A handful of firms are "under pressure" from insolvency, says research by Mercer Oliver Wyman, as th...
A handful of firms are "under pressure" from insolvency, says research by Mercer Oliver Wyman, as the median free asset ratio of life offices fell 2% last year to 5% while some have dropped to zero percent.
Although Mercer Oliver Wyman (MOW) disputes there the situation is really is as bad as has been made out, there are still two or three companies - namely thought to be Britannic Assurance, London Life and Pearl - which carried a virtual "zero" FAR and faced insolvency in 2002 unless they saw some form of capital raising action.
Reported FARs in the life sector deteriorated from 7% in 2001 to a median of 5% in 2002, says Anthony Stevens, head of insurance practice at MOW, but the terms under which they might actually be assessed vary widely, when focus is shifted from the statutory FAR - which include certain liabilities as a cushion - against those offered by realistic assessments, such as high equity backing ratios, a high proportion of guaranteed products, slowness in cutting bonuses, relatively weaker reserving bases and already heavy use of implicit items.
"For a few firms, the evidence is worrying, but the statistics are varied because one firm, for example, had a statutory FAR level of 5% but actually have a better realistic FAR of 14%. On the other hand, another company had a statutory FAR of 8-9% but had a realistic FAR of 4%," says Stevens.
"Very different kinds of portfolios of products determine what the liabilities might be, such as heavy equity legacies of the past which have yet to pay deferred CGT liabilities on the equity portfolio."
Stevens says MOW research - which is based on information supplied by life offices and from statutory documents which are publicly filed with the FSA - there are at least two firms which are below the minimum solvency margin and a further three life offices are within just 1% of it.
Had companies not been able to impose Market Value Adjustments (MVAs) and slash terminal bonuses when they did, the situation might have been much worse and the FSA would have been forced to offer waivers on its statutory FAR assessments at least a year earlier, adds Stevens.
IFAs might disagree with such findings but Stevens also notes that despite their past position and the huge MVA imposed on policies, anyone with an Equitable Life pension would have faired better over the year than under any other life office.
"[Policyholders] would have been better with an Equitable Life pension over the last year than any other provider because they took a lower risk profile and sold all of their equities," suggests Stevens.
That said, analysis of FARs is not as disturbing as it might seem, according to Mercer Oliver Wyman - which is now a part of Mercer Management Consulting - as the inclusion of future profits would boost the median statutory FAR to 6.5%.
If all life offices make maximum use of implicit items - such as future profits - the average free asset ratio for 2002 might have improved to 6.5%, but much depends on the type of business they do and the implicit items included in the financial reporting.
Paul Bruns and Elaine Parkes
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