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Royal descent

Bob Mendelsohn was the man drafted in to try and make a difficult match between Royal & Sun Alliance work. It is a shame that he is no relation to Felix Mendelsohn, the Wedding March composer, who could maybe have offered some much needed advice on harmony. The chief executive finally stepped down this month.

To the horror of shareholders and policyholders, Mendelsohn is laughing all the way to the bank after getting a £1m payout on his contract which had two years to run. He has temporarily been replaced by Bob Gunn but the hunt is on to find a permanent replacement.

Mendelsohn was brought in in 1997, a year after the merger between Royal Insurance and Sun Alliance inheriting their guaranteed annuity contracts. By 2000, GAR liabilities were hitting £1bn.

An attempted sale of the life and fund businesses last year for a reported £2bn was unsuccessful. Dogged by speculation about the parlous state of the with-profits funds throughout 2001, most notably from Ned Cazalet, the insurer stopped taking new with profits business late in December. It did manage to offload its fund management business to Friends Ivory & Sime for £240m in May this year. The deal included a contract to manage the life and general funds for a decade. This concerned some commentators who felt it reduced still further the appeal of the remaining life business.

In August this year, Mendelsohn announced the closure of the life operation to new business to refocus on general insurance but by the end of September he had stepped down.

R&SA was recently fined £1.35m by the FSA – a record penalty for pension misselling and the fourth-biggest regulatory fine ever. Then the company&#39s shares sank to a 17-year low. News has also broken of an estimated £750m deficit in the company&#39s pension fund, due to be reviewed in November.

Canada Life has recently completed its acquisition of R&SA Group Risk, valued at £60m, which will give it a 30 per cent share of the group life market. To raise more cash, R&SA has put several other areas of the business up for sale which could also prove tempting for Canada Life.

Other life offices are also facing difficulties. AMP has admitted that Pearl has been breaching its minimum capital requirements following stockmarket falls. In the R&SA aftermath, it remains to be seen how many of the smaller life companies have low to non-existent free-asset ratios.

One of the first IFAs to warn against with-profits products was Hargreaves Lansdown chairman Stephen Lansdown. He thinks things will have to get significantly better before life offices can restabilise themselves. The firm recently warned R&SA policyholders that it might be better to transfer out despite the penalties. Lansdown says: “Obviously, the companies with less equity-orientated investments will do better than those that had a significant amount in property, gilts and fixed investments.”

Lansdown believes several life companies are in a difficult situation. He says: “For most to recoup the reserve position that actuaries would want, the market will have to go up by at least 2,000 points.”

On the basis of advice from independent actuary AKG, Chase de Vere IFA savings and investments manager Anna Bowes says: “We certainly would not be advising a blanket sell and we are satisfied that R&SA is not an Equitable Life situation.”

She says the company is looking at everything on a case-by-case basis, but thinks that if all their investors got out now it could mean they are clobbered by huge exit penalties just when they could be in line for their annual bonuses. “We are not panicking and don&#39t feel the need to tell investors to get out now. Reserves have been severely depleted and these are clearly going to have to be replenished but that is exactly what with-profits does. A lot are still in the black but it is no good expecting positive returns when the markets are crashing around them,” adds Bowes.

Chelsea Financial Services head of research Juliet Schooling says: “Our advice to clients will depend on exactly what they have got invested, but at the moment for the majority of them it is not worth getting out. At the current levels, I would hope there is not a lot further to fall. There is clearly a buying opportunity there because the markets are going to go up again.” She believes some clients have become far more cautious since the Equitable Life debacle and would be a lot quicker now to pull out of investments.

Byrne Williams managing director Tony Byrne believes smaller IFAs and investors will suffer. He says: “Perhaps Tony should introduce price-capping on legal fees and make Cherie work that bit harder. The 1 per cent price cap on stakeholder is just not operable. IFAs cannot work with a reasonable profit margin and some will no doubt disappear overnight.”

He adds that margins are being squeezed and variety and competition are being hit. “All this simplification is going to have the opposite effect. With less diversity there will not be enough incentives to keep investors interested.”

Byrne describes endless reviews as disastrous stealth tactics to narrow margins and he believes that prices should be determined by the market.

He says: “Stakeholder will make very little profit across the board but it is hard to estimate a realistic solution. Performance is always the most important factor as each client is looking for a different type of service. Some people are willing to pay more than others.”

Amid a sea of problems Royal & Sun Alliance&#39s new general and credit card business More Th>remains afloat. But it was a wise decision by someone not to use the image of company mascot, Lucky the Lost Dog, on the front of the card.

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