Mutual life offices may not have the financial strength to achieve the necessary volumes of business...
Mutual life offices may not have the financial strength to achieve the necessary volumes of business to compete as pressures on margins increase, according to credit ratings agency Moody's.
Its report, entitled Mutual life offices in the UK: judgement day, argues that the current wave of demutualisation in the life and pensions market could lead to increased competition, consolidation and possibly reduced pricing on certain products.
Simon Harris, assistant vice-president at Moody's and author of the report, said: "Scale will become increasingly important in the life and pensions market in terms of ability to write large volumes of business at lower margin levels. Many mutual offices may be unable to achieve these scales and volumes given their current structures."
While the company said it held no bias as to whether companies should or should not review their ownership, it said that demutualisation can introduce several factors, both positive and negative, that may affect the credit strength of the company.
Several of the top 10 life offices are currently mutual, such as Standard Life, and further conversions could significantly impact on competition.
Harris said: "Should a significant number of these offices change their status, competition would be likely to increase as a result of these already large offices having potential access to more capital, enabling keener pricing and/or higher new business abilities."
But the report also pointed out that, on certain product lines, pricing pressures might be reduced. With more focus on the company's bottom line, loss-leading products may be withdrawn or reviewed.
"To an extent, prices in certain niche product lines and some larger ones are led by some mutual offices, who, wanting to retain their existing franchise and market position, offer more attractive and potentially unprofitable prices than proprietary offices. As demutualised entities, pricing considerations may be tightened," Harris said.
Consolidation could also step up if newly-demutualised companies list on the stock exchange, according to the report. With increased access to capital, demutualised offices will be better placed to make acquisitions, but they are also more likely to become victims of acquisition, it suggests.
The report said that while demutualisation should have no impact on a company's credit rating per se, some areas may become credit-sensitive. Demutualisation, for example, can lead to reductions or improvements in the quality of the office's core capital. The excess assets paid out as windfalls to policyholders on demutualisation, for instance, may actively weaken the credit status of an office. Harris added that the enhanced access to capital markets might counteract this argument.
Without shareholder dividends to consider, mutuals are often criticised for having a lack of business focus. But while mutuals have little external influences, Harris is unconvinced that business efficiency would improve upon demutualisation.
He said: "Firstly, many mutual offices already operate on a pseudo-proprietary basis through the use of internal management targets and controls. Secondly, many are major players in the UK life industry, offering broadly the same products through similar distribution channels as proprietary offices. To compete in these markets, mutual offices must therefore at least compete, in efficiency terms, with their rivals."
However, Harris conceded that in some cases the added pressure of external reporting on a quarterly basis might increase business focus.
