Standard Life, Britain’s largest mutual life insurer, was thought to be one of the most active in the market due to its attempts to hedge its still high exposure to equities in the derivatives market. Britannic, which issued a profits warning three weeks ago, said at the time it could cope with the FTSE 100 falling to 3,300 and since then is believed to have further reduced its equity exposure.The speculation prompted heavy selling of insurance stocks yesterday. Britannic suffered the heaviest fall, down 10 per cent to 132.5p, while Aviva dropped 8 per cent to 366.5p. Prudential lost 7 per cent to 360.5p and Legal & General fell 5 per cent to 76.75p.While uncertainty grips the whole sector, the FSA’s main concerns are over the financial strength of smaller life insurers, including mutuals and public companies.The City regulator believes from talking to some smaller life insurers in the past few days that a number of them are so stretched by the downturn in the stock market, they are very close to breaching their solvency margin. This is the key figure that must be met in order for insurers to operate in the UK.The FSA has told these insurers to come up with an action plan detailing how they will stabilise their business.
It has asked them to consider cutting the dividend, raising capital to bolster funds, reducing bonus payments and closing to, or reducing, new business.The regulator does not comment on discussions it is having with specific companies. It said: “We want to ensure that, in the best interest of policyholders, firms take a measured and rational approach to addressing threats to their balance sheets posed by equity market volatility.”Sir Howard Davies, the chairman of the FSA, said three weeks ago that most life companies would be able to cope if the FTSE 100 falls to 3,500 and that “many of them are happy down to 3,000″ The regulator is sticking to that analysis. But Sir Howard told the World Economic Forum, in Davos, that he agreed with a view of the market put forward by Josef Ackermann, the chief executive of Deutsche bank. Mr Ackermann said a brief military campaign against Iraq would provide a short-term boost to global stock markets but would not be a permanent cure, while a drawn-out war would be very expensive and therefore difficult for the market in the months ahead.Analysts said uncertainty in the political situation would harm UK life companies because they will continue to find it very difficult to judge whether to redirect more of the hundreds of millions of pounds they hold in equities into bonds or cash, or to keep shares in the hope prices will recover.. EMI, the world’s third-largest music group, saw its shares dragged lower yesterday on fears of its debt being downgraded to junk status, a possible halving of the dividend and renewed concerns about the outlook for recorded music. This followed comments made by Rolf Schmidt-Holz, the head of Bertelsmann’s recorded music division, that the global music market could fall by a further 7 per cent this year.
Global music sales fell by 9 per cent in 2002.Deutsche Bank also said consolidation in the sector was unlikely in the short term. “We do not see EMI being able to take market share and think it will perform, at best, in line with the declining market,” said Paul Reynolds, the broker’s media analyst.Some analysts are increasingly concerned about the status of EMI’s debt. Standard & Poor’s downgraded its rating on EMI’s debt on Friday although it improved the outlook statement from negative to stable. A forthcoming decision by the rival agency Moody’s could result in a two-notch downgrade from EMI’s current Baa2 negative, analysts said.Deutsche Bank added: “We anticipate the credit rating agencies downgrading the group to sub-investment grade in 2003.
