Cowdery’s Second Coming as Top U.K. Insurance Dealmaker Falters
Clive Cowdery has left investors with losses of 30 percent after failing to repeat the success of the strategy that won him a reputation as London’s top insurance dealmaker. He and his team still profited from management fees.
Resolution Ltd. (RSL), which Cowdery founded in 2008, has missed its targeted returns to shareholders, wound down its plan to buy ailing life insurers and intends to dissolve a management structure that allows its founders to earn private-equity style fees following pressure from the Financial Services Authority. Cowdery will run the firm as a “conventional” insurer rather selling it by 2014 as planned, he said Aug. 15.
“It hasn’t gone as well as we thought or they thought,” said Jane Coffey, who manages 12 billion pounds ($19 billion) as head of U.K. equities of Royal London Asset Management Ltd. and has invested in Resolution since its initial public offering. “It was a complicated structure that made people worry about where the fees were going and what else they were doing.”
Cowdery’s first attempt to consolidate the U.K.’s life insurance industry -- by purchasing pools of expiring policies at below book value from 2003 to 2008 -- netted him a personal fortune of 145 million pounds, earned his investors a return of 28 percent a year and cemented his reputation as London’s top insurance dealmaker. His second venture was hurt in its early stages by a regulatory probe that stopped him from buying insurance assets when they were cheap and a complex public- private ownership structure that put off investors and regulators.
The stock has fallen 44 percent since its IPO in December 2008 and shareholders are down 30 percent if dividends are factored in, according to data compiled by Bloomberg. The firm has an embedded value, a measure of future profits from policies, of about 5.9 billion pounds, 41 percent lower than the 10 billion-pound target announced in 2010.
Cowdery, 49, manages the publicly traded firm through a private partnership called Resolution Operations LLP, owned by him and seven partners, including former FSA Chief Executive Officer John Tiner. Neither Cowdery nor Tiner have a seat on Resolution Ltd.’s board even though they direct the firm’s strategy under a management agreement with the company, an arrangement that diverges from standard practice in the U.K., where a company’s most senior executives are typically board members.
While investors are sitting on losses, Resolution Operations made a profit of 21 million pounds over four years, according to annual filings published at Companies House. The partners have lost about 9.8 million pounds on their 28 million pounds of Resolution shares, Bloomberg calculations show, based on the difference between the price at which they were bought and yesterday’s value.
The fees show the limited downside that Cowdery and his colleagues assumed when they started the company in 2008, according to Sarah Wilson, CEO of Manifest Information Services Ltd., a proxy voting agency with 3 trillion pounds of equity under administration.
“It was a money extraction exercise and one-way bet for the management,” she said. “Nobody begrudges success fees, but only if you’re not also extracting lots of fees along the way.”
The partners declined to comment through a Resolution spokesman, Alex Child-Villiers. The portion of the management fees that wasn’t used to pay salaries was invested in Resolution shares, which have since declined in value, he said in an e- mailed statement.
Cowdery, who was quoted by the Guardian newspaper in Feb. 2011 describing how he relied on welfare for food and housing as a child in foster care, made his fortune in the five years to 2008 by buying pools of life insurance policies that were in run-off, called zombie funds in the U.K., at deep discounts to their embedded value. He released capital by merging them, cut costs, captured a cash flow from expiring policies and sold the firm, also named Resolution, to Pearl Group Ltd., at the market’s top for 5 billion pounds in 2008.
That transaction earned investors a return of about 28 percent a year, and Cowdery is now the U.K.’s 624th richest person, according to the 2012 Sunday Times Rich List. Pearl, now named Phoenix Group Holdings (PHNX), ceded stakes to its lenders, which helped finance the purchase of Resolution.
Cowdery founded Resolution Ltd. in 2008 with Ian Maidens and Jim Newman, his former colleagues from the old Resolution. He also brought Tiner, former CEO of the FSA, on board to help with the regulatory hurdles of restructuring insurers.
The new Resolution would be valued at “several multiples” of the old company, Cowdery said in May 2008, saying the financial crisis would force banks to raise capital by disposing of their life insurance assets. His strategy was to build by acquisition a new-look insurer that generated cash from its book of expiring policies while only selling profitable and low-risk products such as pensions to corporations. The old Resolution bought only pools of expiring policies.
As he started his new company, Cowdery said there was an opportunity because incumbent U.K. life insurers were failing to produce stable returns from running off existing policies, were selling new products too cheaply and paying salesmen too much.
