Newspaper article The Evening Standard (London, England)

A Sideways Solution to the Anguish of Insurers

Newspaper article The Evening Standard (London, England)

A Sideways Solution to the Anguish of Insurers

Article excerpt

Byline: ANTHONY HILTON

SIR Howard Davies did not get to where he is today by making offthecuff remarks he had not thought through carefully beforehand. The chairman of the Financial Services Authority, the City's number one regulator, does not go on television and make concerned noises about the solvency of the nation's insurance companies by chance.

After being wrong-footed on Equitable Life, it is politically astute for the regulator to register publicly his awareness of the difficulties insurance companies face.

If some of them get closed to new business in the future, no one can say the FSA issued no warnings.

Similarly, it makes it harder for the management of troubled insurers to remain in denial.

Nevertheless, there are real problems. Standard Life, which must be one of the soundest insurers, has said it plans to raise a further [pound]1 billion and Friends Provident is touting-round the City for [pound]800 million.

Their regulatory returns reveal that their free asset ratios - the surplus of assets over liabilities and the surplus on their with-profits funds - have been devastated by two years of falling share prices. Most companies must be in the same boat.

The simplest solution short term is to relax the regulatory requirement - which the FSA has quietly done - because although it sounds heretical it does not matter much if the ratios are breached in the short term. A lack of solvency does not spell immediate disaster for an insurance company the way it does for a manufacturer.

What could cause huge anguish, though, is if the fall in share prices continues. This is already the longest bear market, though not the deepest, since the 1930s but some suggest there is still further to go. Applying trusted historic valuation yardsticks, the research boutique of Smithers & Co run by our columnist Andrew Smithers reckons that British shares are still 40% overvalued and and US stocks have a further 58% to fall to reach fair value. …

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