Begging bowl today, jam tomorrow from insurers

Mobile lunacy; M&S/Brooks Bros Â

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Insurers to capitalise on surge in policy premiums

Marks & Spencer disposes of Brooks Brothers

It's a rum old thing really, but for the insurance industry at least, the events of 11 September are proving as much a blessing as a curse. Much like the outlook for the world economy, which ironically is now said to be a whole lot better than it was prior to 9.11 because of all the policy action taken since, insurance has seen both a hardening of rates and an explosion in demand as a result of the terrorist atrocities in New York and Washington. Despite collectively having to shoulder the burden of the largest and most complex set of insurance claims ever, most industry executives see the next couple of years as a period of unparalleled opportunity.

As a result, everyone suddenly wants more capital. This week, we've had two rights issues from Lloyd's of London insurers and there could be more to come. In the latest such cash call, Brit Insurance is raising £160.8m by issuing shares and convertible bonds.

In part, this is a rescue rights issue. On present estimates Brit Insurance will end up forking out around £80m for the World Trade Centre atrocities, which obviously hugely damages its capacity to underwrite in future. But the other purpose of the capital raising is to support an already planned doubling of underwriting capacity to £450m of premiums next year. Brit announced a while back that the half-year dividend was being axed to conserve capital for expansion. Now the final dividend is going too. We're in trouble, but think of all that jam tomorrow, seems to be about the sum of it. The only trouble is that getting from here to there is not going to be easy. The dynamics of the insurance industry are changing fast and it's far from clear how things will settle.

On top of the massive terrorist-related insurance claim, there's the added problem of exceptionally low rates of interest and generally poor rates of investment return to deal with. Insurance companies have traditionally made most of their money from the time value of premium income before it is paid out in claims. That source of income has fallen steeply in recent years, radically altering the economics of the industry.

Neil Eckert, Brit's chief executive, points out that the rights issue will give his company the second-biggest balance sheet in the British general insurance sector after Royal & SunAlliance. Insurance might have all sorts of problems at the moment, but recession isn't one of them, he says. In fact the industry is being hit by a "wall of demand". Better still from his point of view, there's not enough capacity out there to meet it because of the damage done to balance sheets by 11 September. Premium rates are thus rising fast, driven by a combination of rising demand, reduced capacity and investment income substitution.

With such exciting prospects, you'd expect the shares to be bounding ahead. In fact they are close to their all-time low, which is hardly surprising given that the company has just cancelled its dividend and announced an £80m hole in the balance sheet. Even so, it may be that the stock market is still too much stuck in yesterday's story.

Mobile lunacy

It seemed such a populist thing to do that how could it possibly go wrong? No, not Stephen Byers's botched attempt to nationalise the railways without compensating the shareholders, but the telecoms regulator's plans to slap price controls on the mobile phones industry. According to David Edmonds, director general of Oftel, the price controls will be worth £800m to consumers over four years and will bring to heel an industry where pricing is opaque and profiteering is on the increase.

Unfortunately for him, the mobile phone companies are refusing to take their medicine lying down and the whole initiative has the potential to go very badly wrong indeed. All four operators are refusing to accept his proposed price cap of inflation minus 12 per cent for termination charges, and unless he compromises, the proposal is destined to end up with the Competition Commission, where the industry believes it has a good chance of tearing the regulator apart.

The termination charge is the bit of the tariff the mobile phone operator charges for connecting you to one of its customers. Whether you are using a landline or another mobile, it's always expensive to call someone on a rival mobile network. By definition there can be no consumer choice or competition in the termination charge, so Mr Edmonds thinks it a reasonable target for regulation.

So far, so logical. Only one slight problem with the analysis. Mobile telephony is still in its infancy compared with most other industries, it has been hugely successful in coming from nowhere less than 20 years ago to near 100 per cent penetration today, it's already viciously competitive in every respect other than the termination charge, with four major players about to be joined by a fifth, it has yet collectively to make anything in the way of profits, and it is being asked to invest billions of pounds in 3G networks.

For the regulator to be attempting to justify his existence by dipping his hand into an industry which has delivered outstanding value and progress seems at least questionable. In the manner proposed, it is also highly unlikely to deliver either benefit to the consumer or enhanced competition. If the mobile phone industry isn't allowed to earn its money out of the termination charge, it will ensure the return is made elsewhere. The effect will be further to strengthen the already stronger players and weaken the weaker ones. If Mr Edmonds thinks this piece of misguided consumerism will secure him the top job at Ofcom, the new super regulator for telecoms and the media, he's got another think coming.

M&S/Brooks Bros

As an example of buying at the peak of the market and selling at the bottom, Marks & Spencer's disposal yesterday of Brooks Brothers is hard to beat. But it's by no means an exception round at M&S. Other acquisition blunders include M&S's purchase of a Canadian operation which never made any money and was eventually closed down altogether. Then there was the £192m purchase of 19 stores from Littlewoods in 1997. Several of those outlets had to be closed only three years after the deal was done. It may seem hard to believe now but M&S paid an eye-watering $750m for Brooks in 1988 just as the Eighties boom was at its zenith. It was the group's first major acquisition and the Americans must have seen M&S coming a mile off. Campeau, the vendor, had hired Wasserstein Perella as its adviser. Keen to make his mark, Bruce Wasserstein, who is now head of Lazards, played a blinder. He is said to have dined out for years on the price he persuaded M&S to pay.

M&S has struggled ever since to make the deal work. Even after deciding last March to throw in the towel and sell the business, it managed to drag its feet and screw up. Had it moved more quickly it could have sold Brooks for $400m-plus as a trophy asset. But as the US economy deteriorated, Brooks slipped back into loss and its value headed south. Eventually M&S was caught out by the terrorist attacks of 11 September, which destroyed one shop entirely and made another into a temporary morgue. Time will probably show that the del Vecchios have got themselves a bargain, for even in the current climate $225m doesn't seem much for one of the best known clothing brands in America.

j.warner@independent.co.uk