One of the saving graces of the last business downturn was that there was no accompanying banking crisis, or not in the English-speaking world at least. This made the event pretty much unique in the annals of modern economic history. Most business downturns are greatly exaggerated by a coincidental credit crunch brought about by banks desperately trying to retrieve themselves from mountainous bad debts.
Last time around, this didn't happen. All kinds of reasons can be postulated, but the primary one is that low inflation and interest rates enabled the banks to generate a consumer credit boom that counteracted the damage to financial health caused by the collapse of the dot.com bubble.
No banking crisis, then. Indeed, banking profits continued to surge right through what was in all other respects one of the most serious business downturns of the post-war period. The banking world's gain was the insurance industry's loss, for though the banks managed largely to avoid the adverse consequences of the previous boom, life assurers, pension funds and the rest of the long-term savings industry were devastated by them. Policyholders, members and investors suffered a similar fate, though because long-term savings are too far in the future for most people to worry about, they kept on spending regardless.
Insurers tend to be badly hit in any bear market, yet previously, they had generally been able to ride out the storm of depressed equity values by simply taking the view that markets would eventually recover and get them out of jail. Unfortunately, the last bear market coincided with the introduction of tough new solvency rules, requiring a more equal match between current assets and future liabilities to be maintained.
As equity markets declined, life assurers and pension funds were forced to dump their shares in ever increasing amounts. The more they sold, the further the market would fall, causing a vicious downward spiral in prices. Once mountainous reserves of surplus capital were reduced to rubble.
Many pension funds fell into deficit and life assurers were forced to slash their bonuses. Those forced to swap their volatile equities for "low risk" cash and bonds succeeded only in depriving their shareholders of the subsequent rebound in the stock market. Rescue rights issues and capital-raising exercises became commonplace. Great swaths of the life assurance sector were forced to close their doors to new business. Several, including Equitable Life, very nearly went bust altogether. As it is, virtually all policyholders have had their "reasonable expectations", to use the industry jargon, completely shattered.
That crisis reached its nadir around three years ago. Today, the industry is financially recovered, even though the damage to policyholders remains acute. So recovered, in fact, that there is a veritable glut of new life assurance paper coming on to the market, most of it this time not for the purpose of shoring up balance sheets but for that of expansion.
What to make, then, of yesterday's somewhat disappointing results from Prudential? The figures were fine for the boom territories of the Far East and the US, but performance in the core UK business, still around 30 per cent of the total, was uninspiring, particularly when set against the more buoyant new business numbers being reported by a number of major rivals.
Mark Tucker, the chief executive, is still too new in the job to be held wholly accountable for these failings, yet he only recently turned down a takeover approach from Aviva, so he's plainly got something to prove. Less than two years ago, Prudential tapped the stock market for £1bn in new equity for the purposes of taking advantage of the many profitable growth opportunities it saw in the UK. There is little sign of them coming through in these numbers.
Again, Mr Tucker cannot reasonably be blamed for the strategies of his predecessor. However, one of the first things he did when he got his feet under the table was to buy in the quoted minority stake in Egg. The timing now looks unfortunate, with the internet bank slipping quite seriously into the red.
And the main UK business? Mr Tucker says his numbers look poor because he's forgoing the unprofitable growth many of his competitors are pursuing. Much of the growth others are reporting is led by churn with wafer-thin margins, he claims, while he cannot believe the prices that new entrants are paying for bulk annuities, a market where the Pru used to enjoy a monopoly of two alongside Legal & General.
If most of the Pru's growth is in future going to come from the US and the Far East, is there any point in Mr Tucker remaining in the UK at all? He'd find plenty of willing takers for the business if he put it up for sale, including the fast growing Resolution. Yet for the time being, it remains.
If Mr Tucker is right that the growth shown by others is more illusion than reality, then eventually they will be found out. Yet it may be that in a low-margin world, where scale and volume are all-important, Pru is simply too high-cost to hack it. If that's the case, the present value-driven approach will fail. The new round of cost-cutting announced yesterday will help, but is it enough?
Since January, it has fallen to Nick Prettejohn, the former chief executive of Lloyd's of London, to man-manage the UK operation. He's got quite a challenge ahead of him. Still, he should count his blessings. At least he doesn't have to worry about his solvency any more.
Awaiting judgment of the Ombudsman
Why won't anyone listen to me! As a columnist, it is my lot to be ignored, but if you happen to be the Parliamentary Ombudsman, whose job it is to pronounce on whether there has been maladministration in government, you might reasonably expect your judgments would be honoured.
The present incumbent, Ann Abrahams, has been forced to think differently. She's now received so many slaps in the face from the Government that you wonder why she carries on at all.
The Government rejected her findings on whether the Department for Work and Pensions should be held liable for misleading the public over the security of occupational pension schemes, and it did the same in respect of her findings of maladministration in connection with tax credits. Her judgments on a number of immigration cases have also been ignored.
How much more of this can she take? Her constitutional position has been seriously undermined by the Government's repeated snubs. Ms Abrahams' report on Equitable Life later this year is likely to prove a defining moment. The strong likelihood is she will again find maladministration in the way the Government regulated the mutually owned life assurer. It is equally likely the Government will refuse to pay any compensation. If that's the outcome, she'll almost certainly resign, triggering a constitutional crisis. Who would want to succeed her in the job of watchdog without teeth? What would be the point?
There is a pattern in the Government's response to the Ombudsman's strictures. If the case is relatively small in nature, involving a finite and quite limited amount of compensation, the Government tends to do its constitutional duty and pay up. This is more especially the case when there is the opportunity to make political capital out of the case. But when the likely compensation runs to billions, as it would have done with occupational pensions and might well do with Equitable Life, then ministers are understandably more reluctant.
Rightly so, in many respects. If the taxpayer were to be held liable in all cases of incompetence by government officials, there is no telling where it would end. Indeed, the Government would need to give up its regulatory functions altogether for fear of exposing the taxpayer to what would become a tidal wave of claims. For Equitable Life policyholders, Ms Abrahams is the last hope of holding someone financially accountable for their misfortune. Unfortunately, it is a slim one.Reuse content