Jeremy Warner's Outlook: Osmond joins the race for closed life funds

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The Independent Online

Few would think of life assurance as an attractive business after the meltdown of recent years, but just as there is an ever lengthening queue of willing sellers for these assets, there is also a growing number of buyers intent on gathering them up, crunching them together and making something out of them again.

Few would think of life assurance as an attractive business after the meltdown of recent years, but just as there is an ever lengthening queue of willing sellers for these assets, there is also a growing number of buyers intent on gathering them up, crunching them together and making something out of them again. The closed life fund no longer has the same pariah status as it did in the immediate aftermath of the Equitable Life débâcle. Many of them are relatively well capitalised, and perfectly viable businesses. It's just that their owners don't want to run them any more.

Yesterday's purchase by Resolution Life of Swiss Life's closed UK business for a consideration of £205m, and today's expected purchase by Hugh Osmond's Sun Capital of the old Pearl and London Life funds from HHG for £1bn in cash, are indicative of the trend. This is Resolution's second life fund purchase in less than six months, its first being Royal & SunAlliance's life business, for which it paid £850m.

Backed by the Fleming family and a top drawer array of institutional money, Resolution has moved decisively ahead of the game in making these purchases, but as Hugh Osmond's copycat deal demonstrates, it is by no means alone. Other aspiring consolidators of closed life funds include Britannic Group and Old Mutual. A number of other private equity, financial buyers are also active in the market.

The backdrop to their interest bears some exploring. Going back five years or so, there were more than 100 active life funds operating in these islands, an astonishing number for what is essentially a commodity business with very little to distinguish one life fund from another. The origins of this industrial madness go back twenty years or more to when the Bank of England lifted the ban on banks owning insurance companies.

It did so, moreover, on terms which allowed banks a capital free ride on their new assets. Inevitably this created overcapacity, underpricing, overpromising and mis-selling. Compounded by falling equity values there was an eventual collapse in policy values. All of a sudden this capital free business started to blow great holes in the balance sheets of its owners. Worse, a posse of regulators came riding through their doors creating merry havoc with the business model and making it impossible to predict what liabilities would be forced on to the industry next. Worse still, the Government so disincentivised saving that it was made all but pointless to devote resource to marketing the product.

The upshot is that there is already some £190bn of assets in closed funds. Over the next two to three years, this is expected to double again until anything up to 40 per cent of total life and pension assets is in funds closed to new business. Five years ago, the top five life assurers accounted for only 30 per cent of new business. That number will soon be about 60 per cent as more and more small to medium-sized life funds decide it no longer worth the candle.

Something none the less has to be done with this vast tail of legacy assets. It's hard verging on the impossible simply to liquidate them and, anyway, in most cases they will have some sort of a value. Hence the rise of the consolidators.

The consolidators fall into two categories. The financial buyers are only interested in managing the capital, with the administration and the fund management contracted out to someone else. Britannic, now run by a former Merrill Lynch investment banker, Paul Thompson, aims to do all three. Resolution, chaired by the City veteran Sir Brian Williamson, falls more into the former category than the latter, yet interestingly it is the only one of the new breed so far to have pulled off a significant deal. Watch this space, promises Mr Thompson, who refused to get himself into a head to head auction with Resolution for the Swiss Life assets. The consolation prize of Alliance Cornhill is expected to be signed any day.

As for Mr Osmond, who made his money out of pubs, HHG is a first. In going for a closed life fund, he's following the money. The current stream of assets coming on to the market is likely soon to turn into a torrent. That's when the reshaping of this bizarrely fragmented industry can properly begin.

Housing comeback

Tony Pidgley, managing director of the housebuilder Berkeley Group, reckons the worse of the housing slowdown is already over. Reservations in Berkeley's south-east of England heartland were down 15 per cent in the six months to the end of October, and profits fell accordingly. Yet in the traditionally quiet month of November, reservations picked up sharply again, wiping out the shortfall of the previous six months. Confidence seems to be returning.

Mr Pidgley's experience corresponds almost exactly with what's been happening in the wider economy. In the third quarter of this year, the economy hit a soft patch. Demand fell and people began to worry about the effect of higher interest rates on house prices. But since September things have picked up again, and unless you adhere to the theory that the sickly dollar will eventually bring the world economy crashing down with it, then the outlook for next year looks pretty good.

Whether that also means the UK housing market will continue to be "the best investment avenue for UK investors", as Mr Pidgley told Reuters yesterday, is rather more questionable. Mr Pidgley is one of Britain's most canny housebuilders and it rarely pays to bet against him. He called the last crash perfectly. His response to the uncertainties now surrounding the housing market is an interesting one.

He's getting out of traditional, greenfield housebuilding so as to concentrate on urban brownfield development of upmarket apartments. Yet this is a market sustained as much by foreign investment buying as genuine domestic demand. That tap can be turned off as quickly as it now flows. I'm not convinced Mr Pidgley has read the market this time around as well as he likes to think.

Still, a soft landing for the housing market in general is already looking much more likely than the crash some pundits were predicting last summer. The Bank of England, which left interest rates unchanged yesterday after the Monetary Policy Committee's monthly meeting, will be hoping against hope that the economy remains strong, for the last thing it wants to do is cut interest rates again. Nothing would be more guaranteed to send the housing market back into a frenzy of activity. Prices are far too high relative to incomes, and for social, as well as economic reasons, prices need to be cooled.

I doubt Mr Pidgley is right about housing still being the best investment around. The Blairs make as good a contrary indicator as any. They sold their Islington house close to the start of the boom. Just recently they've paid top whack to re-enter the housing market. If you are buying to invest, equities look to me much better value for the next five years than one of Mr Pidgley's penthouse apartments.

Life stealth tax

The Treasury has cleverly defused the row over plans to fast track a new tax on life funds by announcing that there is to be a consultation after all. But does the Government really intend to backdown? Somehow I doubt it. Instead, it will listen intently, and impose the tax anyway.

The Treasury must have realised there would be an almighty row about any attempt further to tax a business which is already on its knees. Why otherwise would it have snuck the proposal into the fine print of the pre-Budget report, and then attempt to impose it with almost immediate effect? The Government is desperate for new sources of revenue, yet the opportunity for taxing by stealth is becoming ever more limited. All the easy targets have already been tapped.

jeremy.warner@independent.co.uk

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