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The kiss of life

The UK life insurance results season generally comes with ups and downs, but this year fears over capital provisions have been causing frenzy on the stockmarkets.

The disclosures have also prompted credit rating agencies to downgrade insurers left, right and centre – we all know to take these ratings with a pinch of salt but it does not paint a pretty picture for the sector.

First, Moody’s downgraded Clerical Medical and Scottish Widows then Fitch cracked down on Skandia’s owner Old Mutual. Aegon was next, being downgraded by both Moody’s and Fitch after it announced a £1bn net loss in Q4 2008. Then Legal & General was downgraded over ongoing fears around capital and Aviva was put on review.

Today, Fitch broke the bad news to Prudential, downgrading its long-term issuer default rating from AA to AA- and its senior unsecured debt rating from AA- to A+ to reflect its exposure to volatile credit and investment markets.

But will Mervyn King be the knight in shining armour?

The Bank of England kicked off the corporate bond side of its £175bn programme to inject cash into the economy yesterday by buying up almost £87m worth of bonds. As well as boosting the flailing British plc, the move is understood to be aimed at helping out insurers, which hold masses of corporate bonds to back their annuity business.

Industry experts doubt it. Many are sceptical as to why insurers, and pension funds which also hold serious amounts of corporate bonds, would want to sell their holdings when they would simply need to buy them back again, probably at a higher price, as they will always need long-dated assets to back their annuities.

Insurance expert Ned Cazalet says: “UK life companies and final salary pension schemes are the dominant owners of sterling corporate bonds because they have long-term liabilities. If they sell these to the Bank of England what are they going to do with the cash? They need to reinvest in something. There is a big issue here because these guys are saying why should I sell them to you when I just have to buy the damn things back, probably at a higher price. The impression I have is that life companies are looking at this stuff and saying what is the point? People are scratching their heads about this.”

Perhaps all insurers should do like L&G, and obviously Standard Life before it, and turn their attention to the Sipp market, which requires far less capital.

Chief executive Tim Breedon said, after announcing a £189m loss yesterday: “Sipp is very important to us. It is a relatively low strain product in terms of capital and we will be looking to push that even further going forward.”

But remember the FSA’s ears are pricked up when it comes to Sipp-tastic sales.

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