Insurer jitters - Insurers on the defensive

Despite wide financial turmoil, so far the UK's insurance profession has managed to survive without any major losses, although some insurers have been burned around the edges by dramatic falls in their investment portfolios.

AIG and Fortis have seen their parent banks capitulate to government aid after bad deals in other parts of their respective businesses, yet both insist that their UK arms are well capitalised and in a position of strength.

The Bank of England signalled an alarm in late October about the security of insurers, "reflected in rising CDS spreads and falling equity prices", however it added that "insurance companies seem relatively well placed to avoid liquidity difficulties".

Before the financial storm, we would have expected quick bids for AIG and Fortis and it is still unclear why selling Royal Bank of Scotland's insurance divisions is taking so long. Times have changed and insurers are becoming more reserved about how they spend money. Seb Kafetz, relationship manager at Lloyds TSB Financial Institutions, said: "People are more cautious and now are only selling for cash because shares are so volatile. It is becoming hard to raise money. I think AIG's larger assets are more likely to sell in the first half of next year."

As share prices rise and fall with abandon, it is unclear how the insurance sector will emerge from the current crisis. Most UK general insurance companies appear to be making money and have solid capital bases. However, the revelation in Ireland that Sean Quinn has been fined EUR3.25m for failing to meet regulatory requirements regarding substantial loans to related companies did not help. Quinn resigned from the board and reassured brokers by saying that Quinn Insurance is "very profitable" and has over EUR2bn in assets. In addition, ratings agencies have come under attack for failing to rate debt properly.

UK insurers have instead been suffering from speculation and Aviva's senior managers have been the latest to reassure investors. Andrew Moss, chief executive at Aviva, has done a good job in calming the markets, giving a detailed explanation of its surplus and capital cushions. To aid his cause, the insurer delivered third-quarter results showing that consumers were continuing to invest in its funds.

Meanwhile, Hiscox has been seeking opportunities, with the insurer recording investment income down just 0.1% over last year. Steve Langan, managing director at Hiscox UK, said: "You should be looking at each insurer on merit. We don't go into high-risk, high-return investments."

Despite the conditions, broker acquisitions are still taking place, with Liverpool-based Powell being snapped up by Oval and Dickson Insurance by Giles. Oval has refinanced to the tune of £115m, with chief executive Phillip Hodson declaring that £60m is available for acquisition. It is not a good time to be publicly listed, however, as AIM-listed Jelf Group's shares have dropped dramatically to below 100p from over 200p, despite expecting a 40% profits increase this year.

One thing is for sure in these times, it is nice to be owned privately.