Pru and Aviva shares slide on capitalisation fears

by Gill Montia

Story link: Pru and Aviva shares slide on capitalisation fears

Indications that the Financial Services Authority (FSA) will ease the capital requirement of UK insurers, to prevent some of the problems seen in the UK banking sector, have been followed by sharp falls in the share prices of Prudential and Aviva.

Both companies may have to take significant writedowns as a result of market turbulence.

In addition they, along with other insurers, have invested heavily in the corporate bond market, where defaults are rising.

Pressure to improve capital ratios in the insurance sector could therefore force insurance companies to sell shares and other assets in a falling market creating long-term damage to the funds that they manage for private individuals and pension funds.

The FSA is therefore keen to avoid the need for any more urgent fundraising, whilst aware that sliding investment markets will wipe billions of pounds of insurance company assets.

In related news, a note to investors from Goldman Sachs issued yesterday has suggested that Prudential and Aviva may consider a merger to ride out these difficult times.

In addition, Legal & General reported yesterday that it has reduced its capital cushion by £500 million, to £2.9 billion. The figure is down from £3.4 billion at the end of June.