Standard Life, Europe's biggest mutual life assurer, has warned it may impose exit penalties if concerns about the life industry's financial strength lead to a flood of early policy surrenders.
The Edinburgh-based group is unusual among leading life assurers in not imposing exit penalties normally known as "market value adjusters" to reflect falls in equity markets.
Mr Iain Lumsden, Standard Life's chief executive, insisted the AAA-rated group's financial position was strong, but also said it might have to make an interim cut in its with-profits bonuses before next February, when the group normally declares its rates.
Standard Life has been operating in Ireland since 1834. and employs about 240 staff in Ireland.
Standard Life's biggest quoted rivals in Britain such as Norwich Union, Scottish Widows, Prudential and Friends Provident have cut with-profit bonuses in recent months, blaming the plunge in equity markets.
In an interview, Mr Lumsden defended his group's unusually heavy weighting in equities and said he did not feel concerned about the group's solvency. He said: "We can manage ourselves through any bear market ... What I feel concerned and worried about is the effect of some newspaper articles on our own policyholders' confidence. That's a problem."
The gloom gripping the sector is partly caused by a series of cash calls from companies as diverse as Legal & General, the UK life assurer, and Switzerland-based Zurich Financial Services along with continuing disappointing news from Royal & Sun Alliance and Swiss Life.
However, questions have been asked about the financial health of Standard Life, which has combined high investment exposure to tumbling equity markets with an extraordinary surge of growth particularly in the UK.
The Edinburgh-based group bolstered its own balance sheet in July with a £1 billion sterling bond issue the maximum it could raise from the debt market.
Mr Ned Cazalet, a respected if outspoken independent analyst, calculated the group's excess capital funds held that exceed policyholders' entitlements had shrunk from £10.6 billion at the end of 1999 to no more than £2 billion now, a drop of more than 80 per cent.
Mr John Hylands, Standard Life's finance director, said he did not recognise Mr Cazalet's figures.
However, the group's admits its free assets for solvency purposes, which is calculated on a different basis from Mr Cazalet's figures, have fallen from £9.4 billion at the end of 1999 to £3.4 billion at the end of last year, a drop of 64 per cent.
Mr Cazalet said: "If that figure was down 64 per cent by the end of last year before the market got even choppier how can it not be down 80 per cent by now?"
Mr Lumsden says: "Clearly, we have had more equities than competitors so we've had a couple of bad years because we have heavier equity exposure though it's only 10 to 15 percentage points," he says. "It's not as if we are wholy invested in equities and everyone else is invested in cash."
In spite of Standard Life's continuing exposure to equities, Mr Lumsden insisted he had "no concerns whatever" about the group's financial strength whether or not equity markets rebound quickly.
Until the end of July, Standard Life said it was not seeing much policy surrender activity. Even last month, it said the volume of surrenders was small, about £15 million, out of a with-profits life fund of £22 billion.
However, Mr Lumsden said: "The more talk there is about our bonuses going down, the more likely it becomes that we are going to have to apply market value adjusters."
The continuing plunge in equity markets means that further bonus cuts are inevitable. Mr Lumsden said: "Of course payouts are going to have to come down, and there's no point in denying that." However, Mr Lumden was also careful not to rule out interim reductions.
