Outlook: Despite the carnage, there's life left in the assurance sector

Darling runways; Reuters gets to grips

No stock market sector has escaped the carnage in equities this past few months, but few have been as badly affected as life assurance. The sector's four largest publicly quoted, British players – Prudential, Royal & SunAlliance, Aviva and Legal & General – were once again some of the biggest fallers in the FTSE 100 yesterday and there seems no support level in sight. Investors can only pray that Jonathan Bloomer, chief executive of Prudential, has something positive to say when he announces half-year results today. After a number of alarming statements from Continental counterparts, the fear is that it will be more bad news. But on a couple of fronts at least, Mr Bloomer ought to be able to provide reassurance.

The two main worries driving sentiment can broadly be summarised as regulation and solvency.

Regulation first. Both the Sandler report and recent work by the Financial Services Authority convincingly suggest the industry provides poor for money. Everyone has instinctively known that for years, of course, but finally it looks as if something is going to be done about it. The solution proposed is commoditisation and greater transparency. This is plainly going to be bad news for margins and profits, but assuming disillusionment with the life assurers and the stock market isn't so all embracing that people give up saving altogether, the bigger, more efficient players, with the scale to provide the sort of low-cost products the Government wants, should eventually be net beneficiaries.

The poor stock market has already driven a number of players to close their doors to new business. That trend will accelerate as the industry becomes more transparent, exposing inefficient life assurers with poor investment performance. The effect will be forced consolidation of a previously highly fragmented industry in fewer and fewer hands. There may be some takeovers and mergers, but most of it will come as a result of companies deciding the game is no longer worth the candle and withdrawing from the market.

For the Pru, Aviva, and Legal & General at least, more transparency and commoditisation shouldn't be anything to worry about. Solvency is the other big concern, as indeed it should be with the stock market in seeming free fall, but again much of the grief seems overdone. Even the weakest of these players in terms of reserves, Aviva, is not about to become insolvent, nor would it even if the FTSE 100 fell as low as 3,000.

As the market approached that level, Aviva and others would be forced to liquidate most of their remaining equity positions, but the rules that oblige them to do that are there specifically to protect the capital of the life fund and prevent it from becoming insolvent. As it is, most big life assurers, although no doubt big sellers of equities right now, would have hedged their portfolios against further falls in the market. Perversely, some of the recent short selling of stock has been designed to do just that. The situation is not as dire as it is often painted.

Rescue rights issues are not impossible, but as things stand, they are unlikely yet to be necessary. That's not to say life assurers wouldn't welcome an injection of new capital, but no one's in the mood to provide it right now and the time for opportunistic capital raising has long since gone. HBOS just about got away with it earlier this year. Nobody else will.

Life assurers face a period of profound challenge. Of that there is no doubt. Serious structural change at a time of exceptionally low or negative rates of return for traditional savings products do not make an easy combination. If the banking sector could ever get its act together sufficiently to provide a decent rate of interest on deposit accounts, it would provide a fresh source of grief to these beleaguered companies, for in a low-return environment, cash beats high-risk, high-cost investment any day of the week, particularly for those saving quite small sums of money. Nobody knows when the slide in life assurance share prices will end, but one thing can be stated with certainty. The bigger fish are not dead yet, and one way or another they will find ways to adapt and survive.

Darling runways

Alistair Darling, the new Transport Secretary, seems intent on tarmacing over south-east England with airport runways. A third one for Heathrow, up to four for Stansted and a brand new airport built on the wetlands of Kent. The only airport to miss out on the bonanza is Gatwick, where ministers have done something very unusual for politicians and agreed to honour a commitment not to build another runway before 2020.

The argument for additional runways in the South-east is powerful when London's existing capacity is compared with the rampant expansion now taking place at airports such as Charles de Gaulle outside Paris. In the words of Mr Darling: "Doing nothing is not an option". But he needs to be careful about what he does do. The immense environmental damage caused by extra runways, and not just to those directly beneath the flight path, has to be mitigated by even greater economic benefit.

The expansion of Stansted will cause howls of protest, but it is the third runway at Heathrow which will provoke the biggest backlash. The inspector at the Terminal Five inquiry expressly ruled out a third runway and the Government in the shape of Stephen Byers (him again) accepted the report and, moreover capped aircraft movements at not much higher than their present level.

Nobody starting out with a blank sheet of paper would dream of siting an airport in west London when prevailing winds dictate that aircraft have to fly over densely populated residential areas at a rate of one every 90 seconds for 15 hours a day.

Some 2 million people are already affected by Heathrow's two runways. Who really wants to widen the envelope by laying down a third? The answer is BAA, which owns the airport, and British Airways, which occupies a third of the slots. Forget the assurance that this will be for short-haul traffic. Once the tarmac is down, it will not take much to add a couple of hundred metres more.

The low-cost airlines, who will account for perhaps half of all short-haul traffic in and out of the UK in a few short years, have not the least interest in a third runway. Laying down extra capacity to meet national need is one thing. Doing it to meet the narrow commercial interests of two companies is quite another. Tread carefully, Mr Darling.

Reuters gets to grips

With masterful understatement, Tom Glocer, chief executive of Reuters, yesterday described his company's first loss since listing on the stock market in the early 1980s as "not a beautiful set of results". He can say that again. On the other hand, they are not nearly as bad as they might have been, given the state of the capital markets, and the downturn has at least given Mr Glocer the excuse he needed to get to grips with Reuters' bloated and often duplicating costs. If the upturn ever comes, Reuters will be well placed to capitalise. The longer-term strategy of attempting to provide financial services companies with complete solutions to their information needs, moulding together internal and external sources of information, also looks promising. Few are prepared to pay for that sort of thing in these markets, but further out it might give Reuters the edge over its arch rival Bloomberg, which is sticking religiously to closed access, proprietary information.

jeremy.warner@independent.co.uk