Or that’s the message Aviva gave when it unveiled a healthy regulatory surplus. But, as Angelique Ruzicka discovers, some commentators believe the company may still have to raise more capital.
The collective message from insurance companies in their third-quarter results is: “We’re just fine, thank you”. Last week Andrew Moss, chief executive of Aviva, stressed the group’s strength as he unveiled a regulatory surplus of £1.3bn. “We are taking an active and prudent approach to managing our capital,” he added.
The candid approach has won some praise. Catherine Stagg-Macey, senior analyst at Celent, says: “It’s the sort of transparency that the market wants. I don’t think they need to raise more capital. They are not in the same position as banks.”
Other commentators are more sceptical. Duncan Hall, an analyst at FinnCap, believes Aviva may indeed have to raise more capital. “Conversations centre on declining new business levels and diminishing investment performance. It means that, at some point, shareholder capital could become exposed – that’s where people get worried about whether there will be another fundraising round,” he says.
In its results, Aviva highlighted how it may be affected by market movements and said it was covered as far as regulatory requirements were concerned. But Hall feels this still raises question marks. “The fears don’t go away. I dialled into conference calls during the results season and talk revolved around technical angles on what may or may not be in the solvency ratios, and what the ratings agency may say,” he says.
“With Aviva, there is the issue of their activities in the US, which get assessed differently from Europe. So people say, ‘Yes you have plenty of solvency, but how do you square that off with the US and European situation? What assessments should we make tying the two together?’ This remains unresolved. Aviva’s general line was, ‘These are the rules, you can have your view but we’ve filled out the boxes’.”
A hit to insurers’ investments could still affect the company, though. Aviva has not appealed for funds but falling markets have shrunk its surplus by £600m in the past month to £1.3bn. It has said any further drops will not affect surpluses greatly – and analysts tend to agree.
Barrie Cornes, director at Panmure Gordon & Co, says: “The drop of £600m is accounted for by the average drop in equities of 25% in the period. While this looks dramatic, the company has indicated that a 20% further fall in equities would only lower the Insurance Groups Directive surplus by some £350m.”
To stem any further losses from the equity markets, insurers have sought the relative safety of corporate bonds and government gilts. But defaults are still a possibility here; UK gilts may be safe but there are concerns about defaults from European countries such as Italy and Greece. Hungary and Ukraine have already appealed for aid from the International Monetary Fund.
While Stagg-Macey feels comfortable about Aviva’s prospects, she is uncertain over insurers that are owned by banks, pointing to Royal Bank of Scotland Insurance (RBSI). “When the bank is in trouble it tries to sell the insurance arm to raise capital ... that can throw things up in the air for insurers.” RBS is believed to be in advanced talks with a private equity bidder over the sale of its insurance arm.
Even though there are no signs yet of insurers being hit by the credit crisis, regulators are making sure that they are prepared. Last week the FSA confirmed that it is recruiting more advisers. It already has City law firm Ashurst on board, but is expanding its panel.
“We are concerned about all firms in this current crisis and have been speaking to them whether they are in insurance, banking or whatever. They have regular chats with us and, of course, we speak to the ABI as well,” said an FSA spokesperson.
The Bank of England is also keeping a watchful eye. Its financial stability report last week warned that the insurance sector had emerged as an area of potential concern.
