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It is quite difficult these days to work out why we need British life assurance companies and what they are for. In the past, the life policy provided a unique tax wrapper for a range of underlying assets, but tax wrappers are now available from any independent financial adviser who is deemed to be big enough to operate a funds supermarket software platform.
Also commoditised and available from IFAs is the administration and accounting for the customers' assets, though such customer service was never the insurance company's strong suit anyway. That leaves fund management as one area where the industry could add value and differentiate itself.
But much of the industry is retreating from this, too. Life companies no longer rely wholly on in-house managers. They often simply act as a conduit to steer the investor to other money managers, many of whom have traditionally been seen as rivals. It is an unconvincing business model.
Happily, there are other bits to the mix, as demonstrated today by Friends Provident. It has had a torrid couple of years, and these figures mark the first stab at rehabilitation under the new leadership of Trevor Matthews, imported last year from Standard Life.
While he might have wished for better market conditions in which to turn the group round, he has undoubtedly made some progress - in the UK in areas such as pension provision and protection, and abroad by cleverly using technology based in the UK, Luxembourg or the Isle of Man to support a sales effort in the Middle East and Asia. He has done sufficient to be confident enough to declare a dividend at the levels outlined in the business plan of last year. That is not to be sneezed at.
The group reports a thumping loss, of course, because of the drop in the market value of its assets, and its new business in the UK is unprofitable despite efforts to cut costs to bring down the overhead. However, separating off the nasty bits, as insurance companies like to do, Friends Provident reports an embedded value profit (which is the one where it takes an immediate credit for the profit on policies) of £420 million. This is up from £16 million last year.
However, the big current issue is not profit so much as the effect of falling markets on the life assurers' balance sheets. Hedge funds are shorting the shares by the million, and no amount of reassurance or clarification from the companies has yet restored market confidence - confirmation perhaps that almost no one has ever properly understood insurance-company accounting, and now is a bad time to start trying to explain it.
That said, Friends Provident's capital position seems sound enough because it has a surplus of £850 million, which it says is 1.9 times the value of its liabilities. In similar vein, it has looked at the drop in the value of its portfolio of corporate bonds and decided that roughly half is attributable to a higher risk of default, and increased its provisions accordingly. All this means the group looks as if it can survive. Now it has to show it can prosper.
Bring back the break-up kings
Former US Federal Reserve chairman Alan Greenspan was probably the last person on earth who claimed that stock markets were rational and market valuations were a true guide to reality, and we all know what happened to him.
But even with that caveat, it is surely quite astonishing that Barclays can consider selling iShares, the division within its fund management arm that creates and markets exchange traded funds, for a mooted figure of £2 billion.
Why is this figure astonishing? Only because at the time news of the talks leaked over the weekend, the whole of Barclays was valued in the market at little more than twice the price put on iShares.
The business on the block makes a profit of only about £250 million against the £6 billion reported by the group as a whole. It does seem hard to escape the conclusion that either it is overvalued or the group as a whole is underpriced - but that, of course, is what fear does.
It makes one hanker after those buccaneering takeover kings of an earlier age, the likes of Jimmy Goldsmith, Jim Slater, Owen Green or one like them with the courage to launch a bid for Barclays at the current price, break it up and sell its unencumbered parts at similarly mouthwatering valuations until all that is left is the steaming toxic residue with Bob Diamond sitting on top. That could then be passed over the Government to sort out.
If, as the Barclays board steadfastly and consistently insists, there is no such toxic rump at the heart of its business, the case for a predatory break-up bid becomes even more compelling. And just think what it would do for sentiment. There would be no more talk of toxic assets. The speculative money would pour back in, searching for the next undervalued financial target and the market would soar.
This is not altogether fanciful. One day something like this will happen. Trouble is, you can never tell when.
