View from City Road: Bad days at the offices

LIFE INSURANCE companies do not want you to know it, but they are not as strong as they were. Two separate surveys of financial strength published yesterday once again illustrate the extent of the damage the industry has suffered from falling investment returns, and the scale of the challenge it faces in the 1990s.

The surveys, in Money Marketing and Money Management, show a widespread decline in free asset ratios, a measure of the funds life offices have available above the amounts needed to cover their commitments to policyholders. Any actuary worth his salt will readily explain why these and similar calculations are virtually meaningless, and the data far too complicated for mere mortals to comprehend.

Strange, then, how the companies Money Management identifies as displaying 'worrying trends' - including Guardian Royal Exchange, Scottish Amicable and Scottish Equitable - so frequently figure in City rumours. The analysis also puts the finger on Norwich Union, the company that has had the most obvious difficulties in the last year.

Life offices have responded by altering the basis on which they calculate the figures. GRE, for example, has included pounds 188m of future profits in its free assets. Others - Norwich Union and ScotAm among them - have adopted a more generous valuation of their liabilities by increasing assumptions of future investment returns. This seems particularly odd since Norwich Union has been in the forefront of institutions predicting lower returns in the 1990s.

Norwich's justification is that life offices' estimates of their assets has to allow for stock market volatility. They are therefore entitled to (and have) considerable freedom over the calculation of their liabilities. And life companies remain comfortably within the latitude allowed to them by law.

No major life office is so weak that it is anywhere near the point of collapse. But all of them must cut the bonuses they pay to policyholders. The 1980s was a golden decade: life offices made hay on the back of the home-buying boom, the rise of the endowment mortgage, and personal pensions. The industry faces the 1990s financially weaker, sensitive to frequent criticism, losing market share to banks - and forced to cut the value of what it has to sell.