As is generally the case with corporate basket cases, Royal & SunAlliance turns out to have been an even bigger mess than previously thought. The great bulk of the £1bn being raised from the rights issue announced yesterday is needed to deal with legacy problems - that's ignoring the £35m the City thought it reasonable to charge for underwriting a share issue so deeply discounted that the risks of it going wrong are virtually zero. You might have thought there was no pound of flesh to be had from Royal & Sun's emaciated, skeletal like figure but, somehow or other, the City has managed to extract it.
None the less, it is hard to see what sort of a future Royal & Sun might have had without this dollop of new capital. Andy Haste, the new man at the helm, reckons he could just about have funded his exit from the US and the extra provisioning he needs for past liabilities from the capital that is released by shrinking the business so much, but it would have left the company in a miserable position with virtually no room for growth. To make your investment grow, he's essentially telling shareholders, you will have to invest more.
This has rather been the story throughout the insurance sector over the past year, with only Munich Re among the bigger players still resisting the case for more capital. The position at Royal, as we now know, is a good deal worse than most, so what's the prognosis? Everything was meant to have been sorted out a year ago. Refused the chance then to launch a rescue rights issue, the company fired the chief executive and announced a root and branch restructuring that involved shrinking the business by about a third.
At the time, this seemed dramatic stuff but actually it has turned out to have been not nearly radical enough with plenty of problems left swept under the carpet. Mr Haste hopes that yesterday's package of measures fully cleanses the manor. It is the habit of new chief executives in the first year in the job to make the numbers look as bad as possible, knowing they can all be blamed on the previous regime and establishing a firm base from which the only way can be upwards.
In Mr Haste's case, I think we have to take his word for it that there is no over-egging or sexing up of the scale of Royal's problems. Indeed, part of the problem he had in selling the rights issue to investors yesterday is that he was perhaps too open about the company's difficulties, which are much worse than anyone anticipated. A further £1bn is being set aside to pay for restructuring costs and previously unrecognised liabilities. The red ink was so bad, that there was even talk of a further downgrade in Royal & Sun's credit rating, which is not what's meant to happen when a company takes steps to rebuild its balance sheet.
The uncertainties and potential elephant traps listed at the back of the rights prospectus are some of the most frightening I've ever come across, including as they do a bizarre legal wrangle the company has got itself into over credit risk insurance on a $500m portfolio of loans to students going through truck driving school. Those with diagnosed heart conditions are strongly advised to skip that section.
Mr Haste talks a good game, and his execution is plainly a big improvement on the disconnected management that went before. Unfortunately, the order of the day still seems to be paying for the past rather than funding the future. For what it's worth, the future mapped out for shareholders yesterday looks a distinctly unexciting one, concentrating as it does on an eclectic mix of commercial and personal insurance in the UK, Ireland, Canada and Scandinavia. What is Royal & Sun really for? Mr Haste's predecessor, Bob Mendelsohn, now enjoying his £2.5m pay-off and £325,000 a year pension back in his native America, had absolutely no idea. As for Mr Haste, he's yet to provide an answer.
CD price cuts
The music majors have no one else to blame but themselves for their current travails. They've failed to respond quickly and effectively enough to piracy, or to the new distribution platform of the internet, they've failed to develop new talent on the scale necessary to keep sales rising, they've paid themselves too much and, most important of all, they've continued to charge too much.
The meltdown they've experienced was both predictable and largely deserved. As it is, sales of recorded music worldwide are continuing to plummet. They fell 10 per cent last year and are likely to do the same again this year. Belatedly, painfully and reluctantly, the industry seems finally to be responding. Yesterday's overnight news that Universal Music Group, the biggest, is to cut wholesale prices by between 16 and 24 per cent on many of its CDs is potentially the most important news yet in the counter attack.
UMG's chief operating officer, Zach Horowitz, reckons he can persuade retailers to translate these discounts into a 30 per cent reduction to consumers, and is optimistic that by so doing, the industry might finally halt the slide in sales. Back in the UK, shares in EMI fell more than 10 per cent, spooked by predictions that a price war launched by the market leader is bound to hurt the smaller players a good deal harder than it does UMG. Yet in truth this is exactly the sort of initiative the industry needs. As things stand, the majors face slow death by a thousand cuts.
Significant progress has been made over the past year in countering online piracy, both in terms of attacking the pirates through lawsuits, legislation and technology, and by developing forms of online distribution that consumers are actually prepared to pay for. But the tide has not yet been turned and the trend is still strongly towards the use of "free" downloads wherever they are made available.
I've always thought of the file sharing phenomenon as a form of consumer strike. People who do it are stealing, and there is of course no justification for theft even from industries that charge iniquitous prices. Nobody would think it reasonable to steal a Mercedes simply because it costs too much. None the less, perhaps as many as 10 million worldwide are doing it from the music industry, which suggests not so much that there has been a collapse in morality, but that there is something seriously wrong with the industry.
UMG's response is long overdue. Let's hope it's not a case of too little too late.
Yesterday's decision by the Bank of England's Monetary Policy Committee to leave interest rates unchanged was scarcely the most difficult one it's ever made. There is no case for a further cut, with something of a mini boom building up in the housing market once more and consumption continuing to roar away, fed by a sea of debt.
Yet there is little case for a rise either. All the current talk of a sharp economic rebound looks misplaced to me. Thanks largely to rising taxes, net incomes are beginning to fall, and though the official figures don't yet show it, unemployment is very probably on a rising trend. That means eventually growth in consumption will grind to a halt too. Consumption has been growing at a rate way above the rest of the economy for donkeys' years now, and although the end of the war seems to have given it a new lease of life, it must be close to its natural end.
The Government's hope is that business investment will pick up sufficiently to compensate for the expected slowdown in consumption, yet despite evidence of a turnaround in business sentiment, the size of the gap may be too big to bridge. All of which points to sluggish overall growth for some time to come. The base rate is likely to remain at 3.5 per cent for some time to come too.