A.M. Best Special Report: Thawing Markets Reducing Pressure on U.K. Life Insurers.

OLDWICK, N.J. -- The global credit crisis led to a decline in life insurers' economic capital positions in 2008, although the industry as a whole managed to maintain compliance with minimum regulatory capital requirements. The decline triggered a number of negative rating actions in the first quarter of 2009. Since then, the economic capital position has recovered in part, aided by improving investment conditions and a range of management initiatives to preserve capital. The resilience of the industry's regulatory capital position is largely due to the strong regulatory framework and prudential management environment the industry has been operating in since introduction of the Individual Capital Adequacy Standards (ICAS) regime in 2004. Another factor working in the industry's favour was its strong capital position, compared with the regulatory minimum, in the years leading up to the financial crisis.

The large investment losses, which drove down financial performance and capital in 2008, were significantly lower in the first half of 2009. However, several of the U.K. life insurers still reported material declines in shareholder equity during the first half of 2009. The improving investment environment, which is characterised by narrowing corporate bond spreads and stabilisation on the equity markets, points to reducing pressure for the life insurance industry in 2009.

Concerted management action also has helped restore capital after the depletion in 2008. The increased focus on conserving capital, which has seen insurers exit unprofitable lines of business and distribution channels while reducing commissions and other costs, is positive. The raising of additional hybrid debt is, however, increasing life insurers' dependence on softer elements of capital, while increasing leverage. Furthermore, potential increases to regulatory capital requirements for annuity business presents additional uncertainty under the continuing pressure on both premium production and capitalization. A.M. Best has decided to maintain the negative outlook for the U.K. life market, as it expects to take more negative rating actions (e.g. downgrades/ outlook revisions) than positive ones.

New business levels have dropped modestly, as strong growth in pension and annuity products offsets large reductions in single-premium, unit-linked business. As the housing market is not likely to recover soon, and consumer confidence and well-being remain subdued, this trend is expected to continue into 2010, putting further pressure on insurers' ability to maintain a balanced book.

Bulk-purchase annuity business is likely to grow at a slower rate, as capital constraints and pricing uncertainties reduce appeal. This is exacerbated by the fact that many pension schemes consider the current prices to be too high already.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.