Review shows Irish life companies are still in a comfortable positiondespite suffering a fall of 45 per cent in their available assets, writesLaura Slattery

Stock market falls have weakened key solvency ratios of Irish life insurance companies, but the overall financial state of the indigenous life insurance sector remains healthy, according to a new review of industry returns for 2002.

Three Irish life offices suffered a fall of 45 per cent or more in their available assets, the report by consultants Life Strategies shows.

The report is based on returns made by the nine largest Irish-headquartered life insurance companies currently writing new business here and declared to the regulator in charge for the period, the Department for Enterprise, Trade and Employment (DETE).

Despite the downturn in world stock markets, life companies still have more than twice the assets they need to cover the minimum solvency margin set by the regulator.

However, at the end of 2001, life companies had available assets closer to three times what they needed to meet the minimum solvency margin, while a year earlier, it is estimated that life companies had more than three and a half times what they needed to meet the solvency margin.

Solvency cover, defined as the ratio of available assets to the minimum solvency margin, fell by one fifth from 272 per cent to 215 per cent during 2002. One life company now has solvency cover of just 137 per cent, while two life offices saw their cover halved.

The assets available to insurance companies to meet the required minimum solvency margin fell by €307 million over the year, from €1,995 million at the end of 2001 to €1,688 million at the end of 2002. This represents an average drop of 15 per cent.

Ms Ann Dalton, director of Life Strategies, said Irish life companies were still "very comfortable" and that as long as there were no further downward spirals in world stock markets, there was no major cause for panic.

"The decline in solvency ratios has been significant and is largely attributable to the underperformance of stock markets in 2002. Looking forward, although stock markets fell in the first quarter of this year, the bounce in the market since then should have a positive impact," Ms Dalton said.

"At the end of the day the required minimum solvency margin is a formula. From the regulator's point of view, you only have to be able to cover 100 per cent," she said. A 215 per cent ratio provides a considerable buffer, the report notes.

The required minimum solvency margin acts as a cushion for life insurance companies, in addition to other reserves set aside to meet liabilities.

These include a resilience reserve, which asks companies to set aside what they would need to meet liabilities in the event stock markets lost 25 per cent of their value and interest rates increased by a certain amount.

This has now been relaxed so that companies now only have to set aside what they would need to cover a 15 per cent drop in markets.

Despite a fall of 20 per cent on the Morgan Stanley World Index in 2002, Irish life companies were able to meet their solvency requirements without having to avail of "implicit items" such as taking credit for future profits.

This is a tightly controlled and legitimate way of covering solvency requirements and has become a common way to support solvency margins in the UK, according to Ms Dalton.

"But the fact that Irish companies have not had to resort to it is another indication that they are in a relatively comfortable position," she said.

The combined free asset ratio - the ratio of available assets to total liabilities - for the nine companies also fell by 0.7 of a percentage point, from 6 per cent to 5.3 per cent.

This was a less pronounced fall than in the UK, where companies relied on an influx of new share or lower grade capital to keep free asset ratios from plummeting to around 1 per cent.

Free asset ratios are widely used as an indicator of the financial strength and security of companies, although other factors must also be taken into account. The highest free asset ratio among the nine Irish companies analysed was 10.8 per cent, while the lowest was just 2.7 per cent.

The extent of life companies' suffering during the bear market depended on the breakdown of their business, the Life Strategies analysis indicates.

"Companies with proportionately more unit-linked business have, in general, suffered less than others as their liabilities have reduced in line with falls in asset values, which has mitigated the negative impact on solvency cover," said Ms Dalton.

Companies concentrating on the non-linked or with-profit segment of the market have seen a more significant weakening in solvency cover.

However, the analysis found that companies with a high proportion of with-profit business tend to hold an initially greater value of assets above the minimum solvency margin than companies with a unit-linked focus.

This is in order to meet the guarantees promised to customers under with-profit products.

"They may have with-profit business that is maturing, where the value of the underlying assets falls short of the guarantees and the company has had to meet the difference," said Mr Jim Murphy, a director at Life Strategies.

The nine companies included in the analysis are Acorn Life, Anglo Irish Assurance, Ark Life, Bank of Ireland Life, Canada Life, Eagle Star Life Assurance, Friends First, Hibernian Life & Pensions and Irish Life.

From next year, life assurance companies will declare their annual returns to the new single regulator, the Irish Financial Services Regulatory Authority (IFSRA).