UK: Life Offices’ Financial Strength Update

Last Updated: 26 May 2005
Most Read Contributor in UK, August 2017


Life offices have recently filed their FSA Returns, setting out their financial position at the end of 2004. These are a rich source of information, given added interest this year because the larger withprofits offices have had to report their Realistic Balance Sheets (RBS) for the first time. This Executive Briefing sets out Deloitte’s summary of the key data. The analysis covers all but a very few of the UK’s large with-profit funds, 40 in total. This article is based only on data in the published FSA Returns.

A "Good News" story

The UK Life sector hasn’t had a great deal to smile about in recent times, and there were plenty of gloomy predictions that the introduction of RBS reporting would be another severe blow. Happily, those predictions have proved largely unfounded. Coupled with recent announcements of improved profits and respectable new business growth by most of the main players, the picture painted in the latest FSA Returns suggests that the industry may be emerging from its recent storms. This is due in part to implementation of de-risking strategies by several companies, which should also improve stability in the years ahead. The fact that M&A activity has picked up pace in the last six months also suggests that confidence is returning – our experience is that purchasers were being put off by potential "black holes" in insurer balance sheets, but that these issues are now better understood, and such liabilities will now generally be valued properly.

Key results

The graph below shows a headline comparison of financial strength, showing how many times the required solvency standard (formerly the Required Minimum Margin, now the Capital Resources Requirement) is covered by the free assets. The average coverage used to be just under 2.75 times, but is now about 2 times. It would be wrong, however, to conclude that the industry is significantly weaker than a year ago. The more accurate interpretation is that the new CRR measure is a tougher minimum standard – as it covers the new "Twin Peaks" requirement, meaning that each fund must report on the more demanding of the old regulatory standard and the new realistic test. Our research suggests that the many offices have actually grown stronger on a like-for-like comparison with last year, so the lower ratios shown below are driven very strongly by the change in reporting rules.

The strongest offices on the new measure are Wesleyan and NFU (they were also the strongest pair last year), and they fare well in several other measures we have analysed. At the other end of the spectrum, the Sun Alliance and Royal funds fare worst, but they now have the backing of Resolution Life. Equitable Life is next in line, but its position is virtually unchanged by the new reporting requirements, indicating greater robustness than many would have expected. It is more surprising to see the Norwich Union fund at the lower end of the range.

 Of all the funds in our analysis, this one has been the most affected by the new RBS measures. In particular, that fund has a high "Cost of Guarantees" liability, meaning that underlying guarantees exceed asset shares on many of its policies. The excess amount is now provided for explicitly on the balance sheet. The second measure, see above, looks only at the realistic balance sheet. It shows the surplus assets as a percentage of the fund’s available assets, so is akin to the old "Free Asset Ratio" but on the new RBS basis. Wesleyan and NFU lead the way again, with Royal London’s Refuge fund looking particularly strong too. At the other end, several funds have no excess assets at all – but this does not mean they are insolvent –see below!

Importantly, these ratios only allow for assets held within the withprofits fund (which may in some instances incorporate some nonprofit business or loan arrangements), and ignore other assets may be available elsewhere in a Group, including for example shareholder funds. All of the funds to the left of the graph that appear to be underwater, have access to additional capital in this way, so policyholders and advisers should not assume they are (near) insolvent. However, the fact that other capital may have been excluded does not invalidate these measures. They will actually be of considerable interest to companies and shareholders and to FSA, because they give a feel for how likely it is that additional capital will have to be "called in" – for example from shareholders or subordinated debtholders, or the drawing down of contingent loans. It is interesting to note that the mutuals are generally well-placed on these measures – it is important that they are, because they have no recourse to shareholder pockets.

Our view

  • Though RBS reporting is not perfect, we believe it provides a much more robust picture of an office’s financial strength than the old regulatory balance sheet alone. This should improve policyholder and investor confidence.
  • Many in the industry, and the FSA itself, had expected that almost every firm’s realistic balance sheet would be weaker than their regulatory balance sheet. This has not happened – of the 40 funds, the regulatory test bites for 20 and the realistic test for 20. In other words, the realistic balance sheet position is actually stronger than the traditional one for half of the funds. We consider this is evidence that the industry’s capital position is more robust than many had thought.
  • As usual, there is more to the figures than the raw data suggests. For example, the apparently weaker offices can point to additional sources of capital outside the with-profits fund. Perhaps more interestingly, the results depend on the type of management actions that are assumed in adverse scenarios, such as a large fall in equity and property values. Some offices will have assumed that all of the losses are passed to policyholders, while others will have shared the burden. There will be an intense period of analysis as companies compare their assumptions, which may lead to changes in the next round of reporting.
  • Several of the funds are closed to new business. Their management teams have a difficult balancing act between retaining enough capital to cover risks, and distributing the surplus assets fairly. FSA’s new Individual Capital Assessments add an extra dimension to this problem – the outcome of these assessments will be of great interest to policyholders and shareholders alike.
  • As ever, there are more challenges ahead, with companies needing to improve their realistic balance sheet processes (including how to calculate and report analysis of change), respond to FSA’s Treating Customers Fairly initiative, and cope with further significant changes in reporting at the next year-end, when FRS 27 rules come in. We believe that much of the groundwork has been done, and that firms can begin to look to the future with more confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.