Life insurers feel the heat

PHEW! Just when share markets look at their most vulnerable, they come bouncing back. The rally that began on Wall Street late last week carried through to London and gained some fresh momentum after a pair of 'old economy' stocks, McDonalds and Procter & Gamble, came up with higher earnings forecasts.

The game for shareholder capitalism is not over just yet. Nevertheless, this year's declines in the leading market indices, coming after two years of falls, is beginning to have an impact on Britain's financial sector.

A combination of strong growth in insurance sales and falling valuations inevitably places pressure on the capital of life companies. This is particularly visible at present because life insurers are conducting a half-year update of their annual returns.

It is this that is leading to an unusual amount of activity in the sector. Standard Life is shifting a higher proportion of its life fund into bonds. Friends Provident is doing a bond issue.

HBOS has already strengthened its balance sheet with a £1.4bn rights issue, half of which was earmarked for its life fund.

Legal & General raised capital for its life fund by selling its investment management company to the group, using proceeds to boost the life fund, which is growing rapidly.

One curiosity of all this is that those banks who have opted for bancassurance, diversifying by buying life companies, face a different type of squeeze.

Pressure on their life funds from falling share markets can potentially weaken the prudential capital-ratios they are required to maintain as banks.

This is among the reasons that HBOS took the opportunity, much to the market's disdain, for a rights issue at year-end.

It may not be the last to cast around for new capital. Lloyds TSB, long considered the star performer of the banking sector, has seen its share price fade in recent weeks.

Last night, it was 662 1/2p, having come down from a peak of 817p since May. It is thought that Lloyds might need to take steps to preserve cash and strengthen its capital.

This might mean reining in growth of the dividend, if not cutting it. Some kind of fundraising cannot be ruled out.

A few years ago, it was all the rage for banks to be ' manufacturers' of their own financial products, which meant higher margins. But, with demand for extra capital climbing, it might have been just as well to stick to their banking guns and let the insurers bear the risk.

Global pay retreat
One of the great fallacies of the boardroom pay debate is the frequent claim that Britain's executives need ever bigger rewards because of the global market in top managers.

The reality is that, while our companies may need the occasional overseas executive to revitalise their fortunes, there is no great evidence that top American firms are crying out for British leadership.

It is encouraging then that Vodafone's pay committee appears to be recognising that the global market in executives is overhyped, and there is little point in looking across the Atlantic for comparators.

This is even more the case post-Tyco, Enron and the technology collapse. Americans are embarking in a campaign to clean up company accounts.

The dispensing of executive stock options as if they were confetti is one factor under close scrutiny since the option liabilities have become so large that they are a drag on earnings. There will always be occasions when British companies need to reach overseas to find the right person.

Matt Barrett at Barclays may have been over-rewarded, but at least he has restored confidence and direction to the bank.

But this is very different to Vodafone. There, the present directors are responsible for overpayments for acquisitions, the extravagant cost of next generation licences and the succession of share placings that has led the market to drive the shares down.

Moreover, measuring performance against American firms when the main competition comes from European cellular operators such as Orange is daft.

If Vodafone blazes the way in reforming pay practices, this will be a critical breakthrough for the whole of corporate Britain.

At last, perhaps, after the extravagances exposed in the US, non-executives here are ready to call a halt and stop Britain falling into the same murky pit.