Cowdery said when starting the venture investors would receive a “mid-teens” percentage annual return over the life of the project, which was scheduled to end with a sale in 2013 or 2014.
The venture didn’t start well. In March 2009, Resolution’s directors were the subject of an FSA investigation into the sale of the previous company to Pearl in 2008. While the probe was discontinued without any finding of wrongdoing within two months, it stopped Cowdery from buying life insurers at bottom of the market following the financial crisis.
U.K. life insurers Legal & General Group Plc (LGEN) and Aviva Plc (AV/) both dropped to 20-year lows in early March 2009 before more than doubling by May that year. Resolution instead paid 1.9 billion pounds for Friends Provident in 2009, giving it an embedded value of 3.1 billion pounds. Resolution later bought Axa SA (CS)’s U.K. life insurance unit and Bupa Health Assurance Ltd., two smaller firms.
Resolution managed to extract enough cash to fund a 250 million-pound share buyback program in 2011. It canceled a similar payout this year, citing “heightened investment, economic and regulatory uncertainty.”
Tougher regulation, more volatile markets and financial firms less willing to sell insurance assets have undermined the success of Cowdery’s second Resolution venture, Royal London’s Coffey said. Record low interest rates have squeezed profitability for most European insurers since 2008.
Other insurers such as Legal & General, Standard Life and Aviva began to adopt Cowdery’s strategy and focus on producing cash for shareholders rather than revenue generated from commissions paid to sales advisers, according to Matthew Preston, a London-based analyst at Berenberg Bank with a hold rating on Resolution.
“It’s difficult to pull the same trick twice,” he said. “When they launched there were plenty of assets available. The rally in 2009 was very unhelpful.”
During its four years, Resolution Operations, Cowdery’s private partnership, earned 54.1 million pounds in management fees, according to annual filings at Companies House. The firm posted 21 million pounds of profit during that time after paying employees’ wages and administration expenses.
About 12.2 million pounds of the profit was used to pay the partners’ salaries, which ranged from 265,000 pounds to 672,000 pounds, the filings show. The remaining 8.77 million pounds was paid to Resolution Capital Ltd., an investment firm owned by the partners that was used to invest in Resolution Ltd. shares.
Resolution Capital “has never paid a dividend or otherwise distributed value to its shareholders” and its profits were used to buy Resolution shares, spokesman Child-Villiers said in an e-mailed statement. The shares have fallen in value and are now less than an initial loan given to the company, meaning the firm has “negative value” to its partners.
Cowdery provided an initial 20 million-pound loan to buy shares in Resolution’s IPO, the filings show. It was increased to 7.25 million pounds in July 2010, when the firm sold shares to buy the Axa unit. Resolution Capital paid 1.1 million pounds of interest on the loan in the year to March 2011, according to company filings.
Cowdery separately invested about 600,000 pounds in Resolution shares in December 2011, regulatory filings show.
While the Resolution Operations partners may have collected fees, they haven’t yet benefited from a potentially larger payout written into the Resolution’s IPO prospectus. That entitled them to be paid 10 percent of any increase in embedded value created by end of the project.
The share price at which this payout begins to accumulate is 275.6 pence, according to Resolution’s first-half results. The stock closed at 217.3 pence a share yesterday, 21 percent below the payout price.
“The big payout from releasing value was about crystallizing cash out of the Resolution structure,” said Simon Gergel, who manages 700 million pounds at RCM Allianz in London including Resolution shares. “Until cash is paid out through some sort of transaction or through many years of dividends, the founders wouldn’t get a massive payout.”
Cowdery plans to disband the management structure, which involves at least six satellite companies and is domiciled in Guernsey, in the Channel Islands, under pressure from investors and the FSA. Tiner, 55, will retire as CEO of Resolution Operations once the changes are complete.
“People didn’t feel they understood the old structure,” said Royal London’s Coffey. “Removing it should make it easier to compare them against other insurance companies.”
The move follows an FSA consultation paper published in January that criticized so-called externally managed companies, without naming Resolution. If adopted more widely in the U.K., the practice of managing a company without sitting on its board “could seriously undermine the ability of shareholders to hold managements to account,” the FSA said. Such companies should no longer be eligible to be publicly traded, the paper said.
“What they’re planning to do in terms of collapsing the structure will be helpful in simplifying the business and maintaining a listing on the stock market,” RCM’s Gergel said. “It’s not worked out as a lot of people hoped or expected but a lot has happened in the past four years in financial services.”
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