uk life in 2010 and beyond...consumer confidence in uk life 0% 20% 40% 60% 80% 100% sep 08 dec 08...

© 2010 The Actuarial Profession www.actuaries.org.uk

Life conference and exhibition 2010David Prowse & Harish Gohil, Fitch Ratings

UK life in 2010 and beyondA rating agency perspective

7-9 November 2010

Agenda

Credit Ratings

UK Life Market – Metrics

Ratings Trends

Looking Ahead

Q&A

1© 2010 The Actuarial Profession www.actuaries.org.uk

Credit Ratings

Purpose

• Security / financial strength

Meaning

• Probability of default / loss given default

Users

• Investors

• IFAs / policyholders

• Actuaries

Implications

• Cost of finance2


10 Steps in the Rating Process


3

Rating Initiated

Lead and backup analyst assigned

Company sends accounts & other infoDates for meeting

Review of public & non-public information

Questions sent to issuer

Replies in advance of management meeting

Management meeting

Further analysis

Credit committee presentation

Rating committee review & decision

Preparation of final rating report & press release

Ratings published & full rating report available to subscribers

Ongoing dialogue and surveillance

1

2

3

4

5

6

7

8

9

10


Analytical Methodology

4

Accounting framework

Regulatory environment

Tail of losses

Bargaining power

Barriers to entry

Competitive advantage

Pricing trends

Competitive landscape

Industry Review

Peer analysis

Financial flexibility

Capital adequacy

Catastrophe risk

Reinsurance utilisation

Loss reserve adequacy

Investments and liquidity

Profitability

Financial Review

IT capabilities

Brand recognition

Expense efficiencies

Operational scale

Market share

Business mix

Distribution capabilities

Underwriting expertise

Operational Review

Financial projectionsHistory of support

Corporate governanceExplicit support agreements

Organisational structureGroup synergies

Successful plan execution

Strength of subsidiaries

Risk appetiteStrength of affiliates

Organisational Review

Management Review

Parent financial strength

Strategic vision

Dividend requirements Management quality

Financial flexibility Depth and breadth of experience


Analytical Methodology

5

Accounting framework

Regulatory environment

Tail of losses

Bargaining power

Barriers to entry

Competitive advantage

Pricing trends

Competitive landscape

Industry Review

Peer analysis

Financial flexibility

Capital adequacy

Catastrophe risk

Reinsurance utilisation

Loss reserve adequacy

Investments and liquidity

Profitability

Financial Review

IT capabilities

Brand recognition

Expense efficiencies

Operational scale

Market share

Business mix

Distribution capabilities

Underwriting expertise

Operational Review

Financial projectionsHistory of support

Corporate governanceExplicit support agreements

Organisational structureGroup synergies

Successful plan execution

Strength of subsidiaries

Risk appetiteStrength of affiliates

Organisational Review

Management Review

Parent financial strength

Strategic vision

Dividend requirements Management quality

Financial flexibility Depth and breadth of experience


Agenda

UK Life Market – Metrics


0

1

2

3

4

5

Avi

va

Frie

nds

Pro

vide

nt

Lega

l &G

enera

l

Pru

dent

ial

Roy

alLo

ndon

Sta

nda

rdLi

fe

(GBPbn)End-2008 End-H109 End-2009 End-H110

Regulatory Capital

Source: Companies

IGD / FGD Surplus

© 2010 The Actuarial Profession www.actuaries.org.uk7

0

5

10

15

20

Roy

alLo

ndon

Pru

dent

ial

CU

LAC

CG

NU

Sco

ttish

Equ

itabl

e

NU

LAP

Cle

rical

Med

ical

L&G

Frie

nds

Pro

vide

nt

Sco

ttish

Wid

ows

Sta

nda

rdLi

fe

(%) 2007 2008

WP Free Asset Ratios – Still a Risk

Source: Companies’ FSA Returns, Fitch


0

5

10

15

20

25

Pru

dentia

l

L&

G

Frie

nds

Pro

vide

nt

Sco

ttish

Wid

ows

Sta

ndard

Life

CU

LAC

CG

NU

Roya

lLo

ndon

NU

LAP

Sco

ttish

Equ

itabl

e

(%) 2007 2008

WP Cost of Guarantees – Still a Risk

Source: Companies’ FSA Returns, Fitch

As % of With Profits Benefit Reserve


Earnings – EV and IFRS

• MCEV Inconsistency

• EV in credit analysis

– Long-term profitability (VIF, VNB)

– Risks, profit drivers– Adjust IFRS balance sheet to allow for VIF

• I(?!)FRS …

• EV for long-term value

• IFRS for group balance sheet and cashflow


0

1

2

3

4

5

Avi

va

Frie

nds

Pro

vide

nt

L&G

Pru

dent

ial

Sta

nda

rdLi

fe

(%)2008 2009

New Business Profit Margins

Source: Companies

UK Life & Pensions (PVNPB Basis)


Quarterly Sales – Regular Premium

Source: ABI


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210

Investment & savings Individual pensions Occupational pensions

Offshore business Individual protection Group protection(GBPm)

Quarterly Sales – Single Premium

Source: ABI


0

5,000

10,000

15,000

20,000

25,000

30,000

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210

Investment & savings Individual pensions Occupational pensions

Offshore business Individual protection Retirement income(GBPm)

Consumer Confidence in UK Life

0%

20%

40%

60%

80%

100%

Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 May 10

Gone up a lot Gone up a little Stayed the sameGone down a little Gone down a lot Don't know

Compared to a year ago, do you think the benefits of saving (including saving for your pension) have...

