May the third force be with us

INSURANCE is the most valuable of British invisible exports. Figures for 2003 published the other day by the promotion bureau IFSL show the sector accounted for £6.4bn of the £17bn of overseas earnings generated by the City.

Securities dealing, for all the fuss and publicity it generates, accounted for just £3.3bn of profits while banking chipped in £2.9bn.

Given its importance, one would think the leading British insurance stocks would dominate the financial sector of the FTSE 100 index but in fact there are only two companies of consequence - Aviva and Royal & SunAlliance.

But today, with the flotation of a business called Capital Insurance Holdings, comes the possibility of a third.

Capital Insurance is initially a tiny issue, with Collins Stewart raising just £117m of capital for the company. Appearances are deceptive, however.

Although the purpose of the exercise is to get a share quote and working capital for a Lloyd's insurance market business called Euclidian, the real point is to create a vehicle that will lead to the consolidation of the dozen or so small listed companies operating within the Lloyd's market.

One snag is that these small companies show no desire to be consolidated. Another is that the last time there was a mass takeover of Lloyd's businesses, about 10 years ago when corporate capital arrived and Americans moved in, the entrepreneurially driven underwriters found it hard to live with big company disciplines and most eventually left. A third is that a surprising number of the principals have little respect for each other.

But Michael Wade, a long-time Lloyd's stalwart who pushed the consolidation idea hard but unsuccessfully when he was a director of Brit Insurance and who is chairman of the new company, is convinced it is time for another try.

He argues that though many of the integrated Lloyd's vehicles are good at what they do and have genuine underwriting talent, they are mostly too small to attract serious interest and backing of institutional investors. As a result they get the costs but not the benefits of being public.

Hence his interest in consolidation. Put enough of them under one umbrella and it would be possible to create a business with a market capitalisation of well over £2bn that would be a pure play on the London insurance market. That, he thinks, would whet the appetite of the investing institutions and build a third force.

The reason it hasn't happened before is that none of them trusts the others not to have a load of horrendous claims buried in the filing cabinet, and they cannot agree who will be boss.

The claims problem will be addressed by Berkshire Hathaway, a 25% shareholder in today's float, reinsuring the back book of the companies so they are clean when acquired. The personality problem will be addressed by leaving the businesses very much alone to develop as they see fit.

The distinctive culture of the acquired businesses will not only be preserved but actively encouraged. The holding company will simply act as an umbrella for what Wade calls the 'Lloyd's villages', which would continue to operate in their own way with their own brands.

The parent gets the benefits of their entrepreneurial flair and they get a cheaper cost of capital, a more-buoyant share price and a greater ability to withstand the kind of shocks that have already derailed the likes of Goshawk, Cox and SVB.

It's a great idea but the test will be if Wade can make the players in Lloyd's as enthusiastic for it as he is and keep them enthusiastic once inside his tent. He has logic on his side - but in this market logic doesn't always come into it. It will be a major coup if he can make it work.

Balfour beauty

IT has been a good week for Mike Welton of Balfour Beatty, and it is still only Wednesday.

On Monday he heard Chancellor Gordon Brown repeat his promise to pour billions into hospitals, education and transport, areas in which his company is a key player. This morning, he reported completion on the sale of Andover Controls to Schneider for $403m, which as well as giving Balfour a paper profit of more than £100m, also gives it the wherewithal to go deeper into Private Finance Initiative contracts.

Construction groups normally grow in line with the rate of economic growth but Balfour is galloping along at between 10% and 20% and hopes, when construction slows, to have built and be operating so many hospitals, schools and the like that it can live comfortably on the income.

Forget stories about construction being dull - this is a business for our times.