American tragedy finds a market that can cope

Mobile agony; Lattice threats; Energis rebound
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The Independent Online

"Reports of my death," Mark Twain famously said, "have been greatly exaggerated." The same remark might be applied to Lloyd's of London, which has been forced to read of its own imminent demise so many times in its 313-year history that it long since gave up counting. The atrocities in New York and Washington have brought out the obituary writers all over again, and by the look of it, they are once more likely to be disappointed.

In point of fact, the crisis finds Lloyd's better prepared for calamitous loss than at any stage in its recent past. What's more, the size of the loss, at £1.3bn, is in real terms rather less than some past disasters to hit Lloyd's. Adjusting for inflation, Hurricane Hugo in 1989 and Hurricane Andrew in 1992 were bigger, and so was the Piper Alpha disaster. For some Names and corporate partners, this latest calamity will be the final straw, and in the months ahead some syndicates are bound to lose backers. But on the whole, the market seems quite capable of weathering the storm and perhaps even emerging from it strengthened rather than weakened.

To understand why this is the case it is worth going back to the disastrous losses of the late 1980s and early 1990s, when the market really did come perilously close to collapse. Losses spiralled out of control after an unprecedented concentration of natural and man-made disasters combined with a series of asbestos and other health-related claims to produce something close to complete meltdown.

What made matters infinitely worse was that many syndicates had reinsured the risk with other connected Lloyd's syndicates, producing a reinsurance spiral. Furthermore, poor regulation and controls had allowed agents to concentrate risk on a relatively small number of Names, so that while some Lloyd's members were perfectly all right, others were forced into bankruptcy.

Today the situation is completely different. There are still, believe it or not, some Names prepared to take on the risk of unlimited liability, but these days they are thin on the ground, and exposure to the terrorist outrage seems to be quite widely spread among mainly limited liability Names and corporate backers. The capital controls and reforms put in place during the 1990s seem largely to have worked.

What happened in New York and Washington is unprecedented in the annals of insurance. But the size of the loss is by no means unheard of and since the early 1990s, all Lloyd's syndicates have been forced to stress test their ability to deliver against much worse scenarios than this. Ten years ago, America's tragedy would almost certainly have translated into a fresh crisis for Lloyd's, but the lessons have been learned and acted upon, and fingers crossed, things look to be basically OK this time around.

Nor does the future look as bleak as it is being painted. The outrage will make the accounting years of 2000 and 2001 look grim, but reduced capacity and soaring premiums ought to ensure that 2002 is one of record profits. Some Lloyd's members are even talking of taking on increased exposure in anticipation of boom years ahead. Every disaster brings its own lessons for the insurance industry, and they are no doubt there aplenty for Lloyd's along with everyone else. But at least this time around Lloyd's seems assured of survival.

Mobile agony

There's nothing new in price caps for mobile phone companies. Vodafone and BT Cellnet have been living with RPI minus 9 on the termination charge for the best part of two years already. All yesterday's proposals from Oftel do is raise this to minus 12 and apply it to the other two operators, Orange and One2One as well. That hasn't stopped some strongly worded protests from Vodafone and others, who reasonably argue that with the industry now barely growing and the huge costs of the 3G buildout yet to come, this hardly seems the best of times to be tightening the regulatory screw.

Oftel's David Edmonds points out that the new pricing formula won't be applied to the 3G but that's hardly much of a consolation for companies already so strapped for cash that some of them are beginning to wonder whether it's worth building the new networks at all. As it is, all of them were hoping to finance the cost of 3G to some extent out of existing cash flow, which as a result of these measures will now be that much lighter.

The termination charge is the fee extracted by each operator for routing a call onto its network. This is not a market in which there can be either consumer choice or competition, so it's right to control it to some degree. But if the Government wants to achieve its aim of a rapid 3G build out, this doesn't seem to be the right way of going about it. Mr Edmonds might well find his determination challenged before the Competition Commission

Lattice threats

New management. Different regulator. Same old problem. The gas pipeline operator Transco has exploded again over what it claims is an undeliverable set of price controls from Ofgem. Provided this is more than mere sabre rattling, the gas men are headed for the Competition Commission for the third time in eight years. On both previous occasions, they got little or no change and the indications are not very promising this time around either.

Callum McCarthy, the man behind this beastly assault on shareholder value, has already backed down so much from his draft proposals in June, that the final price controls announced yesterday are worth only a measly £5 off the average £320 gas bill. Hardly the "smash and grab raid" that previous gas men had to put up with.

Sir John Parker, chairman of Transco's holding company, Lattice, is a sensible man and recognises a lost cause when he sees one. Why else did he turn down the chance of becoming Railtrack chairman? There is no good reason for subjecting Lattice shareholders to nine months of uncertainty with little prospect of a happy ending. Too often the gas pipeline business has cried wolf, only easily to absorb the worst that the regulator can throw at it. Transco should break the habit of a lifetime and settle for the regulatory devil it knows.

Energis rebound

Everyone knows that things are bad out there, but can they really be as bad as the 39.5p to which short sellers have driven shares in Energis, the telecommunications group. Adjusting for subsequent scrip issues, the price is now lower than at the time of flotation in 1997, when Energis was still more hype than reality. As today's trading statement will confirm, Energis has since been transformed into a fast-growing and vibrant business, with real profits and excellent prospects.

At around a third, the increase in revenues for the first half are likely to come in at the lower end of analysts' forecasts, but with Ebitda growing at nearly 40 per cent, the company seems easily capable of fully funding its business plan. Few other telcos can claim the same. We live in crazy times, but eventually reason will return, and this is not a rational price for a sound company certain to stay the course.

j.warner@independent.co.uk

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