Whereas before, mergers or takeovers by well established rivals might have been the norm, today, any insurer whose annual results are less than perfect may find itself the subject of attention by Clive Cowdery’s Guernsey-based “acquisition vehicle”.
The news is not all that good for Friends’ shareholders. If they vote in favour of the takeover, and the betting is that they will, shareholders will get 0.9 Resolution shares for each Friends Provident share or a cash alternative to a maximum of £500m. The deal values each Friends’ share at 79.4p – just over a third of the 225p at which the stock was floated when the company demutualised in 2001.
Even more significantly, it means all the old assumptions about how to value insurers have been shot to pieces by this deal. From now on, insurers can forget about a premium to their embedded value when they are sold off. According to a research note I saw from Panmure Gordon, Friends is being disposed of at a 31 per cent discount to its embedded value at the end of June.
Maybe I should declare an interest – a significant chunk of my personal pension is invested with Friends Like the company’s other 2.86 million customers, I too have an interest in what is going on. I also have an interest as a journalist.
Either way, there are some important lessons to be learnt about the entire Friends’ experience of the past few years. The first is that the idea that flotation on the stockmarket can in and of itself deliver the opportunity of faster growth has been exposed as a myth.
After its listing in 2001, Friends briefly traded at 220p a share. But in the aftermath of the first stockmarket crash, its shares plummeted as low as 66p in March 2003. They recovered and even reached 190p three years later. Yet they fell yet again, reaching an all-time low of 50p in October last year.
With hindsight – and some people said so at the time – this was not a company with a capacity for strong independent survival in a tough market. Friends’ most recent sales figures have plunged by 40 per cent in the UK and 32 per cent internationally. According to one report, it will now take Friends 25 years to make a return on the capital invested in new individual business in the first half of this year.
It is as a policyholder that I am most affected. In all the years I have parked my money there, the value of my pension pot has barely changed, with growth almost non-existent, even when the market was growing, to the point where I am left wondering whether instead of fund managers they just have a 16-year-old work experience lad who pretends to invest on our behalf. Yet, in common with any other policyholders, I will not get to vote on the takeover.
And even if we all did vote, what would change? Ultimately, what Resolution is all about is recognising that old-style life insurers such as Friends can be run more cheaply and more efficiently if they are all owned by one big company.
Friends is the first of a number of planned takeovers in the coming years, which Resolution hopes will give it massive economies of scale, bringing down overall admin costs.
But that money is not going to flow back into the funds of hard-pressed Friends’ policyholders and investors. No, it will go straight into the pockets of Clive Cowdery and the financial institutions that lent him the money to go on an acquisition spree.
Cowdery’s parent company, Resolution Ltd, is based in Guernsey for tax purposes. It then pays Resolution Operations, the investment firm run by Cowdery and his partners, £10m a year to manage its portfolio, with a mandate to buy, merge and restructure insurers. After costs, the seven partners of Resolution Operations will take home a 10 per cent share of any profits they make.
In three or four years time, what Cowdery hopes to do is to sell the company on to another third party and pocket a load more money. This is what he did a few years ago with Resolution Mark 1, with which be bought up zombie funds, pocketing £150m after selling that vehicle off. This will be his second bite of the cherry.
Millions of policyholders are just pawns in this game, paying for this kind of “business acumen” with the flesh off our backs. No wonder ordinary punters do not trust the industry.
Nic Cicutti can be contacted at firstname.lastname@example.org