Solvency rules caused life insurers to dump £30bn worth of equities

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The Independent Online

Life insurers dumped £30bn in shares last year, according to the Financial Services Authority, as they sought to protect their capital from plummeting stock markets.

In a speech to an insurance conference in Poland yesterday, John Tiner, managing director of the FSA, revealed details of a survey of 50 top life insurers in the UK conducted to assess whether they could withstand further falls in the stock market without becoming insolvent. "We estimate that life insurance firms sold about £30bn of equities from their with-profits funds. We anticipate that most of this was reinvested in bonds," he said.

This sell-off represents about 3 per cent of the value of the London stock market.

Insurers have traditionally held about 70 per cent of their assets in equities, but as the stock market entered its third year of decline, their fund values have plummeted. Policyholder bonuses have had to be hacked back in an effort to conserve the much-depleted capital within the with-profits funds.

One of the biggest sellers was Equitable Life, which last month admitted that it would have been insolvent and in the hands of administrators had it not dumped almost £4bn of equities in 2002.

Equitable now holds only 4 per cent of its £12.5bn portfolio in equities, with 70 per cent in bonds and the remainder in cash and property. AMP has also switched almost all of its with-profits funds into fixed-income securities.

Norwich Union's equity holdings fell by 43 per cent during 2002, as its portfolio shed £6.5bn in value. Friends Provident's portfolio fell 38 per cent, as £3.9bn was wiped off its fund. Standard Life's portfolio fell by 30 per cent and lost £8.4bn in value.

"It is fair to say that most insurers were selling equities or not investing their cash flow into the stock market, and I think there is still going to be more selling," Ned Cazalet, the independent insurance analyst, said. "The market is only up 3 per cent since the start of the year so many funds have still taken a hammering. Those who have dramatically reduced their equity holding will be unlikely to get back into the market."

As insurers struggled to meet their statutory solvency requirements, the FSA last year had to waive the rules for companies that could show their breach was only temporary. Mr Tiner says the insurers did have sufficient risk controls in place to protect their assets.