Investment Column: Cash pile is causing problems at GRE

Guardian Royal Exchange has a credibility problem. Since John Robins took over as chief executive three years ago, the composite insurance group has done everything it promised. It has an impressive cost-cutting record, has made good strides into the growing telesales market and has bought into sensible niches. The market, however, remains unconvinced.

Since Mr Robins arrived from Willis Corroon in 1994, GRE's solvency ratio, which measures the net assets backing the premiums it writes, has almost doubled to 95 per cent. Far from getting the City's nod of approval, that strengthening of the balance sheet has merely set analysts fretting about what the company will do with the pounds 700m excess capital burning a hole in its pocket.

As a result investors have largely steered clear of the stock, which has fallen to a sharp discount to its reported net assets. Its peers, meanwhile, have seen their shares move to a premium to the underlying value of their shareholders' funds. GRE's cause was not helped by interim figures yesterday showing trading profits of pounds 105m, well below the pounds 137m achieved in last year's first half and the pounds 120m or so analysts were hoping for.

That shortfall on brokers' forecasts was largely caused by the recent strength of the pound and will be reversed when sterling loses its exuberance. The underlying picture, however, remains uninspiring, with GRE's life assurance operation still an also-ran and the core general insurance business too heavily reliant on the difficult motor insurance sector.

Motor policies account for almost 40 per cent of GRE's general premiums, which is arguably much too high a proportion given the inherent volatility and price sensitivity of the business.

Mr Robins reckons that shouldn't matter if the service quality and customer relationships are strong enough, but it is hard to believe that most people insure their cars these days on the basis of anything other than price.

If that is right, the recent rise in motor premium rates will not turn into the meaningful recovery the industry needs if it is to recover a decent level of profitability. Outside motors, the outlook for other premiums is even bleaker.

GRE is in a bind. It has the cash to expand but can't find anything to buy at a sensible price. Shareholders must hope the company resists the temptation to overpay and hands its extra cash back to investors in six months or so. If it does, the shares, down 5.5p at 289.5p, look reasonably underpinned on a 7 per cent discount to net assets, but they have few attractions.