The shipwreck clause that deserves a wide berth

Reinsurance; Rocco's return; Pot luck
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The Independent Online

Sir Ian Byatt did more than anyone to hole the water industry below the line with a combination of fierce price regulation and his refusal to let the industry restructure its way out of trouble. But now his successor at Ofwat, Philip Fletcher, has come along in a lifeboat with a plan to bail the industry out. The "shipwreck clause" he is writing into the licences of 10 suppliers will allow them to raise prices if they are suddenly caught out by unforeseen calamities such as natural disasters. It will also oblige them to share any unexpected windfalls that might come their way with customers. But that is how the regulatory contract is supposed to work.

The bottom line, says Ofwat, is that the industry will enjoy greater certainty, making it easier for suppliers to secure lower-cost financing for the huge environmental programmes they face. Ofwat was struggling yesterday to come up with many, or indeed any, concrete examples of circumstances in which the shipwreck clause might be invoked. It would also have to be a disaster of Titanic proportions as the clause only applies to situations where 20 per cent or more of a supplier's revenues are at risk.

Most utilities spend their life trying to prevent the regulator poking his nose ever deeper into their business. And yet this time around nearly all the water suppliers have fallen over themselves to ensure this condition is written into their licences, thinking that there can only be upside.

One of the few suppliers which has refused to play ball is United Utilities, the owner of North West Water, which has a long memory and recalls the Government's last attempt to "help" the industry through Margaret Beckett's late and unlamented error correction mechanism. United reckons that the shipwreck clause represents further unnecessary intervention and argues that in any case the regulator has a statutory duty to help companies out if they fall into financial difficulties for reasons beyond their control. It sounds as if United is right and the others are wrong. In which case the regulator will, for a change, have hoodwinked the industry, rather than the other way round.

Reinsurance

After, the débâcles of Equitable Life and Independent Insurance, it's easy to see how the insurance industry can make a drama out of a crisis. If these simultaneous shocks in life and general insurance weren't enough, it now seems there's trouble in store for the reinsurance industry, those clever people who insure insurance companies.

A new analysis by the brains at Morgan Stanley suggests that the reinsurance industry got a little complacent during the late 1990s as Hurricane Andrew, the Northridge earthquake and the late-Eighties recession became a distant memory. For investors, Morgan Stanley's conclusion is upbeat: the larger, better established reinsurance companies will benefit from rising premiums and a "flight to quality". Such companies represent most of the listed reinsurance sector, and Morgan Stanley sees a "powerful upswing" in global reinsurance with shareholders merrily stumping up the capital to bolster reserves in the hope of reaping fat returns ahead.

But the research is also at pains to note that the gain will not come without pain elsewhere, notably among the smaller and medium-sized reinsurers. They are painfully under-reserved at a time of diminishing stock market returns and, more worryingly, spiralling claim inflation.

Never mind that the astronomical damage awards seen in the US, such as the $3bn grant to a US smoker, tend to be reduced on appeal. They are on the rise nevertheless, and fuelling a compensation culture in Europe. Only a fool would bet against another "freak" storm devastating the sector again.

Certainly, not every insurance company collapse, such as Independent Insurance, will justify a Serious Fraud Office investigation. But that is not to say that the industry is free of greed and incompetence. If a reinsurer goes belly-up, it is the primary insurers that are left with the bill.

Rocco's return

The Americans call it closure. That might be the best way to describe Granada's return of the Forte trading name to the founding family by way of the Compass catering group yesterday.

It is more than five years now since the Forte hotels empire fell to Gerry Robinson in one of the most bitter takeover battles this country has ever seen. Much has changed since then. The hotels have been scattered to the four winds with all the chains, such as Meriden, Posthouse, Heritage and Signature, now in different hands. Granada is back as a pure media company and Compass has kept the Travelodge motels, the Little Chefs and the motorway service stations.

But has real shareholder value been created from the original deal. Or was it, as Sir Rocco maintains, a complete waste of time?

It is certainly a complex issue that even cone-headed City analysts have struggled to get to the bottom of. The obvious numbers are that Granada paid £3.8bn for Forte and that the hotel operations were sold this year for a total of £3.3bn. But Compass has retained the Travelodge and Little Chefs. And it is not clear how much money Granada sucked out of the hotels operation during its period of ownership.

What can be said is that the Forte name was the number one brand in hotels before the bid and now no longer exists. Furthermore, the fabric of many of those hotels was allowed to deteriorate as investment was cut to boost profits.

But the City is cruel place and Forte paid the price of failing to outperform expectations. Nevertheless, there is a sort of sweet justice in seeing the wheel turn full circle and the Forte name return to its rightful place, especially when the the empire's founder is still alive and looking as fit as ever. It now falls to Sir Rocco to build up his new hotels chain under the family colours. Call it Forte 2: the revenge.

Pot luck

The sedate world of ceramics has never known anything like it. First the venture capitalist Jon Moulton decides to take a pot shot at Royal Doulton. Now, Portmeirion, the company named after the North Wales village where they filmed The Prisoner, delivers a shocker of a profits warning and fires its chief executive. I am not a number, I am a free man, as Kami Farhadi might be reflecting today. He has paid the price for putting too much of Portmeirion's crockery in one basket. Economic slowdown in the US and foot-and-mouth here have combined to punch a huge hole in profits.

Portmeirion has now torn up plans for a visitor centre and is instead concentrating on sprucing up its kilns and promoting its new Starfire collection. But perhaps the company should be looking over its shoulder. It is open season in the Potteries and Portmeirion is a good deal cheaper today than it was yesterday.

m.harrison@independent.co.uk

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