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ALEX BRUMMER: Insurers face safety test over private equity

ALEX BRUMMER: Private equity interest in insurance could be beneficial for policyholders if returns are improved

  • Across the Atlantic there is increasing regulatory concern over the way in which private equity firms have swept up £286billion of insurance companies 
  • New private equity owners have been switching out of traditional holdings of low-yield government bonds into riskier assets. 
  • Private equity can bring skills to the party in the shape of more efficient financial structures and more skilled portfolio management 

After three centuries, Britain’s biggest general insurer RSA, Royal Sun Alliance, has finally vanished following the £7.2billion joint takeover by Canadian and Danish competitors. 

Canada’s Intact takes charge of RSA’s UK and Canadian operations and Denmark’s Tryg is the new owner of the Scandinavian businesses. 

Chief executive Stephen Hester leaves an even richer person, with an estimated payday worth £16m. In his eulogy, departing chairman Martin Scicluna sheds crocodile tears noting that ‘RSA has provided peace of mind to individuals and protected businesses from risk for more than 300 years’. 

Under scrutiny: After three centuries, Royal Sun Alliance has finally vanished following the £7.2billion joint takeover by Canadian and Danish competitors

It has been hugely disappointing that long-term investors have failed to come to the defence of a company with similar origins in the coffee houses of 17th century London to the Stock Exchange, Lloyd’s of London and the Bank of England. 

Hopefully, RSA has found a safe home among recognised insurance outfits even if the UK is sacrificing leadership in a vital industry and eroding the nation’s tax base. 

Of more concern is the recent tendency for insurance assets to fall into private equity hands. In a short period of time, Bain Capital has acquired motor insurer Esure and is close to victory in a battle for life and pensions mutual Liverpool Victoria. 

Doubtless, Bain will prove a sound and safe owner. Across the Atlantic, however, there is increasing regulatory concern over the way in which private equity firms have swept up £286billion of insurance companies. New private equity owners have been switching out of traditional holdings of low-yield government bonds into riskier assets. 

Private equity can bring skills to the party in the shape of more efficient financial structures and more skilled portfolio management. But US regulators fear that insurers could face a cash shortage should financial conditions change rapidly. 

The new owners might have to face a rash of general insurance claims or withdrawals by investors. Events of this kind are not unknown in an era of unpredictable climate change or if investors run for cover as during the financial crisis. Refinitiv reports that Carlyle Group has placed approximately £3.6billion of insurance money it manages through its large £30.8billion Fortitude portfolio into buyout funds, credit and alternative investments. 

Another insurance investor, Apollo, has indirectly exposed offshoot Athene to structured loans including £1.4billion invested in bankrupt car rental group Hertz. 

Private equity interest in insurance could be beneficial for policyholders if returns are improved. The fear is that traditional approaches, which keep other people’s money safe, are being diluted.

Hanging on 

There is an unwritten rule about governance. If a company is doing brilliantly well, intrusive long-term shareholders do not wield the big stick unless something dreadful happens, such as Rio Tinto’s wanton destruction of ancient caves in Australia. 

Peter Cowgill, the supreme leader of sneaker and sportswear champions JD Sports, is a beneficiary of this effect. He has been able to maintain his dual role of chairman and chief executive supported by a share price which stands at 949p, double where it was a year ago. He is also made safer by the 55 per cent shareholding of the Rubin family vehicle Pentland. 

Cowgill doesn’t take criticism lying down and, following reports that he might be thinking of relinquishing a role to bring governance of the company in line with the City code, he has issued a stock market statement saying there was no recruitment process for either a new chairman or chief executive. The company does concede that it is constantly reviewing its leadership. 

With so much of the High Street struggling, JD receives the benefit of the doubt. But Cowgill’s ruthless treatment of landlords during the pandemic won him few friends and has weakened his prospects of holding on to the reins.

Space odyssey 

UK investors have few opportunities to invest in space with the sale of Inmarsat, Cobham and others to private equity. 

The launch in London of Yoda, a fund which invests in satellite operators and hardware, provides that opportunity. 

It will track the Space index which has achieved 71 per cent returns in the last year. This begs the question as to why Britain’s big battalion investors have been so reluctant to back British ambitions in the night sky 

Read more at DailyMail.co.uk