The UK Life Market in 2014 and Beyond A Rating Agency Perspective

Transcription

1 The UK Life Market in 2014 and Beyond A Rating Agency Perspective David Prowse and Clara Hughes Fitch Ratings 10 November 2014 Agenda Credit Ratings Capital in Ratings Annuity Market Expectations Other Market Themes UK Life Sector Outlook Q&A 1 1

2 Credit Ratings Purpose Security / financial strength Meaning Probability of default / loss given default Users Investors IFAs / policyholders Actuaries Implications Cost of finance 2 Steps in the Rating Process Ongoing dialogue and surveillance 10 Rating Initiated Lead and backup analyst assigned Ratings published; full rating report available to subscribers 9 Review of public and non-public information Questions sent to issuer 3 1 Company sends accounts, other info Dates for meeting 2 Preparation of final rating report and press release 8 Management meeting 4 Replies in advance of management meeting Rating committee review and decision 7 Rating committee presentation 6 Further analysis 5 3 2

3 Insurance Rating Methodology 4 Sector Credit Factor Reports 5 3

4 Capital One of Twelve Credit Factors Qualitative Sovereign and country-related constraints Industry profile and operating leverage Market position and size/scale Ownership Corporate governance and management Quantitative Capitalisation Debt service capabilities and financial flexibility Financial performance and earnings Investment and asset risk Asset/liability and liquidity management Reserve adequacy Reinsurance, risk mitigation, and catastrophe risk 6 Scorecard Approach to Ratings 7 4

5 Fitch s Factor Based Capital Model Fitch s enhanced factor-based capital model Measure of insurers capital strength Risk-based capital model Increased transparency Publicly available Download at: /prismfbm 8 Prism FBM Resources /prismfbm 9 5

6 Rated Portfolio Well Capitalised Category Difference Between Prism FBM Score and Rating Source: Fitch 10 Prism FBM Provides Risk Based View Of Capital Average Prism FBM Score Versus Regulatory Capital Score Source: Fitch, Companies 11 6

7 UK Life Timeline of 2014 Announcements Budget: No one will have to buy an annuity 19 March Press reports of FCA review insurance shares plummet 28 March (am) FCA business plan 31 March Annuity sales down 50% April Queen s Speech: collective pensions 4 June H14 Fitch: disruption from regulatory reforms a key risk 20 November Pension fund charge cap 27 March FCA clarification, shares rebound 28 March (pm) Fitch: UK life outlook negative 31 March BoE: accountability for insurance executives 22 May Source: Fitch 12 Fitch Expects Annuity Sales to Decline 30-50% Post-Budget Survey of How Retirees Plan to Use Pension Pots (%) Mainly annuity Mainly cash All cash Drawdown Source: Hymans Robertson survey of 1,000 defined contribution pension scheme members, April

8 Business Mix Determines Exposure to Annuity Decline UK Individual Annuity Sales (2013) (GBPm) 2,500 2,000 1,500 1, Diverse multi-line insurers Annuity-centric 0 Prudential Aviva Legal & General Just Retirement Partnership Source: Companies 14 Pensions Auto-Enrolment Scale is Key Positives Captures larger population Boosts AUM Cross-selling opportunity Negatives Small amounts Low margin Low persistency 15 8

9 Exposure to Low Bond Yields Varies by Country UK Life Product mix relatively immune Annuities well matched With-profits flexible Dutch Life ALM strong good matching / hedging Low yields exacerbate new business decline German Life High proportion of guaranteed business Significant duration gaps Rated insurers can meet guarantees for 10+ years French Life Guarantees not onerous Italian Life Issue is sovereign risk, not low yields 16 Capital Above Pre-Crisis Levels Regulatory Solvency Ratio (%) End-2007 Aviva Friends Lifeª Legal & General End-1H14 b Old Mutual Prudential Standard Life a End-2007 data is for predecessor company, Friends Provident b Not published for end-2007 Source: Companies 17 9

