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FSA/PN/075/2005
04 July 2005

The FSA today reports that its end-2004 data for the UK's largest with-profits insurers show that their capital position has continued to improve. Compared with June 2004, the firms' aggregate surplus assets over liabilities, measured on a realistic basis, had improved by 16% at the 2004 year end.

David Strachan, the FSA's sector leader for insurance, said:

"This represents a further step forward for with-profits firms. The second half of 2004 saw major progress by the largest firms under our new realistic reporting requirements.

Clearly the stronger market conditions have played their part, but this is also an indication of firms getting to grips with the new requirements. This is good news for both the firms themselves and for consumers who will benefit from stronger, better capitalised insurers."

Key figures

• Between June 2004 and the year-end 2004, the realistic working capital of with-profits firms increased by 8% to £24.9bn. A number of firms were allowed to include support arrangements in their assets which took the total aggregate realistic working capital to £26.7bn, some 16% higher than in June 2004.
• The overall capital held by firms (£81.1bn) exceeded the capital resource requirement (£46.3bn) by 75%.
• The aggregate holding of equities by with-profits firms has been broadly stable – increasing from 36% to 37% of total with-profits assets over that period. The level varies between different with-profits funds.

The FSA introduced new capital requirements for insurers on 31 December 2004. These require insurers with with-profits liabilities in excess of £500m to take a more risk-based approach to the calculation of their assets and liabilities. This will ensure that assets are more closely aligned to the business written by the firms.

Notes for editors

1. In 2005, with-profits firms reported to the FSA on a realistic basis (requiring firms to reserve for benefits which are necessary to treat policyholders fairly, but which the firm is not contractually obliged to pay) for the first time. Firms have been making private submissions to the FSA on a realistic basis since June 2002.
2. The FSA requires with-profits firms to calculate a risk capital margin (RCM) – an additional liability over and above their realistic liability. The RCM is a 'stressed scenario' combining a variety of adverse factors in one scenario that includes equity and property value falls, interest rate changes and worsened credit experience. The aggregate RCM for with-profits firms was £11.3bn. Aggregate realistic working capital net of the RCM, increased from £11.0bn to £13.7bn before the support arrangements and £15.5bn after such assets. Support arrangements were not included in the June 2004 capital calculations.
3. All with-profits firms with with-profits liabilities in excess of £500m are required to report on a realistic basis. The figures above are derived from those firms, which cover more than 98% of total with-profits business in the UK.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness.