AMP fails to reassure over Pearl's solvency

The insurance giant AMP saw its shares slide to an all-time low after attempts to reassure investors yesterday that the company is not short of capital by its chief executive, Paul Batchelor, failed to settle nerves.

Mr Batchelor told the Sydney stock exchange, where the company is listed, that the group was well capitalised and could continue to support the UK businesses after it emerged this week its UK subsidiary, Pearl Assurance, is breaching its regulatory solvency margins.

But shares slid nearly 8 per cent yesterday to 11.8 Australian dollars (£4.17). The company has seen A$8bn wiped off its value since April.

The group is trying to raise A$750m to reduce its debt and strengthen its balance sheet, but had to reveal in its rights issue prospectus that Pearl is not meeting regulatory capital requirements. AMP has injected £400m in to the fund this year and more capital may be needed.

"Investors should not confuse the issue of regulatory capital with that of economic solvency – they are separate issues," Mr Batchelor said. "AMP remains well-capitalised and able to support its UK financial services operation."

He said the group has assets of up to £1.4bn in the UK that are not admissible under FSA regulations for technical reasons. The group is waiting for a replacement finance director after Mark Decure announced his sudden departure two week's ago.

Equity markets have taken their toll on the Pearl fund, along with many other insurers. AMP yesterday said every 100-point drop in the FTSE 100 will affect solvency by £120m.

The group has desperately sought to shore up reserves in Pearl by cutting bonuses and by pulling out of expensive lines of business such as with-profits bonds. AMP like many other insurers has been selling equities to reduce its exposure to the stock market.

Pearl Assurance was once a cash-rich business when AMP bought what was then a listed company in 1989 for £1.1bn. AMP has used the healthy cash reserves of the Pearl fund to fund acquisitions of new businesses, such as the pension company NPI and the financial website Interactive Investor International, as well as provide ongoing capital support to the UK life businesses through contingent loans.

This has allowed AMP to use capital to support the business without seeing the effects hit the headline balance sheet in Sydney.

Ned Cazalet, an independent insurance analyst, said: "AMP has a problem in that its shareholders are in Australia but most of its business is done in the UK. Explaining their UK position had always been a problem for them – a lot gets lost in the translation. Pearl has been used to finance the business and acquire companies. Now it has a lot less capital and AMP will have to shuffle its assets around."