Guide to Analysing Companies

ESSENTIAL FINANCE
01 Essential Finance 10/11/06 2:21 PM Page 8

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panies, which pick up the risks? Some insurers promised guar-
anteed returns to their customers during the boom years of the
1990s, only to find that, because falling stockmarkets had
reduced the value of their assets and depleted their reserves,
they were unable to fulfil their promises. To make up the
income they have lost, insurers have been big buyers of credit
derivatives and asset-backed securities, which have a higher
yield and so are often riskier than other investments.
Observers fret that the banking system may be storing up
problems for itself through the wholesale transfer of risk to in-
surers and other investors. Indeed, some insurance companies
are owned by banks. A number of Japanese insurers have gone
bust in recent years because they were unable to meet guaran-
teed payments to their policyholders, and others have not been
allowed to go bust because of the threat it would pose to the
banking system. Because of falling stockmarkets, many more in-
surers around the world have been forced to increase penalties
to savers for withdrawing their money, thus helping to shore up
their own balance sheets.
Insurance companies are carrying another burden too.
During the boom years of the 1990s many insurers, particularly
life companies, relied too heavily on equities. Many UK insurers
held as much as four-fifths of their assets in shares, or at one
point about 20% of all domestic equities traded on the London
stockmarket. When the markets began to slide, the companies
were forced to sell. After a while, the sales become self-fulfilling.
The more equities tumble in value, the more the insurance com-
panies have to sell in order to meet the levels of free capital de-
manded by regulators. Regulators have already had to be
lenient in the way they apply their rules.
Back-scratching
It is not surprising that greater internationalisation has encour-
aged demands for closer co-operation between regulators in dif-
ferent countries and in different industries. It is an irony that a
country with one of the most sophisticated financial systems,
the United States, also has one of the most fragmented systems
of regulation. While other countries moved during the late