Assessment of companies and how they are impacted by the Covid-19 stress

24 March 2020

Yet again the operational Financial Strength required to deliver ongoing client expectations and experience has risen to the fore and its importance, whilst at all times of great significance, heightened. For the third time in 25 years it appears that we are facing another ‘1 in 200’ year event and hence question marks will once more hang over affected companies, with widened coverage here due to the emergence in recent times of platform providers and DFMs.

Advisers, on behalf of their customers, need more information and assurance in this area than ever. And this requires independent input from a recognised source of expertise to this end.

AKG is pleased to continue to provide this component directly via our Rating Portal and reports, via rated entities themselves and via third party systems at this vital time, to meet the ongoing needs of the advisory sector.

We are pleased to confirm that AKG's assessment work continues as normal, fully resourced and adjusted where required to new working practices. This is being augmented by further work and activities to question companies in terms of their specific current operational resilience and capital capabilities to deliver this against the backdrop of the current pandemic.

We expect companies to be open and collaborative with AKG, hence helping to support the delivery of this information and assurance into the market, via AKG’s familiar and widely distributed financial strength ratings and assessment resources, which are the market standard and most used source of such information.

And AKG would underline that, whilst cognisant of business priorities, where companies take an opaque or resistant stance and hence where sufficient information is not made available or forthcoming, a suitably cautious stance in line with the needs of advisers on behalf of their customers and the duty of care they are exercising on their behalf, will likely be adopted.

This should be fully understood by companies and AKG would anticipate given its previous experience and long-established industry relationships that companies will continue the good work of enabling independent expert scrutiny and delivery of information to support robust selection and advice through the advisory sector.

Current activity

Further contact to rated companies, as above, to gain further timely information is underway.

Ratings that could be Affected and Current Commentary

Overall Financial Strength Ratings (all AKG sectors) and Unit Linked, Non Profit and With Profit Financial Strength Ratings (for insurance companies and friendly societies, where applicable in the AKG Provider and Offshore Sectors):

Many insurers are relatively well positioned under the rules and structures imposed by Solvency II or equivalent regimes in offshore jurisdictions such as the IoM and the medium to longer term prognosis is relatively benign assuming, as anticipated by most commentators, the disruption is short in duration and there is a relatively swift recovery. But further developments are possible should disruption be prolonged.

Platform, DFM and non-insured pension providers have similarly adopted better risk management and capital management/adequacy measures in recent years. However, unprecedented market falls and restrictions in flows do present significant challenges. Different by size and shape of businesses to some degree. But pressure across these companies will be significant and a prolonged disruption and negative impacts could certainly lead to market exits or further M&A activity is likely.

Similarly, life insurers though relatively well positioned as above, have stress tests which would even be tested by the unprecedented nature of current and ongoing market falls and volatility in ratio measures is likely.

Supporting Ratings

Image and Strategy:

Strategic changes are to be anticipated. Not least in delayed growth and development plans as capital has to be allocated differently and the market stalls or slows in different areas.

A further retrenchment to core aspects (where this remains possible) in terms of product lines and geography is to be anticipated.

Annual Review:

Currently unaffected by the current crisis, with any assessment impact here likely in future years.

Service:

Risk management and operational resilience (ironically with a current focus from the FCA in terms of DP18/04 somewhat overtaken by the pandemic event) have been improving in recent years, but operations will be significantly tested by staff availability amongst other pressures. BCP mechanisms, such as increased working from home, will kick in but service capability and capacity will be tested by the scale and breadth of this pandemic.

Briefing Note: Analysis of COVID-19 Survey Responses

AKG monitored developments closely during March and April and as a key part of this Covid-19 impact appraisal wrote out to those companies which engage with the AKG assessment process on a full, participatory basis to invite responses to a Covid-19 survey.

The key points arising from AKG’s analysis are outlined in this note.

The note and its content is valid as at the issue date of 30 April 2020. We acknowledge that the Covid-19 situation remains fast moving and so company developments need to continue to be monitored on a regular, ongoing basis in order to keep abreast of impact responses and positioning.