Legal & General first insurer to get solvency waiver

Legal & General yesterday became the first life insurer to receive a waiver on its solvency tests after the Financial Services Authority offered to relax the rules earlier this year to prevent forced equity selling.

The FSA invited insurers to apply for a waiver in an effort to stop companies in the sector, which own more than a fifth of the UK stock market, from aggravating the three-year decline in stock markets by selling shares to maintain a regulatory level of solvency.

Continued exposure to the stock market during last year's falling market meant that a number of companies were brushing up against their minimum margin of solvency. The current rules force companies to sell their equity holdings when their reserves breach a certain level and the waiver is designed to let companies weather the stock market slump and stay open for new business.

A spokesman for Legal & General said yesterday: "We felt this was very sensible action to take. We largely maintained the size of our equity portfolio and don't want to decrease it. This waiver will allow us to continue our strategy."

Both Legal & General and the FSA yesterday insisted the waiver had been granted because the company had been able to demonstrate that it is financially sound and can meet its liabilities. Legal & General said last month it had 12 per cent more in assets than it needed to cover liabilities, well above the 4 per cent minimum required by the regulator. David Prosser, the chief executive of Legal & General, raised £786m in a rights issue last year to strengthen its balance sheet.

Legal & General can now, however, reduce its liabilities and boost its assets by assuming that some customers will stop paying in to policies. It can reserve for what it expects to pay out, rather than a blanket company-wide measure. It will also be allowed to hold assets outside its with-profits fund and increase the valuation of its assets against its liabilities.

Many other insurers, including Prudential, Aviva, Friends Provident and Standard Life, have said they are applying for solvency waivers to allow them to maintain the freedom to invest in equities for the long term.

Ned Cazalet, an independent insurance analyst, yesterday said: "Legal & General is one of the stronger companies in the sector, but whatever way you look at this, it is a weakening of the solvency regime and companies are being allowed to operate with lower solvency requirements. A waiver may put the brakes on selling equities, closing to new business and hacking bonuses back further, but should companies be avoiding these issues and not taking action that might be necessary?"

The granting of waivers is a transitional step by the FSA in the path towards a new method of measuring life insurance solvency that will more accurately assess the realistic strength of a company.