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Moore&#39s code

The howls of outrage from some IFAs when the FSA told life insurers not to overpay bonuses this year are looking dafter by the day.

A detailed analysis of the annual reports of CGNU and Standard Life illustrates the worrying position life offices are finding themselves in.

CGNU is showing that its surplus capital has halved from £14bn to £7bn. Standard Life is showing a £5bn fall to £8bn. Standard has long been one of the strongest life offices in the UK and CGNU, with an AA credit rating, is no flake either. There is little doubt that as further companies, many weaker than these two, issue annual reports, the numbers will get even more unpleasant.

An aggressive stance in equities is the reason for the size of the falls in CGNU&#39s and Standard&#39s excess capital. Weaker offices should have a higher proportion of bonds, cushioning them from the worst effects of last year&#39s stockmarket falls but they will not be immune.

Those charged by the Government with reforming the financial services industry might like to take a careful note of these figures. Last year was a terrible one on the stockmarket while it might yet rec-over somewhat this year. It is on this basis that Standard and CGNU are retaining their high levels of equity holdings.

There is no guarantee, however, and a return to the bull run which kept everyone fat during the 1990s seems like so much wishful thinking on the part of some City professionals. Even if the markets were to stage a mild recovery, products like stakeholder pensions – which are unlikely to show profits for at least 10 years – are adding to the capital strain on life offices.

Standard Life, for example, needs its equity holdings to grow at 7 per cent to hold its excess capital where it is, with the need to pay bonuses and cope with the strain of aggressively writing new business.

Endowments are all but a thing of the past, leaving only with-profits bonds as a reliably profitable banker – and they are unlikely to escape the attention of the Ron Sandlers of this world, arguably rightly. But Mr Sandler, Gordon Brown and the FSA should beware of acting hastily.

With-profits as a concept is desperately in need of reform. The flaws have been highlighted time and again. Equitable Life anyone? But life insurers are no longer the fat, lazy and greedy beasts they were of old. With price con-trols being imposed willy nilly, while they at least might like to be greedy, it is no longer a realistic option.

Many of the life industry&#39s problems are admittedly self-inflicted but successive Governments and regulatory bodies must take part of the blame for allowing them to get away with practices at best dubious, at worst bordering on criminal, for so long.

Nonetheless, problems of the past should not be allowed to get in the way of the issues that need to be addressed in the here and now. The Government needs to understand that insurers are under a severe degree of capital stress. However worthy reforming legislation – whether prompted by Sandler or dreamed up by mandarins and special advisers – may seem, the Government must carefully consider the impact it will have on an industry that is beginning to look dangerously exposed.

I have so far been rather impressed with John Tiner at the FSA, who appears to be striking the right balance in the work he is doing on reforming with-profits funds. New Labour, however, is regrett-ably fond of nice splashy headlines and at the moment it could really do with some.

No one is quite sure what Sandler will say but the indications are that the industry is in for a bruising encounter. The temptation for the Treasury to use what the indications suggest will be a damning indictment of the long-term savings industry to gain some pro-consumer Brownie points is clear.

It is a temptation that should be resisted. Any change needs to be assessed within the context of the millions of savers already in life funds and in the context of an industry which provides thousands of jobs and a significant proportion of the UK&#39s GDP.

Getting it wrong could leave us with more Equitable Lifes – something nobody, whether in Government, regulation or the industry, wants to see.

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The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Forecasts and past performance are not a guide to future performance. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you of any change to our views.

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