Buyout predator Resolution is on the prowl, but may become prey

Published on Saturday 18 July 2009 14:17

HOW little policyholders, who picked Friends Provident as their pension or investment provider because of its Quaker and ethical heritage, could have imagined their savings might one day end up in the hands of corporate wolf Clive Cowdery.

Cowdery's ambitions to gobble up large chunks of the insurance industry for his company Resolution far from end there. The rag-bag of life assurance brands now held, with some discomfort, within the Lloyds stable are also within his sights, as potentially is the mighty Prudential itself, Legal & General or even Aviva.

But it's worth remembering the story of Little Red Riding Hood, where the wolf is slain while the innocents get away. And indeed, on Friday, Friends turned the table on the predator, and may yet turn wolf itself. In general, though, the City welcomes Cowdery's activities, having supported his recent capital-raising exercise to the tune of 600 million. He has a record of releasing value for shareholders.

And behind the scenes many within the insurance industry view his activities as an opportunity rather than a threat. They are likely to embrace any mechanism for speeding up consolidation, viewed as inevitable, thereby reducing the number of competitors. If it allows them at the same time to dump historic baggage, so much the better. Some secretly welcome the chance to end the ceaseless reputational damage which some legacy business entails.

The two groups which cannot fail to view his activities with concern are policyholders, who get no say, and staff, whose futures are placed in jeopardy by these activities.

Maybe change is inevitable. The insurance industry is at a crossroads, with big question marks hanging over its future. Mighty corporations, once confident in their mission, are no longer so certain why they get out of bed in the morning.

It used to be so simple, when communities gathered together at first to make sure that bodies could be buried via funeral plans, and later that families could be protected through simple life insurance. Thus Scottish Widows was set up to support the widows of the Napoleonic Wars, and Friends Provident was established in Yorkshire 177 years ago to provide security for Quakers and like-minded families.

It was only as recently as the 1970s that insurers began to focus on investments, such as endowments, bonds and pensions.

But various regulatory doors were opened to them in the Thatcher years, through which they charged.

And for a while some investors did well, with those who stayed the course reaping rewards. But rich pickings were partly paid for by the draconian treatment of policyholders who surrendered early, and received nothing back. Once this practice was outlawed, and tax reliefs scrapped, returns fell and the industry's high charges were exposed.

As various sharp practices unravelled, scandal-worms crawled out of the cans: pensions mis-selling, endowments and guarantees which could not be met. Many smaller companies threw in the towel.

Household names such as Royal, Sun Alliance, Abbey Insurance, Allied Dunbar, NPI, Scottish Mutual, Eagle and many more disappeared.

Cowdery cut his teeth on this world of the living dead by establishing a company now referred to as Resolution Mark One, which mopped up the zombie funds.

The experience of consumers whose policies were taken over by this operation was not a happy one. Annual bonuses were terminated, investment performance lagged, information was not forthcoming and customer service was poor.

Resolution counters criticisms by pointing out, somewhat disingenuously, that a couple of its funds were top performers. This followed a special bonus relating to capital restructuring, and brings little comfort to investors with Alba Life (formerly Britannia and Crusader), Scottish Provident and Scottish Mutual at the very bottom of the table.

Which doesn't augur well for his latest venture, known as Resolution Mark Two, where this time the intention is to acquire and consolidate "open" insurance companies, where business is still flowing and the funds viable.

In theory, policyholders' interests are protected because charges should already be set on their contracts, and fund management will be outsourced. Alarm bells, though, are already ringing by the siting of the operation outside mainland UK in Guernsey, for tax purposes.

Resolution's prospectus commits it to making money for shareholders. The high charges attached to many of these historic contracts mean there is scope, apart from economies of scale, for slashing costs and releasing value, which might not be feasible for a company sensitive about its image.

As industry observer Philip Martin said: "With the best will in the world, these deals are not driven with policyholders' interests in mind. It's about releasing value for shareholders from existing books of businesses."

This is staunchly denied by Resolution.

But its share price of 100p last December has now slipped to around 89p, so it will have to look to its shareholders soon. And here it faces significant challenges.

The world has changed since the first Resolution began buying up funds five years ago. The zombies are already buried, leaving our biggest insurers as targets, most of whom are staunchly committed to independence.

But insurance analyst Ned Cazelet argues: "This company has been set up to do deals. It is a deal machine, and deals it will do. If you hire a dog to bark, the dog will bark."

Friends Provident, the first to come under attack, rejected the paper swap offer of 0.8 new Resolution shares for each Friends share as "wholly inadequate".

The two companies have history, though. Friends and Resolution Mark One were due to merge in autumn 2007 when first Standard Life and then Pearl turned up with competing bids to spoil the party.

On Friday it was Friends which made a bid for Resolution, in terms which put Friends in the driving seat.

Investors are not convinced it is a great deal for Friends, whose shares were down 1.5 per cent, while Resolution shares were up 2 per cent.

This story has some way to run, and whatever the outcome other potential takeover candidates will be sounded out, not least those housed within the Lloyds group, which is currently grappling with the merger of Clerical Medical and Scottish Widows operations.

As one industry insider put it: "Lloyds could keep the Scottish Widows brand as its vehicle for the future, but sell bits of business which have been difficult to manage or will be a headache to integrate."

But question marks have also been raised over the Prudential, Zurich, Skandia and even Aviva. As Cazelet concludes: "This company will come under pressure to do deals, so deals it will do. The worry is, because of the pressure, it could end up overpaying."