Abbey frets over life business

BANKING group Abbey National will be forced to shore up its main life insurance business if the blue-chip FTSE 100 falls another 3.7%.

The disclosure, revealed in City briefings, marks a new stage in the crisis facing insurers as share markets tumble. The Financial Services Authority, the City's watchdog, has already warned some firms are close to breaching their solvency ratios - levels set by the FSA to ensure companies can meet their commitments to policyholders.

Abbey said its Scottish Mutual business would breach solvency rules if the Footsie falls below 4400 points. The index closed at 4580.3 on Thursday, down 3.9% in three days. The group refuses to say how much it would need to shore up Scottish Mutual. But a spokesman said it could be a similar amount to the £150m pumped in when the Footsie plunged to around 4250 after 11 September.

It said the cash would be drawn from a central fund where Scottish Mutual‘s reserves are held. The spokesman did not rule out a rights issue, but added: 'Abbey National is a very well capitalised business'.

Abbey executives, including new finance director Stephen Hester, have been briefing analysts in recent days. The group was forced to issue a profits warning early last week, hammering its shares, thanks to losses in its wholesale banking division.

The UK stock market has slipped around 35% from its peak in December 2000, but was the 600-point slide in the Footsie in the past month that has pushed insurers to the brink. Standard Life said last week that it planned to raise £1bn and Friends Provident is raising £800m through a bond issue, although it insists the money is needed to fund growth rather than prop up its with-profits business.

Lloyds TSB has reassured analysts this week that the market 'must fall significantly' before its Scottish Widows business breaches solvency ratios. It has previously set the danger level at 4,100 points.

Analysts say 'pure' life insurers, such as Prudential, Royal & SunAlliance and CGNU, could be in deeper trouble as they lack the crutch of a major banking business. James Leal, banking analyst at Gerrard, says various 'smoke and mirrors' accounting tricks can also be used to meet solvency requirements but he believes Scottish Mutual has already played that card. 'It's quite possible that it is breaking the ratios already,' he added.

RSA shares closed down 13 3/4p at 238 1/4p, CGNU was off 14p at 512 1/2p and Prudential slipped 4p to 558 1/2p. Abbey National shares tumbled 26p to 757 1/2p.