Solvency crisis puts pressure on Standard Life to convert

Standard Life yesterday appeared to be under fresh pressure to end its status as Europe's largest mutually owned life company after it emerged that the insurer has been locked in urgent discussions with the City regulator over its financial strength.

Despite talking for several weeks, the Financial Services Authority and Standard Life have so far been unable to agree about the way the insurer should calculate its liabilities stretching decades into the future.

Market sources said the dispute, which started after Standard Life filed its results ending in November, centres on new accounting regulations the FSA is phasing in. Under the new system, the amount of surplus capital Standard Life has in its coffers is thought to have slumped from £5.6bn to about £2.5bn.

While Standard Life attempted to shore up confidence that its finances were still robust, it admitted the revelation about the row with the FSA had prompted hundreds of policyholders to call Standard Life to ask about their investments yesterday.

Speculation in the market also grew that Standard Life, which is led by Iain Lumsden, might have to consider abandoning mutuality in order to gain access to the capital markets, enabling it to bolster its capital reserves. The 2.6 million policyholders might also find the insurer has to trim the bonuses it pays this year.

"There has been a high level of engagement between the company and the FSA," the regulator said in a statement. The discussions are close to a conclusion, at which point Standard Life is planning to put out a statement to its policyholders and bondholders explaining the consequences of the FSA's action. The FSA is pushing for all life insurers to move from "statutory solvency" to "realistic solvency" by the end of this year, which will force companies to account for a wider range of future liabilities than they currently have to reserve capital for.

One of the major areas of contention is over guaranteed bonus policies, which promise policyholders a fixed payout every year irrespective of what happens to the stock market.

Such policies have already become deeply controversial after their prevalence on the books of Equitable Life led to its collapse. Standard Life has also written a substantial number of guaranteed policies.

A spokesperson for the Edinburgh-based company said: "Standard Life is not in any financial difficulty and there is no question of it being more than able to meet all of its obligations. Our underlying financial strength has not changed materially from the mid-year."

Analysts said that the difficulty Standard Life has got into with the FSA is unlikely to be repeated when other insurers file their own returns. Shares in all major life insurers rose, on speculation Standard Life's difficulties with the regulator could draw new business their way.

Standard Life has already come under pressure to convert to a public company. David Stonebanks, a retired lecturer and its most recent carpetbagger, said he would send off within the next two weeks about 2,000 letters from policyholders requesting the insurer to convert. "If it is true that they need to raise capital, flotation would be the obvious way to do it," Mr Stonebanks said.

Some market observers said the FSA's concern was probably not that Standard Life had too little capital, but rather its structure, whereby its entire business was pooled within its with-profits fund. This meant policyholders' money was used to fund business ventures, such as setting up its bank and expanding into other countries.

Warning of further cuts in bonuses for with-profits policyholders

Policyholders in with-profit funds are likely to suffer falls in their bonuses this year, despite the revival of equity prices that their money is invested in, the Institute of Actuaries warned yesterday.

The gloomy statement is likely to be particularly unwelcome to Britain's savers, many of whom have already suffered two years of falling bonuses after insurance companies slashed payouts in response to dire stock market conditions.

The note of caution comes before the bonus season which begins next week, with Aviva, Britain's biggest insurer, set to announce its payouts on Tuesday. It will be followed by the other major insurers in the next few weeks. Many insurers will announce yet another round of reductions because many have not passed the full falls in the stock market on to policyholders in the past few years. Under the "smoothing" system employed by most with-profit funds, some of the investment return in good years for the stock market is held back to bolster payouts in the bad years.

The Institute also said policyholders should not expect a bonanza, or even modest increases, in most cases this year because returns on equities and bonds are expected to be more muted than in the boom times of the 1980s and 1990s.

The actuaries' trade body said: "Investment returns from equities and fixed-interest assets are expected to be lower in the future, because the UK is expected to continue to be a low interest rate/low inflation economy. Therefore future pay-outs under with-profits policies are likely to fall."