The report, by Cazalet Financial Consulting - one of the leading authorities on the life insurance sector - says NPI's finances have slipped so that "repair is needed as a matter of very considerable urgency". Without repair, the report adds, "its solvency at the end of 1998 would be in question". The report estimates that NPI might not be able to show any free assets, over and above the minimum required to show solvency, if its financial position were assessed this month.
Ned Cazalet, who wrote the report, said a sum approaching pounds 1bn must be injected into NPI's funds to restore it to financial health.
Even if a buyer paid an optimistic price of pounds 1.5bn, little more than pounds 0.5bn would be left for policy-holders, generating windfalls well below pounds 1,000, he added.
"With the Prudential's takeover of Scottish Amicable, the Pru was able to distribute ScotAm's reserves to the policy-holders. With NPI, as far as its life fund is concerned, there is nothing in the pot to give away," he said.
The report estimates NPI's investments will have returned almost nothing since the start of the year. Taken with outgoings (excluding policy premiums and claims) the society is estimated to have a negative cash position of pounds 500m.
In calculating its liabilities, NPI has used optimistic assumptions about investment returns which sharply boost the level of free assets it appears to hold in public documents. If the life insurer used more conservative assumptions, it would appear much weaker, the report said. Its free asset ratio - the main measure of financial strength - would shrink from 7.9 per cent to around 3 per cent, even before markets slumped.
Mr Cazalet said NPI, in common with other life insurers, was likely to be forced by the end of this year to ditch its optimistic assumptions because of dwindling interest rates. That would boost liabilities to the tune of pounds 400m.
"Like other mutual life insurers, NPI believed the sun would shine forever and has found itself selling out from a position of very considerable weakness," Mr Cazalet added.
NPI's appointed actuary, Bernard Brindley, handed in his resignation on 23 July. He left when his replacement, Philip Moore, joined NPI on 1 October.
Alastair Lyons, chief executive of NPI, said yesterday: "The argument that we have been forced into this [de-mutualising] by our level of solvency is categorically not true. The action we have taken is not caused by solvency and there is not a solvency issue currently in the organisation."Reuse content