Entire insurance sector takes a hammering
Insurance stocks have taken a beating lately. One problem is the complexity of their finances, leaving questions over the health of their balance sheets.
"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.
Abad 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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?
Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
By Kalpana Fitzpatrick Published
-
What does Rachel Reeves’s plan for growth mean for UK investors?
Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
By Katie Williams Published