“It’s all in a day’s shorting,” said Lex in the FT. A UK life assurer releases grim results and hedge funds manage to hammer down not just that stock, but the entire sector. At times like this, a business so geared to the vagaries of the markets is “easy fodder”, as the falling value of the assets they hold can produce some hair-raising losses. For example, Aviva reported a £1.95bn profit last year, said Michael Prest on Breakingviews. But taking into account falling investment values, that slumps to a loss of £7.71bn.
A bad time for insurers to be opaque
The problem for insurers is that “almost no one has ever properly understood insurance company accounting and now is a bad time to start explaining it”, said Anthony Hilton in the Evening Standard. The real issue is not the headline profit and loss figures, where investors “should have expected to see large swings… given what has happened in the markets”, said Prest. Instead, it’s a “simple question of faith” regarding their balance sheets, as Lex put it: whether their investments exceed their liabilities. Standard Life has a surplus of £3.5bn and Prudential £2.5bn. But Aviva, the largest of the three, has “just” £2bn, leaving investors worried about whether its dividend is sustainable. The smaller Friends Provident should be well capitalised at £800m, although it has long-running cash flow problems.
But be careful with these numbers: insurers are the “quintessential black boxes”, said Robin Geffen in the FT. As with banks, “protestations of adequate capitalisation will be sceptically received” and with good reason: during the boom, insurers bought into riskier assets, added leverage and offered guaranteed-return products to boost sales. It’s likely that they will have to raise capital through rights issues, dividend cuts and asset sales.