Fear of £50bn capital raising forces market to cut insurers

Insurer shares fell after the Association of British Insurers (ABI) warned Chancellor Alistair Darling that Solvency II would force insurers to raise an extra £50bn in capital, the Times reports.

Blair Stewart, an analyst with Merrill Lynch, dismissed the warning as lobbying. He said such a large recapitalisation would be the size of the entire market cap of the quoted UK insurance sector.

He said the City believed the rules would be watered down.

Worst affected companies would be:

  • L&G, which has a £20bn annuity book and could face costs of £1.1bn
  • Aviva, which has an £18bn book and may need to find £1bn
  • Prudential, which has a £13bn book with costs of about £700m.

Hedge fund Odey Asset Management also increased its short position in the L&G, making it the biggest faller, closing 6½p, or 8%, down at 68p. Aviva fell 15p to 390¼p and Prudential fell 11p to 514½p.

Hybrid bonds

The FT added that the ABI’s second serious concern is that it believes the European regulators group CEIOPS wants to end the use of junior or hybrid bonds as a form of capital and force insurers to replace them with straight equity.

Tony Silverman, analyst at S&P Equity Research, said: “Aviva and Axa have, in relative terms, the most hybrids,” he says. “Their in-issue amounts are close to or in excess of what can be counted towards their IGD calculations.”

Mark Chaplin, consultant at Watson Wyatt, thinks that the ABI estimate for capital increases is excessive and based on an older version of the proposals.