Insurer Pearl in breach of solvency requirements

Pearl, the UK life insurance company owned by the Australian financial services giant AMP, is breaching the solvency margins required by regulators.

Pearl, the UK life insurance company owned by the Australian financial services giant AMP, is breaching the solvency margins required by regulators.

Swiss Life yesterday put its UK insurance business up for sale after posting a six-month loss of Sfr386m (£165m). The group aims to raise Sfr1.2bn through a rights issue. The UK business, which specialises in niche life products, may be worth up to £200m. Shares in the insurance sector took a hammering on the news.

The Sydney-based AMP group yesterday published the prospectus for its 750m Australian dollars (£260m) rights issue in which it said it expects Pearl to meet its regulatory capital requirements by the end of the year. But this will only happen after a number of capital initiatives have been implemented and assuming that stock markets do not make any further significant falls.

Solvency margins – the amount of capital a company must have to make sure it can cover its liabilities – are calculated once a year under Financial Services Authority rules.

But insurers must inform the FSA if they slip below their solvency margin, or if they expect to find meeting the requirements difficult, at any time during the year. They then must present the FSA with a detailed plan of how the business will be recapitalised before the FSA will accept the solvency breach is temporary and no further action is needed.

AMP has already taken a number of steps to shore up capital reserves in its UK businesses – Pearl, London Life and NPI. As major investors in equities, these have been seriously damaged by this year's volatile stock markets.

Pearl has already received a £400m injection from AMP this year, but more may be required. The Pearl fund was closed to with-profits business last month and new investments are being put in to a less capital-intensive fund. Bonus rates have been cut and the fund's exposure to equities has been reduced.

AMP says it has had an ongoing dialogue with the FSA over Pearl, and the regulator is satisfied with its plans. "Weakness in equity markets has put pressure on the UK businesses," a spokesman for AMP said. "We have taken many steps to address the issue and expect to meet the requirements by the year end."

Ned Cazalet, an independent insurance analyst, said Pearl would not be the only company breaching solvency thresholds.