The sagging mortgage market will weigh on the protection business of insurers, Legal & General signalled yesterday as it predicted a 10% drop in the personal insurance market this year.
L&G was reporting broadly flat first-quarter sales, beating expectations, as the booming pension buy-out market and a distribution deal with Nationwide offset other pressures.
The shares eased 5%, however, as analysts picked up on the deteriorating outlook for the broader market, the pessimism over protection products and L&G's growing dependence on its traditional bulk corporate annuity business.
The UK's third-largest life insurer, and the first to report on the early months of 2008, posted worldwide sales up 1% on a year ago to £372m, some £25m above the consensus estimate. Analysts had expected UK-focused L&G to be more vulnerable to the credit crunch, particularly the weakening mortgage market.
L&G reported weak protection and individual annuity sales, and a drop in pension and bond investment, though strong growth in the bulk-purchase annuities business, where sales quadrupled from a year ago to £72m, limited the UK sales dip to 1% at £335m.
Later yesterday, the insurer announced a £180m pensions buy-out deal with paper group M-real.
Analysts, however, said the impact of growth in bulk annuities on margins and profits was still unclear, given the increased competition from entrants such as Paternoster and Pension Corporation in the buy-out market place.
"It is growing in one line, so if that line stops growing you are in trouble - I am not sure this momentum will be there through the year," said analyst Raghu Hariharan at Fox-Pitt, Kelton. "If you exclude the bulk annuities, growth in the UK is pretty anaemic."
The insurer's key protection business fell 14% year-on-year in the first quarter but did remain steady on the last quarter of 2007.
Chief executive Tim Breedon said he expected the UK individual protection market to fall 10% in 2008 but expected L&G to increase its market share. He said there was "no doubt that conditions in the mortgage market are making it tougher we're not immune to it but we are more resilient than perhaps people gave us credit for".
Analysts said there was little read-across from the sales for other UK insurers, with Prudential, which reports first-quarter sales today, again likely to see weakness at home offset by its strong Asian business.
L&G shares closed 6.375p lower at 124.5p.
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