Europe's biggest mutual insurer Standard Life has dumped £7.5 bn worth of equities since the start of the year as it moves to meet the requirements of the FSA's new solvency rules.
In its 2003 full-year results released last week, Standard says it has now reduced its equity-backing ratio to around 50 per cent, slashed from 74 per cent in June last year, in a “strategic realignment” of the with-profits fund investment portfolio from equities into bonds.
The equity-backing ratio is the ratio of equity and property holdings in the fund to total assets.
Rating agency Fitch says the move is indicative of the direction that the UK life sector is taking and predicts that other insurers which manage with-profits funds are likely to follow suit in selling off equity holdings to meet the new regulatory requirements.
Fitch consultant Martin Lees suggests that in the future the UK life market's capital structure will look more like the US, with “more modest” investment in equities, due to risk-based solvency requirements.
He says equity holdings are likely to be replaced by increased exposure to corporate bonds.
Standard's realignment sees stakeholder with-profits policies with no guaranteed growth rates continue with an equity ratio of 75 per cent while unitised policies with relatively high guaranteed growth rates will now have an EBR backing of around 30 per cent. All other with-profits policies, including mortgage endowments, will have a backing of 55 per cent.
Lees says: “As the life insurance markets in aggregate have traditionally been a major equity investor, this could be a significant drag on the UK stockmarket unless unit-linked investments can make good the shortfall in demand.”
Standard Life managing director UK life and pension sales Nathan Parnaby says: “We are always reviewing whether we should be in equities at this level, but this was part of the strategic plan so there should not be any further decrease. It is as likely to go up now as it is to go down.”