Simon Evans: Vultures circle to feed off stricken insurance firms

The sector's plight will be good news for others
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The Independent Online

Paul Ruddock, founder of the hedge fund Lansdowne, must be enjoying this weekend. A few weeks back it was revealed that he and his team had placed a £26m bet on a decline in the share price of Britain's biggest insurer, Aviva.

Disastrous results from insurer last week saw the company's share price plummet by 33 per cent amid concerns about its long-term capital position. Aviva's shares are now more than 60 per cent lower than a year ago, while Ruddock's personal fortune, which was estimated to be worth as much as £350m last year, might now be that little bit bigger.

Spurred on by Ruddock's success, others in the hedge-fund world are preparing to feast on the carcass of the insurance industry. One analyst I spoke to said he had been inundated with calls from hedge funds asking for his opinion. The smell of blood is getting stronger.

Philip Scott, the finance director at Aviva, used the firm's shocking numbers to take a swipe at the hedgies for their "deliberate" shorting of his company. Surely someone at Aviva should have gagged Scott: he and many of his peers might not like it, but his industry looks to be following banking into dire straits.

The rather simplistic argument I heard from one hedge fund manager for the shorting was that bankers, cleverer than their insurance counterparts, must have dumped a fair chunk of their toxicity, and the insurers are holding more of it than they would have us believe. I'm not sure I buy the "clever bankers" theory but the rationale for shorting the sector looks to be based on a host of fundamentals.

Solvency remains a key concern at Aviva. A £2bn capital surplus, known as the IGD, is an additional buffer above and beyond the minimum regulatory requirements. But the composition of the capital base in the round looks shaky in the eyes of some. Some £6bn of it is comprised of lower quality hybrid debt and a chunk is in the form of goodwill from its RAC business. Some analysts think the financial regulator has been overly lenient with Aviva. Time will tell.

In October, the regulator pulled back from enforcing rules that could have forced life insurers to downgrade assumptions of investment returns and hold more capital. Industry guru Ned Cazalet is one to have voiced concerns about insurer's assumptions calling them "lax and optimistic".

I submitted a freedom of information request to the regulator asking for additional clarification about how this moratorium came about. It refused, telling me that "disclosure of discussions ... would be likely to have an adverse impact on the UK's position as a major international financial centre as well as its economy generally". An appeal has been lodged.

Beside Aviva, whispering still continues about the capital position of Legal & General: will it have to tap up investors to shore up its capital base. The firm's brusque chief executive, Tim Breedon, is earning his corn after his honeymoon period when he returned £1bn to shareholders.

Friends Provident's relatively new chief executive, Trevor Matthews, has plenty to do to turn around the slimmed down company. Numbers from Old Mutual last week did little to inspire confidence, while Prudential remains rather rudderless, a recent spurt in its share price down to talk of the sale of its UK business rather than a particular upturn in fortunes. Standard Life reports numbers this week, a month after it had to stump up £100m to support a fund that was supposedly a safe sterling investment.

But, lurking in the background, one insurance industry figure must be smiling. "Clive Cowdery must be like the kid in the sweet shop," one chief executive told me. With a fair amount of cash to hand – some £500m – and share prices tumbling, the market seems to be coming to him. Rumours suggest he is readying himself for a tilt at Prudential's UK business, which would in turn free up cash for Prudential boss Mark Tucker to pursue Asian aspirations with AIG.

Selling Resolution at the top of the market, Cowdery has shown himself to be a smart cookie and he'll be itching to get back into the game. But like the sweet-shop kid, he won't want to gorge on something that makes him sick further down the line.

Three cheers for the end of the smoke-and-mirror private equity merchants

It's hard to shed a tear for those highly paid masters of the private equity universe who are falling on hard times.

The last few weeks are likely to go down as some of the worst in the history of the British buyout industry. The casualty list lengthened last week when Candover revealed it is to wind down and die a slow death.

This is the very same Candover that was one of the most active players during the heady days of the buyout boom that has since come to characterise the horrible excesses of the cheap-money fuelled world.

Candover led a consortium last year that bought Expro, an oil services group, for the princely sum of £1.6bn – roughly 30 times the company's previous year's earnings.

Candover hasn't been the only big hitter to suffer of late. There was a time when Guy Hands and his Terra Firma group couldn't put a foot wrong. His purchase of record company EMI, looked liked a deal too far at the time and thus it has proved. He wrote off £1.6bn off the company's value last week – roughly half its worth.

Remember Permira, led by Damon Buffini? His company has been forced to write down the value of its investments by nearly 40 per cent. The company has admitted that Gala Coral, the betting firm once valued at an absurd £5bn, is worth nothing.

What about 3i – the listed, respectable public face of private equity? It dumped its chief executive, Phil Yea, and slashed the value of its giant portfolio by a fifth.

And then there's SVG, the private equity house run by Nick Ferguson, the man who told the world he paid less tax than his cleaner. His company, a listed vehicle that basically invests in Permira's funds, has been forced to go to investors for more cash. The second rights issue was backed by little more than half the shareholders who, like the rest of us, are tired of the excuses.

Candover's chairman, Sir Gerry Grimstone, said it was unclear what the industry will look like in the future. I'll tell you what is clear, Sir Gerry: at last, some of the smoke and mirror merchants who profited in the boom, will have to work hard to earn their expensive corn. Three cheers for that.

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