Royal's brave new dawn

ROYAL & SunAlliance, the sick man of the UK insurance industry, is finally showing the first tentative signs of a possible recovery.

It posted a loss of almost £1bn and slashed its dividend by 62% to 6p a share in an attempt at a clean sweep ahead of the arrival in April of its youthful new chief executive Andy Haste.

Bob Gunn, the veteran Canadian insurer who is holding the fort, has made good progress on a drastic overhaul following the departure of Bob Mendelsohn.

Barring a total market meltdown, it will float off its Australian and New Zealand businesses shortly. Staff reductions of 12,000 are on target, and if all continues to go to plan, RSA will move from a £700m capital shortfall to an £800m surplus next year.

Given its abysmal recent track record, however, it would be foolhardy to rule out

fresh horrors. The shares, which edged up 1/2p to 67p, are down from a five-year high of 805p. The group is a prime candidate for ejection from the FTSE 100 index.

But that is the least of its problems. Its life funds are among the weakest in the industry. The staff pension schemes, while not so deep in hock as analysts expected, have a £400m black hole and will require big injections of capital.

RSA intends to concentrate on general insurance, where demand is strong and premium rates are rising, though uncertainty looms ahead of a possible war with Iraq.

It is not just RSA that is suffering. On Thursday alone, Swiss Life reported an £800m loss, while Dutch giant Aegon, owner of Scottish Equitable, halved its dividend and saw its shares plunge. City regulators are hitting the insurers, including RSA, with draconian fines for foisting unsuitable products on the public. The Pru is the latest to be landed with a £750,000 fine for mortgage endowment mis-selling by its Scottish Amicable arm.

Bob Gunn has done a creditable job at RSA, and is no doubt looking forward to a peaceful retirement in his native Canada this spring. But Andy Haste still has it all to prove.

Sticking with shares
THE latest figures from researchers Russell/Mellon CAPS provide stark confirmation that it has been

a dire year for Britain's final salary pension funds.

The average return was minus 12.9%, making it an unprecedented third year of losses in a row. Performance has been so bad that even five-year returns are in negative territory after accounting for inflation.

Over 10 years, the picture is better, with real returns 3.2% a year ahead of average earnings, and 4.8% ahead of retail prices. The really intriguing thing is how funds responded to the shares slump.

Many - one in four last year - switched their money managers, even though the boffins at Russell/Mellon reckon this has an adverse impact on performance because of the disruption and costs involved.

What pension funds have not done, contrary to popular belief, is to switch from shares into bonds. The proportion of shares held by the average fund has fallen slightly, and the percentage in bonds has risen. But this is entirely due to market movements.

They have in fact been net buyers of shares and net sellers of bonds, in order to keep in line with pre-set benchmarks that tell them how much to put in different types of asset. It may seem like madness

to be sticking to the benchmarks at a time like this.

But these intrepid buyers have picked up shares at prices well down from their peak. They might look clever a few years from now - provided, of course, that the market recovers.

Don't panic
THE European Central Bank has taken action - albeit modest - to bolster the sluggish eurozone economy by cutting rates a quarter of a percentage point to 2.5%. Most observers had hoped for a half-point cut, but knowing the stubborn nature of the ECB, were not too surprised at the smaller reduction.

Eurozone unemployment is at its highest level for almost two years, consumer confidence is at a five-year low and growth was just 0.8% last year, down from 1.4%.

ECB president Wim Duisenberg had previously said it was not a good time to cut rates because of uncertainties over war with Iraq, but with the economic picture looking increasingly bleak, was forced to change his mind.

Over at the Bank of England, the Monetary Policy Committee opted to keep UK rates at 3.75% - probably because another cut so soon after last month's 0.25% shaving would have suggested panic.