Life insurers' capital strength 'at 5-year low'

The financial strength of life insurance companies has hit a five-year low and pressure on credit ratings in the sector is set to continue, according to a report published today by the rating agency Standard & Poor's.

There have been nine downgrades of insurance companies this year, compared with only one upgrade – that of Sun Life Financial of Canada, which has all but withdrawn from the UK. Four insurers have had their ratings withdrawn because they have closed to new business, including Equitable Life.

S&P, which put 65 per cent of insurers on a negative outlook in July, says companies with a triple BBB minus rating or above have a secure capital position. The pressure on weaker companies, however, is not lessening. Paul Waterhouse, an analyst at S&P and author of the report, is expecting greater consolidation in the industry and for weaker companies to exit the market for certain capital intensive products entirely.

The earnings performance of many insurers is also likely to suffer. The fall in asset values means insurers will be using policyholder returns to shelter them from the full extent of the falls, but this will eat further in to the insurers' capital reserves. S&P expects further declines in policy payouts. Mr Waterhouse said a number of insurance companies were keen to raise more capital to grow their businesses, but are waiting for the market to pick up to avoid launching deeply discounted rights issues.