Sample sizes of at least 2,500Source: ABI Savings and Protection survey


Agenda

Ratings Trends


Net Upgrades Less Downgrades

-60

-50-40

-30

-20-10

0

1020

30

2002 2003 2004 2005 2006 2007 2008 2009 2010

(Number)

a At 5 October 2010Source: Fitch

a


What We Said a Year Ago ... Update (1)

• Simple movement from recession to recovery is not enough to change our rating outlooks to stable

• Resilience of the industry has been the key driver

• It is possible more ratings will need to first be downgraded before ratings stabilise

• Did not happen in great numbers, but some rating actions

• Even after we move into recovery, sustained strength of the recovery, and successfully addressing new issues like high inflation, are needed for ratings to stabilise

• Recovery slow to date, but no emerging issues, as yet



• A true opening up of capital markets at reasonable spreads and equity prices, to allow for renewed financial flexibility, is needed

• This has occurred to a large extent, although funding costs remain higher relative to pre-crisis levels

• A material retrenchment of unrealised investment losses, and greater comfort that losses to capital will be covered by our core Stress, is needed

• This has happened for many issuers. Capital positions are now as strong as before the crisis, or close to



• As conditions improve, it is likely there may be “lagging”charges taken by companies that, if greater than expectations, could adversely pressure ratings

• Not seen to any great extent, but do not rule out yet

• Finally, any unique insurance-specific issues will need to be reasonably resolved before a sector will stabilise

• Typically no major post-crisis issues have emerged – a positive for the industry. Reserving and claims inflation remain unknowns


Negative36%

Stable57%

Positive7%

Stable35%

Positive1%

Negative64%

Fitch European Ratings – Outlooks/Watches

A Year Ago… …And Now

Source: Fitch. Insurer Financial Strength ratings, 184 at 20 Oct 2009, and 193 at 5 Oct 2010


Stable

Stable

Stable

Stable

Negative

Stable

Negative

Stable

Stable

Stable

Stable

Current

Oct 08NegativeNov 09Reinsurance

Oct 08

Oct 08

Negative

Negative

Oct 10

Oct 10

Switzerland Life

Switzerland Non-Life

Feb 08

Feb 07

Oct 08

Oct 05

Oct 07

Oct 07

Oct 08

Oct 08

Since

Negative

Stable

Oct 10

Oct 08

Italian Life

Italian Non-Life

Oct 10

Oct 08

Oct 10

May 10

Oct 10

Mar 10

Since

Negative

Stable

French Life

French Non-Life

Prior

Negative

Negative

German Life

German Non-Life

Negative

Negative

UK Life

UK Non-Life

Market Outlooks by Key Sectors

Source: Fitch© 2010 The Actuarial Profession www.actuaries.org.uk

21

Agenda

Looking Ahead


Solvency II – UK Life Solvency Ratios

Source: Milliman

Breakdown from QIS 4 to Estimated QIS 5 (Draft Specifications)

100%

110%

120%

130%

140%

150%

160%

QIS 4 YE 07QIS 4 YE 08 IlliquidityPremium

Market SCRMktCorrelations

SCR Other QIS 5 DraftYE 08

(Solvency ratio)


Solvency II – Internal Models

Given that each insurer writes different business, has a different risk profile, a different corporate structure, different operational processes and a different risk management framework, each internal model will be different and used in a different way (FSA DP 08/4).

Photo Source: US Army


Implications for Ratings

Capital Req.s Up Means

Leverage Down

Increased Barriers to Entry

Improved Risk-Based

Assessment

Transparency and

Comparability Up?

Short-Term Implem-

entation Risk

Threats to Some Product Lines

Technical Issues: Coupon

Deferrals

Transparency and

Comparability Down?


Solvency II – Implications for Ratings

Challenges for UK Life – Solvency II, Plus …


Financial Markets

Austerity

Financial Markets

AusterityNet

Outflows

Net Outflows

RDRRDR

CostsCostsTax

changesTax

changes

Challenges For UK Life – Visual Reminder


Predictions for 2011+

• Products

– Annuity market in flux

– Simpler savings products

• Distribution– Bancassurance, direct sales up, IFA sales down

• Regulatory/financial reporting– “QIS6”, “Solvency II(a)”

– MCEV postponed for Solvency II– IFRS Phase 2 will be huge …

– Warchests + low margins + Solvency II M&A


What Insurers May Not Want You to Know

• The whole truth– Headlines always good– Operating/underlying– “Good results = good management, bad results = investment

markets”– Modelling “adjustments”

• Lapses/surrenders/outflows – invisible relative to sales figures• Sensitivity to credit markets• Solvency II

– Not ready– Worst-case impacts

• Capital / M&A strategy• They don’t like insurance!© 2010 The Actuarial Profession www.actuaries.org.uk

29

Questions or comments?

Expressions of individual views by members of The Actuarial Profession and its staff are encouraged.

The views expressed in this presentation are those of the presenter.


uk life in 2010 and beyond...consumer confidence in uk life 0% 20% 40% 60% 80% 100% sep 08 dec 08...

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