Peril in insurers' push into corporate lending game

THE terrorist assaults of 11 September hit insurance companies in two very obvious ways. Those which had covered people or buildings involved in the attacks will have to pay out substantial sums of money. Those invested in the equity markets have seen volatility increase and the outlook become more uncertain. But the events may come back to haunt insurers in a third, more subtle, way.

In the past few years, insurance companies have become increasingly significant players in the lending market. Large corporate loans have for decades been syndicated among groups of banks, so reducing the risk for individual operators. Recently insurers have joined the game.

Typically, banks now take on a share of a loan and sell bits of it to insurance companies. The banks benefit as they are exposed to less risk and the insurers benefit because they get investments with reasonable rates of return.

The system works particularly well when times are good, interest rates are low and companies are performing. It may be less robust as the economic climate changes.

In its voluminous Financial Stability Review yesterday, the Bank of England highlighted the increased exposure of the insurance sector to the corporate lending scene. It admitted that it does not know how important the phenomenon is because it has insufficient information. Arrangements between banks and insurers are private and there is no telling how much debt has been sold to them and whether this is in particular sectors. What is clear, however, is that there is an issue at stake.

Credit rating agency Standard & Poor's has just calculated that global defaults are running at record levels. So far this year, more than 195 companies have failed to repay almost £75bn of debt. The outlook suggests more defaults are likely next year.

If insurers have lent to companies that simply renege on their commitments it could have nasty consequences for investment returns. If insurers become involved in debt restructurings it could also have unpleasant ramifications.

There is finally a danger that insurance groups will try to pass the buck back to the banks. That would create waves throughout the financial sector.

Armitt challenge
Under normal circumstances the role of a company's board is to look after shareholder's interests. These are supposed to be directly aligned with the long-term interests of a company itself, so the job description makes sense.

Railtrack is not a normal company. Following the seizure of its assets by Transport Secretary Stephen Byers, shareholders are no longer a welcome part of the group. This left chairman John Robinson and chief executive Steve Marshall in an increasingly untenable position. Defending shareholders' interests put them on a collision course with Railtrack's current effective owner, the Government.

The decision to appoint a new chief executive at operating level makes good strategic sense, therefore. It allows Robinson and Marshall to pursue their own agenda while providing Railtrack with some much-needed, top-level day-to-day management.

Unfortunately, the announcement was bungled. Earlier this week, the Government let it be known that former senior BR man John Prideaux would become Railtrack's new chairman and there was much speculation that the group's engineering director Richard Middleton would be the new chief executive. Prideaux turned down the job and Middleton has been overlooked.

Byers' handling of Railtrack since placing it into administration has been so clumsy that this botch-up was only to be expected. The good news lies in the identity of the man who has been appointed. Railtrack middle managers may carp that John Armitt is not an old-style British Rail man but industry experts have the utmost respect for him. Before his stewardship at Costain, he masterminded the construction of the Channel Tunnel Rail Link. This is nearing completion and has been built with a minimum of fuss and a maximum of efficiency.

Armitt is not a complete outsider to the rail industry like former chief executive Gerald Corbett, or indeed Steve Marshall, but he has the commercial instinct rarely to be found in those who forged their careers at BR. His job is probably the most challenging in British industry. But he could just make a go of it.