A major pension and annuity provider, Legal & General, has sought to draw a line under increasing speculation that it would be forced to raise funds from its shareholders after it said a £1.6bn cushion would protect it well against a prolonged economic downturn and future slumps in the stockmarket.
Shares in Legal and General stabilised following the statement, though some of its rivals, Prudential and Aviva (Norwich Union), also strong in the pension annuity arena, suffered further falls in their share prices.
On the day of the statement, Aviva lost more than 3% of its value, and Prudential 5%, after a similar drop the previous day. Legal and General, which stood at 159p in early 2007, finished that day up 2.2% at 45.3p.
Some investors have said that they were concerned that insurance companies would be forced to cut back their dividend payments or ask for further capital from shareholders despite insisting their finances remained robust, and that they had sufficient reserves to map their way through deteriorating worldwide economic conditions.
Regulators have confirmed they are in touch on an ongoing basis with all the UK’s 130 life insurance companies and have insisted they test their solvency stringently against further steep falls in the stockmarket. It is understood the Financial Services Authority (FSA) has demanded they test their solvency should the stockmarket reduce from its current level just above 4,000 to 2,000.
L&G said that its reserves had dropped from £2.9bn to £1.6bn following a £650m write down on its £17bn book of pension annuity business and a £650m capital injection. The company has stressed to investors that its reserves policy is cautious and would allow it to survive a 1930s-style recession, should we be unfortunate enough to get one.
They said that last year’s default experience was broadly in line with their long term assumptions, but they feel that they should now reserve on a more prudent basis. As part of their year-end process, they have therefore decided it is appropriate that they take additional reserves against the possible risk of a short term rise in credit defaults.
The rules are that insurance companies must set aside spare capital to cover guarantees that are attached to retirement annuities and with-profits contracts. The capital is mainly invested in corporate bonds, which are considered to be a safe haven except when a sharp economic downturn happens to force companies into insolvency.
Most corporate bonds held by insurers are AAA-rated and invested in what is considered large, stable businesses, but around £105bn of the £237bn sterling corporate bond market is issued by banks, which aren’t exactly stable these days.
It is all rather difficult to understand. We can only hope that the major companies and the regulators know what they are doing and that you can continue to get competitive annuity quotes to find the best annuity rates for your retirement income.
