Outlook: It's not time to bail out sinking life assurance companies

Trinity Mirror
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Both in terms of its length and duration, the present bear market in equities is the worst since the mid-1970s. Dire conditions call for drastic measures and the story somehow managed to take wing in the City yesterday that the situation is now so bad in the life assurance industry that some companies might need a co-ordinated 1970s style bail-out if insolvencies are to be avoided.

Both in terms of its length and duration, the present bear market in equities is the worst since the mid-1970s. Dire conditions call for drastic measures and the story somehow managed to take wing in the City yesterday that the situation is now so bad in the life assurance industry that some companies might need a co-ordinated 1970s style bail-out if insolvencies are to be avoided.

Both the Treasury and the Financial Services Authority say they haven't been contacted and, in any case, could not see how they might help even if they were. The age of state sponsored bail-outs, even when financed by the industry itself, are long gone. There have been exceptions. In 1998, a group of international investment banks were strong armed by the US Federal Reserve into rescuing Long-Term Capital Management because of the threat the collapsed hedge fund posed to financial stability.

Bankruptcy in the British life sector doesn't fall even remotely into the same category. Even if a big British life assurer went to the wall, it wouldn't prompt meltdown in global capital markets. But the effect would be profoundly destabilising none the less, undermining the savings of hundreds of thousands of people, destroying public trust in the industry and activating the financial services compensation scheme, under which the strong are obliged to ride to the rescue of the weak. If there is any danger of this happening, you would expect the Association of British Insurers already to be sounding alarm bells with the FSA and the Government.

No one would admit to such soundings even if they were being made, for they would then become a self-fulfiling prophecy. Even so, the whole story seems a little implausible. The life assurance industry has no case for assistance, except in circumstances where it can be demonstrated that the fault lies with financial regulators, and outside the compensation scheme, it is in any case hard to see through what mechanism such a rescue would be administered.

If there is a section of the financial services industry deserving of state aid, it is pensions, not life assurance. The Government is equally culpable with the stock market in bringing the private provision of pensions in Britain to its knees. It abolished the tax credit on dividends, at a cumulative cost to the industry of £20bn, it has been miserly in the extreme on the national insurance rebate, so much so that pension providers are recommending millions of people switch back into state provision and, as the National Association of Pension Funds pointed out yesterday, it continues to charge penal rates of stamp duty on equity purchases at an average cumulative cost to a £50,000 pension pot of £8,000. If employees are looking for someone to blame for the closure of their final salary pension schemes, they need look no further than Gordon Brown, the Chancellor.

But that, as they say, is a another story. With the insurers, there's no case even for a government-sponsored life boat, let alone a bail-out by taxpayers. None of the bigger players seems to be in any immediate financial danger, even with the stock market falling like a stone and, if anything, the solvency of the industry as a whole seems to have improved a little since the last bout of nerves in mid-July. Since then there have been further closures to new business while a number of those with rich parent companies have been recapitalised. Almost without exception, the insurers took advantage of the summer rally in equity markets to adjust their positions and set their houses in order.

Even with Pearl, the situation doesn't yet look terminal. Pearl's parent company, AMP, had planned to patch up its finances with a rescue rights issue, but no investor in their right mind is going to stick new money into a company which publicly admits that emergency funds will be needed if the FTSE 100 sinks beneath 3,700. The stock market duly sunk beneath the crisis point yesterday, prompting the resignation of AMP's chief executive, Paul Batchelor. Now without a chief executive or a finance director and with a chairman who wants to go as soon as he can, AMP can forget all thought of a rights issue. That doesn't mean Pearl will go under. Pearl's solvency can be addressed in other ways, perhaps by rejigging group assets.

There's little prospect of respite for life assurers in the foreseeable future. The stock market scarcely seems likely to get much better for now. All the pressure of sentiment and events continues to be down. The new factor yesterday was Germany. Now politically as well as economically paralysed, there seems little prospect of the structural reform necessary to address the deep malaise in Europe's economic hinterland. War on Iraq, the related prospect of an oil price shock, a US economy still desperately trying to work off the excesses of the bubble, it's hard to see where the good news necessary to revive the stock market is going to come from. Rather the reverse. The overriding impression is of a gathering storm, both in the world economy and geopolitically.

Nothing is for ever, and once the shake-out is complete, the surviving life assurers will emerge from the gloom to find they've got the market to themselves. For that reason, if no other, there's no question of the industry launching a lifeboat to pick up the weaker swimmers. It's just getting from here to there that's the problem.

Trinity Mirror

Philip Graf, chief executive of Trinity Mirror, says he's served his time before the mast and wants to go off and do something else while he's still young enough. As a result, he's going to quit next summer. Well, perhaps that's the reality, but Mr Graf runs one of Britain's biggest-selling popular newspapers and, given the hotbed of media gossip in which he operates, he cannot expect that to be accepted as the unvarnished truth.

The merger of Mr Graf's Trinity with Mirror Group has failed to live up to its promise, and while nobody's having a happy time in the newspaper business right now, over the last year there have been some key mistakes, particularly with the national newspapers. The decision to rebrand The Mirror by taking it back to its roots in the popular dissemination of serious news has so far failed to add anything to circulation. Indeed, circulation is falling at its fastest rate in years. As for the price war with The Sun, that was folly of the first order. That The Mirror could never win such a battle was wholly predictable and the campaign has only succeeded in damaging profitability at a time when the title can ill afford it.

According to insiders, neither of these strategies originated with Mr Graf, who is at heart a regional newspapers man, and a good one at that. But he is the chief executive, and if he allowed himself to be led by others, then that's his look out and he must carry the can. You can forget any thoughts of the battle hardened Sir Victor Blank, the chairman, or the Mirror editor, Piers Morgan, taking the wrap for it. They've survived worse than this and, if anyone's going to go, it certainly won't be them. Mr Graf's departure looks to be a case of jumping before he could be pushed.

jeremy.warner@independent.co.uk

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