The week's winners
Zurich Financial Services up 4.1%
Domestic & General up 1.7%

The week's losers
Hiscox down 8.5%
Jardine Lloyd Thompson down 6%

First it was asbestosi …

The week's winners
Zurich Financial Services up 4.1%
Domestic & General up 1.7%

The week's losers
Hiscox down 8.5%
Jardine Lloyd Thompson down 6%

First it was asbestosis, then it was directors' pay.

It has not been a good few weeks for Royal & SunAlliance (R&SA).

And it hardly inspires confidence in the UK's second biggest general insurer to see management apparently lacking direction.

To even be thinking of tinkering with executives' bonuses at a time when the group has admitted all its operating profits for 2001 would be wiped out by the need to increase reserves has raised eyebrows.

What investors need to see is management devoting itself to taking advantage of the current hardening market conditions.

Despite its apparent cosy position close to the top of the UK league, R&SA is playing a dangerous game.

It needs every single penny of capital it can lay its hands on to build business on the back of the upswing in rates.

The degree to which it succeeds or fails will only become clear in 12 to 18 months' time. By then, unless R&SA has beefed itself up in the current feeding frenzy, it could easily become prey to a bigger and hungrier beast.

And there is unlikely to be a shortage of predators looking across the channel from the Continent.

Analyst David Hudson of HSBC believes R&SA is taking advantage of hard market conditions "to the extent that its constrained balance sheet will allow."

But he warned that directors should think carefully diverting capital away from the market.

He said: "Shareholders have already been told to expect a far lower dividend this year.

"You could argue it would be in shareholders' best interests if they passed the dividend and retained the capital that would be paid out in order to take advantage of the hard market."

He said any move to lower the hurdles for directors' bonuses would be "unbelievably cheeky".

He added: "They have failed patently to meet any of the targets they've set themselves over the last four years. Directors should be made to suffer along with the shareholders."

True, there have been notes of optimism in the market. Commerzbank notably upgraded the stock from `hold' to `accumulate' on the basis that, at 319p, the shares are a good buy.

With its estimated loss from the World Trade Centre tragedy now standing at £215m and a provision for Enron investments at £15m, the importance of asbestosis becomes clear.

The total claims anticipated are now at £689m, although there is a healthy difference between the annual paid claims (£36m in 2001) and total reserves.

Commerzbank gives a nod of approval to R&SA's plans to finance the upturn without new equity capital. Under a quota share reinsurance deal, it will cede 10% of its gross premiums to a reinsurer.

For the sake of the UK general insurance industry, let us hope its optimism is well placed.

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