With-profits life insurers are bigger and stronger

By Chris O'Brien
Director, Centre for Risk and Insurance Studies
Nottingham University Business School


17 May 2006

Large with-profits funds are still growing, and looking stronger than a year ago, with assets now totalling £380 billion, up from £347 billion.

Chris O'Brien commented: "The 'realistic balance sheets' that life insurers issue as part of their returns to the Financial Services Authority (FSA) help remove some of the mysteries about with-profits funds. This is our 5th annual survey, covering the 20 top with-profits life insurers."

Companies have been helped by good investment returns in 2005. Highlights are:

• In total, insurers'' assets are 6.88% more than their liabilities (on this 'realistic' valuation), a surplus of £24.5 billion. The surplus a year ago was £20.7 billion.
• Prudential had a £10.7 billion increase in its assets; with £89.3 billion assets in total, it remains the largest with-profits life insurer.
• Standard Life, planning to demutualise, shows realistic assets exceeding realistic liabilities by £4.1 billion, 24% up from £3.3 billion a year ago.
• In total, companies are setting aside £24.4 billion for options and guarantees (included in their liabilities), up from £23.2 billion a year ago.

The FSA also requires companies to carry out "stress tests", to check they can cope with specified adverse scenarios. These require a further £8.5 billion (2004: £9.7 billion) of capital, and all firms meet this requirement. Indeed, if we look at the companies' insurance business as a whole, then their capital is £33.4 billion (2004: £26.6 billion) more than regulatory requirements.

Chris O'Brien added:

"Companies use different assumptions in the new basis, and the new regime does not always reflect companies' individual situations suitably. Care is therefore needed in making comparisons between companies.

Where companies have a large surplus of realistic assets, policyholders do not necessarily receive more as a result, though some of those surplus assets might be distributed in the future, e.g. by a demutualisation or other arrangement. A relatively low ratio of surplus assets is not necessarily a sign of weakness. However, a company with a large surplus of available assets may have extra flexibility, e.g. as regards new business growth or its ability to invest in equities.

The actuarial profession has (for 2005) issued guidance such that closed funds ordinarily include what would have been an excess of assets over liabilities as a planned enhancement to the with-profit benefit reserve (WPBR), reflecting such surplus being added to bonuses at some stage. Since those planned enhancements then appear as a liability, the surplus becomes zero.

Four closed firms that show a zero surplus have material amounts included in their planned enhancements to WPBR which, if regarded as surplus, would result in surplus assets ratios as follows:

• Scottish Equitable 7.06%; Equitable Life 6.59%;
• Pearl Assurance 3.04%; Phoenix Life & Pensions 1.84%.

Note that, in a proprietary life insurer, a share of such enhancements would in fact be payable to shareholders.

9 insurers show a positive cost (to them) of "smoothing"; for 9, their smoothing is an asset to them (for 2 it is neutral).

Further research we plan will extend this work to smaller insurers; analyse firms' payouts; and examine firms' mortality assumptions on pensions."

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