View from City Road: Bigger is not always better

INSURANCE company accounting is not becoming any easier. Guardian Royal Exchange offered a choice yesterday between pre-tax profits of pounds 3m or pre-tax profits of pounds 150m. Which should you choose?

GRE argues that the higher figure is the better measure of its business because it includes the investment gains (realised and unrealised) it has made managing its own funds. This investment management is undoubtedly an important part of insurers' activities. And investment figures will not always flatter the results - a stock market crash could hurl GRE into loss.

Nevertheless, the new basis has some perverse consequences. For example, it suggests that GRE's dividend is nearly twice covered by earnings. Since even the reduced dividend paid last year was almost covered, one might wonder why the insurer too such drastic action as to cut its payout. Except that on the old basis, the company lost pounds 210m in 1991.

A European directive will require other insurers to move towards this method of accounting for investment gains by 1995, though few seem as keen on it as GRE. Coming on top of the unprecedented losses of 1990 and 1991, the introduction of the Accounting Standard Board's FRS3 and the possibility of accruals accounting of life profits, insurance company shareholders still have to wait a few more years for two consecutive and readily comparable sets of accounts.

GRE's return to the black was earlier than expected by the market. Most of the recovery came from the UK, where underwriting losses almost halved to pounds 170m, thanks to higher premiums and lower losses from subsidence, bad weather and mortgage indemnity.

GRE hopes it has acted early enough at Albingia in Germany to prevent the gathering recession from wreaking the damage that has been suffered in the UK. Albingia made a reduced pre-tax loss of pounds 18m last year and is expected to make another, smaller loss this year.

A final dividend of 4.5p gave a total payout of 7p a share, giving a yield of only 5 per cent. The group's small US operation reduces its attractions in the face of recovery in the US market. Switch to General Accident or Commercial Union.