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Blood on the walls in the emergency room

Norwich Union’ emergency cuts in with-profits payouts last week has sparked speculation that the rest of the life industry is going to follow suit and take drastic action to preserve financial strength.
Analyst Ned Cazalet says the only surprise is that the cuts were not more stringent. He says: “It is just the beginning. There is going to be blood on the walls. Capital is going down the tube.”
He says most companies will be forced to follow. Unsurprisingly, NU agrees. All life offices are resorting to the mantra of “monitoring and reviewing the present situation carefully”.
Across the industry, very different positions are being adopted. Whereas Standard Life, Liverpool Victoria and AMP Pearl have no MVR in place (Pearl’ contracts preclude their use), most other companies have put them in place.
In L&G’ case, the MVR for pensions is an eye-watering 24 per cent, higher than the 20 per cent benchmark of Equitable Life.
Axa and AMP NPI have already imposed 5 per cent payout cuts on with-profits. AMP NPI has an MVR policy of between 3 and 15 per cent on unitised with-profits, which rises to 21 per cent for socially responsible investment with-profits. AMP spokeswoman Carmel McCarthy says this is to reflect the bigger falls in values for ethical investments.
Faced with the collapse in confidence in the markets, which has seen the FTSE lose a quarter of its value this year, life companies have an array of options. Companies can lean on their reserves or orphan assets.
If they are subsidiaries of bigger companies, they can get cash injections.
More controversially, life companies can reinsure their risk or can take advantage of accounting regulations that permit them to use future profits. Both these practices are believed to be frowned on by the FSA and were roundly criticised by Ron Baird’ report into the FSA’ handling of Equitable Life.
The EU is working on Solvency II, a directive which will end the use of future profits and introduce a more flexible risk-based approach to monitoring the financial health of insurance companies.
Life companies can also sell shares either to meet immediate solvency requirements or transfer into fixed interest to better match assets with liabilities.
They fear getting trapped in a vicious circle where they have to sell shares which can drive the market further down while policyholders take fright and cash in policies.
The FSA says only that it is monitoring the situation carefully and will not comment on specific companies or on any actions that it is taking.
A few weeks ago, FSA managing director John Tiner reassured MPs that life companies were not close to being sellers of equities but at that time the FTSE stood above 4,500.
At the recent FSA AGM, chairman Howard Davies repeated that reassurance but added: “It is bound to be the case that the weak equity markets will affect firms with a large proportion of shares in their asset base.”
Companies such as Standard Life, Norwich Union and Legal & General say they are not seeing signs of inv-estors panicking.
Standard Life head of with-profits David Hare says the company is scrutinising exit numbers carefully and it will introduce an MVR if it sees an increase.
Even if policyholders do not take fright en masse, there is what the insurance companies call investors selecting against them and critics such as Cazalet describe as consumers making an informed decision.
NU has taken the brave step of announcing that it has been paying out 122 per cent of asset share. Standard Life does not disclose such information but it is widely thought to be paying out even more.
Hare says: “We do not want to do anything that allows people to do things that are against the interests of the fund.” He points out that trans-generational transfer of assets is central to with-profits – “the present generation cannot get it all.”
Cazalet says if he was an IFA, he would be advising clients to cash in on the situation with payouts that he thinks are unsustainably high.
Given the air of crisis surrounding the health of life companies, it is not surprising to see IFA opinion deeply divided on the issue of with-profits. Firms such as Hargreaves Lansdown are refusing to sell with-profits products but others such as Chartwell Investment insist they still have an important place in some investors’ portfolio.
Wentworth Rose chief executive Philip Rose says he is carefully analysing the investments of his clients and transferring out of companies with suspect financial strength.


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