London: Standard & Poor's (S&P) Ratings Services has revised its outlook on the UK-based life assurer, Standard Life Assurance Company, to negative from stable. At the same time S&P affirmed its ratings on the group, including its AA/A-1+ ratings on Standard Life and its A+/A-1.

"The outlook revision reflects S&P's concerns that its expectations for Standard Life's operating performance may not be met," says credit analyst Manish Bakhda. Nevertheless, the ratings on Standard Life continue to reflect its superior business position and above-average capitalisation.

In a concentrating market, Standard Life's leading position in the UK life and pensions market is demonstrated by its share of 13.5 per cent of the total UK market and more than 18 per cent of the independent financial adviser market.

This position is supported by Standard Life's award-winning, high-quality service standards and very strong financial strength. After the recent bonus cuts, Standard Life's maturity payouts will still compare favourably with the majority of competing life offices and other investment schemes held over a comparative time horizon.

Standard Life's above-average capital strength has enabled it to continue to maintain a more aggressive investment policy for the benefit of its with-profits policyholders and to support its new business growth. The waivers granted by the Financial Services Authority in 2003 will improve Standard Life's published solvency position and better reflect the underlying, realistic position.

However, the company's ability to improve its underlying capital position is more limited given the need to smooth maturity payouts, the delay in earnings improvements, and uncertain investment markets.

In addition, the quality of capital is weaker after the 2002 junior subordinated debt issue and reliance on the margins implicit within the realistic position. S&P expects that the management will seek to maintain above-average risk-based capital adequacy throughout the current uncertain environment.

"Progressive actions by the company to conserve its capital base (by reviewing payouts on a more frequent basis) and the negative sentiment in the industry have contributed to the decline in Standard Life's sales and lower persistency," says Bakhda. "Both these factors, combined with lower asset values, are likely to delay the expected improvements in operating performance and unit costs."

S&P considers that the first half of 2003 has resulted in a sharper decline in long-term savings and investments for Standard Life than peers. Despite this, the rating agency expects that Standard Life will remain a market leader in the UK life and pensions market. Furthermore, the company is expected to continue with its prudent financial management strategy to support its very strong financial strength.

S&P expects underlying operating performance to improve over the next one to two years. Maintenance of the AA ratings on Standard Life is based on the above expectations being met.