Cowdery's Power Pushes U.K. Insurers to Change, Raise Dividends
Resolution Ltd chief executive officer John Tiner
Resolution Ltd via Bloomberg
“What is happening in U.K. life insurance in the last two years is a realization is that investors need to get better long-term value from the industry,” said Tiner.
“What is happening in U.K. life insurance in the last two years is a realization is that investors need to get better long-term value from the industry,” said Tiner. Source: Resolution Ltd via Bloomberg
Cowdery’s Power Pushes U.K. Insurers to Change
Resolution via Bloomberg
Clive Cowdery, founder of Resolution Ltd.
Clive Cowdery, founder of Resolution Ltd. Source: Resolution via Bloomberg
Clive Cowdery founded buyout company Resolution Ltd. in 2008 saying he wanted to snap up stagnating U.K. insurers. Two years and two acquisitions on, his presence has pushed rivals to their best half-year results since the financial crisis.
Aviva Plc, Legal & General Group Plc and Standard Life Plc posted higher earnings and raised their dividends in the first half, making life insurance the second-best performing industry in the FTSE 100 Index this quarter. The three firms have all risen at least 20 percent since July 1, giving them market values likely to keep them out of Resolution’s reach.
Cowdery, 47, started Resolution saying life insurers weren’t producing stable returns from running off existing policies, that they were selling new products too cheaply and paying too much to salesmen. He then purchased Friends Provident Plc and Axa SA’s U.K. life-insurance unit. Aviva, Legal & General and Standard Life responded, avoiding Resolution’s grasp, by selling fewer new policies at higher prices, cutting commissions to salesmen and returning money to shareholders.
“These companies have had to do what Cowdery is doing to get their valuations to where they should be, so they’re not vulnerable to a bid,” said James Lowen, co-manager of JO Hambro Investment Management Ltd.’s 500 million-pound ($784 million) U.K. equity income fund. “He’s going to do a third transaction, which will keep the interest, the focus and the pressure on the wider sector.”
Four-Year Plan
Resolution’s share price is yet to benefit from Cowdery’s strategy. The stock has fallen about 40 percent since the firm first sold shares in 2008. Cowdery, who this month held a 2.06 billion-pound rights offering to fund the purchase of the Axa unit, has always asked investors to judge him when his plan to buy four British life insurers is complete in 2012.
“What is happening in U.K. life insurance in the last two years is a realization is that investors need to get better long-term value from the industry,” said Chief Executive Officer John Tiner. “A lot of what has been going on has been supportive of that.”
Resolution today posted a first-half operating profit of 203 million pounds, compared with a 7 million-pound loss a year earlier as it benefitted from higher sales at Friends Provident, which it purchased last year.
More Rights Offerings
“With more rights issues planned, investors aren’t seeing a compelling opportunity to go in now,” said Colin Mclean, who manages 650 million pounds at SVM Asset Management in Edinburgh, including Resolution shares.
The stock climbed 9.3 pence, or 3.8 percent, to 255.3 pence at 10:03 a.m., giving the company a market value of about 3.7 billion pounds.
Legal & General CEO Tim Breedon has repeatedly renounced the merits of merging life-insurance companies, citing the “difficulty of extracting cost synergies” from bundling together the old policies of separate companies.
He’s responded to the threat posed by Cowdery by reducing commissions to salesmen and focusing sales on products such as income protection, which offer higher profit margins than traditional life insurance.
“Cowdery’s theory is that these companies have running revenues from the existing book, but most of them are wasting it on new business,” Mclean at SVM Asset Management said. Aviva, Legal & General and Standard Life have been to some extent “cutting back on the sales activity and letting the benefits come out of the back book, returning more to shareholders.”
Cash Generation
Cash generation at Legal & General rose 19 percent to 358 million pounds in the first half, while at Standard Life it was up 6 percent to 160 million pounds. At Aviva it gained 80 percent 900 million pounds.
“We have a proven history of extracting value from our back book and a strong track record in delivering against our efficiency targets,” an official at Standard Life said. “We have also continued to pay a progressive dividend to our shareholders since demutualization in 2006.”
Officials at Legal & General and Aviva declined to comment on the impact Cowdery may have had on the industry.
The three insurers all trade at between 70 percent and 85 percent of embedded value. A price of 100 percent of embedded value equals the profit that would be made if the insurers were closed to new business and existing policies were run off over time.
Government Plans
New products and government plans for the insurance industry are also helping life companies cut costs. The U.K.’s Retail Distribution Review will ban insurers from paying commissions to salesmen from 2012, and products such as self- invested personal pensions and single premium life insurance require less capital to be put aside than the policies sold 10 years ago, Shore Capital Plc analyst Eamonn Flanagan said.
Resolution’s rivals have also changed executives and reporting standards in recent months. Legal & General replaced Finance Director Andrew Palmer with Nigel Wilson, Aviva appointed Pat Regan as chief financial officer in October, and Standard Life named Jackie Hunt as CFO in April.
The new finance heads have pledged to simplify insurance accounting by focusing on International Financial Reporting Standards rather than the embedded value method, which includes future profits from existing policyholders.
“We think the sector will end up trading at a premium to embedded value and so will outperform over time,” Lowen at JO Hambro Investment Management said. “Cowdery’s going to show the back book can be run off for cash.”
Lowen expects life-insurance stocks to rise by as much as 35 percent over the coming year if companies can keep making higher payouts. His fund rose 7.04 percent in July, beating the peer group average of 5.9 percent, according to Morningstar Inc. Standard Life and Legal & General are the fund’s biggest holdings.
To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net
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