10 Solvency II Timeline to Implementation Back On Track LGTA Results Jun 2013 O2 Passed Mar 2014 Public Level 2 Draft Mid 2014 Level 2 TS Confirmed Jun 2015 Level 1 Law Mar 2015 Public Reporting Begins 1Q LGTA 1Q 2013 Level 2 Drafts Q Private Reporting Begins 1Q 2015 SII In Force Jan 2016 LTGA: Long Term Guarantee Assessment; O2: Omnibus 2 18 Solvency II Predictions Solvency ratios to go down but. surplus capital to go up Internal models to reduce capital requirements Equivalence for US 19 10

11 Solvency II Implications for Ratings Neutral Capital Req.s Up Means Leverage Down Increased Barriers to Entry Improved Risk Based Assessment Transparency and Comparability Up? Implications for Ratings Short-Term Implementation Risk Threats to Some Product Lines Technical Issues: Coupon Deferrals Transparency and Comparability Down? 20 Globally Systemically Important Insurers (GSIIs) 9 insurers designated GSIIs: See Fitch comment 2 in UK Aviva, Prudential Extra regulation Extra capital: Non-traditional business eg US variable annuities 2019+? Competitive disadvantage Individual countries may mirror GSII standards 21 11

12 Affirmations Predominate Net Upgrades Less Downgrades (No.) Credit Crunch Eurozone Crisis Stability 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Source: Fitch 22 Outlooks / Watches Stabilise Ratings Stable (%) 100 Positive Negative Stable Negative Outlooks Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Downgrade, Stable Eurozone Crisis Source: Fitch 23 12

13 UK Life Ratings Company IFS rating a Outlook/watch Prudential AA Stable Legal & General AA- Stable Scottish Equitable AA- Stable Friends Life A+ Stable Scottish Widows A+ Negative Old Mutual A- Stable a Insurer Financial Strength Rating of main operating company Note: Ratings as at 28 October 2014 Source: Fitch 24 Predictions for the Market 2015 and Beyond Products Shift from annuities to simple drawdown Collective pensions will not take off Distribution Shift to restricted / no advice Persistency improves Digital Market Trends Cost cutting Pension risk transfer to insurers Access to capital 25 13

14 Fundamentals Negative on Balance Negatives Annuity decline Regulation intensifying Low investment yields Pricing competition Net outflows Partially Offset By Strong capital Relatively immune to low yields Better management discipline Cost control Product mix Pricing Overseas earnings 26 What Insurers May Not Want You to Know The whole truth: Headlines always good Operating / underlying performance Good results = good management, bad results = markets Modelling adjustments Lapses / surrenders / outflows hidden behind sales figures Solvency II: Not ready Worst-case impacts Capital / M&A strategy Delighted to have sold our acquisition 27 14

15 Some Things We ve Heard ill thought-out EU legislation endangering a great British business that should have its HQ right here in the UK If we were to redomicile you'd be turning out the lights in the City everyone else would have left first" S2 is unfathomable you re dealing with all these Europeans S2 LTGP is just a nonsense, an utter nonsense. The results were rubbish Trying to prepare for S2 is like trying to nail jelly to the ceiling Force feeding government debt to financial institutions through regulation allows the government to fund the deficit cheaply RDR the industry couldn t behave itself. Systematically throwing capital at intermediaries The Spanish are happy they re buying risk free govies yielding 6% Government bonds = return-free risk We won t get out of this cycle without a credit event. That s why we re keeping the credit reserve S2 will bring volatility. We all knew that from the beginning. Let s not be naive Most funds are in the bottom quartile Insurers don t go bust they can make up their liabilities 28 Invitation Save the Date Please join us at Fitch s European Insurance Roadshow Thursday 22 January 2015, London Ask the presenters or check for details at /events 29 15

16 If You Want to Know More Find these and more on insurance at /insurance EU Parliament Vote Ensures Solvency II On Track for 2016 March 2014 UK Budget Proposals Negative for Annuity Providers March 2014 Bulk Annuities To Help Insurers Handle UK Pension Change March 2014 UK Life Outlook Negative March 2014 Low Rates Largely Behind UK Annuity Sales Drop - For Now May 2014 BoE Underlines Growing Regulatory Scrutiny of UK Insurers May 2014 Collective UK Pensions Pose Fresh Challenges for Insurers June 2014 UK Life Insurance Dashboard 1H14 August 2014 Insurance Rating Methodology 4 September Questions Comments 31 16