Fitch Ratings suggests UK life insurers' earnings will remain depressed as they deal with the impact of the recession. As a result, the agency's negative credit ratings outlook for the UK life sector remains in place.

However, there is a glimmer of hope for the sector as regulatory capital positions have proved resilient.

Fitch also says for some life companies there are signs of a possible bottoming out of the sales slump if figures for Q2 are compared to those from Q1.

"Sales have fallen across the market as consumers have cut back on purchasing insurance and savings, in order to channel more of their disposable income into reducing their mortgage burden," says David Prowse, senior director in Fitch's Insurance Group in London.

Fitch analysed first half sales for 2009 compared to the same period last year across six UK life companies. It found the value of new business fell 24% from £31bn to £23bn for Aviva, Friends Provident, Legal and General, Lloyds Banking Group, Prudential and Standard Life combined. AXA and AEGON, which report sales on an annual premium equivalent (APE) basis, took tumbles of 17.7% and 22.5%, respectively.

In spite of an overall drop in sales, companies' ability to adapt to the new conditions means some have fared better than others as the recession has impacted on different products.

Annuities in particular were providing high margins for some providers. Sales in this area are relatively resilient to the economy because they are bought by customers with pension pots that have to be converted to annuities on retirement, according to Fitch.

The steady flow of customers approaching retirement age has also helped maintain sales levels for large annuity providers such as Prudential and L&G.

Prowse adds: "Many companies believe the higher yields that were available in the first half of 2009 on the corporate bonds that they bought to back annuity sales will translate into higher investment profits."