Firms with life sectors face tougher FSA capital requirements
Legal and General (L&G) has responded to market speculation yesterday by issuing a statement about its reserves and changing to a more cautious approach and doubling its reserves to £1.2bn.
Shares L&G led a stock market fall by life assurers, as investors and analysts predicted that Britain’s fourth-largest insurer could be forced to top up its capital reserves by nearly £2bn because of problems in its life business
Other insurers with life businesses were also hit on fear the regulator would make more stringent demands on them to raise capital.
This morning L&G said: “As at December 31st 2008, we estimate our Insurance Group Directive capital surplus was in excess of £1.6bn. This reflects falls in equity markets to 31st December 2008, the credit default reserving detailed below, and our current view of other year-end adjustments (an assessment of which is ongoing), but is before accrual of the final dividend.
The company added: “In 2008 Legal & General's default experience was broadly in line with long term assumptions. However, in the light of the current economic environment, the company believes it is appropriate to reserve on a more prudent basis. As part of its year-end process, Legal & General has therefore decided it is appropriate to take additional reserves against the anticipated risk of a short term rise in credit defaults.
“The planned additional reserves, which are before tax, follow a thorough sector-by-sector review of our portfolio, and default experiences from the 1930s and subsequent recessions. On the basis of this analysis, we have decided to increase credit default assumptions for the next four years from our long term assumption of 30bps per annum for corporate bonds to approximately 130bps per annum, again before tax. This is equivalent to a further £650m (before tax) in credit default reserves, taking total reserves for defaults in our annuity portfolio to £1.2bn.
“In our judgement these increased reserves are both prudent and appropriate to cover all reasonably foreseeable circumstances. We have worked closely with the Financial Services Authority and have kept them fully informed of our approach.
The FT reported: “The regulator declined to comment Monday, but people familiar with its treatment of life assurers believe it is moving towards a stricter approach to determining the amount of money that must be set aside for potential defaults.”
