The logic of a U-turn

?This may come as a surprise to those inured to our legendary scepticism, but one of the biggest mistakes in business journalism can sometimes be paying too much attention to what chief executives say.

Take Resolution Group. When it began as Resolution Life four years ago, we listened to founding chief executive Clive Cowdery forcefully extolling the joys of investing in closed life insurance funds.

Why bother with the expensive business of chasing new custom when you could generate buckets full of cash from managing old policies better, he argued, quick to disagree with anyone who dubbed these vehicles “zombie funds”.

Now Cowdery is apparently tiring of his role as king of the zombies as he is trying to pull off a merger with Friends Provident.

His rationale: Resolution has plenty of cash but very little new business while its target has the opposite problem.

As for the initial business model of snapping up other closed funds, the stock market recovery since its nadir of 2003 means they are now much more fully-valued.

The zombies have become too expensive so it’s time to move back to the tried, but still untrusted (by the general public), mechanism of extracting “achieved” profits from new business streams down the track.

Pearl Group, Hugh Osmond’s rival zombie venture has other ideas and has amassed a stake in Resolution with which to argue its case, so this one has much longer to run.

But it does demonstrate how dangerous it is for commentators, and companies’ staff too, to tie executives too closely to the logic of the past.

“At the bottom of the bear market, Prudential sold its UK general insurance business to concentrate on life, while Royal & SunAlliance took the opposite step by selling its life operations

Markets change and the chief executive’s job is to exploit them. Staff may deride so-called U-turns but being entrepreneurial is about not following the pack and testing new directions.

The same logic applies to the general insurance market.

At the bottom of the bear market, Prudential sold its UK general insurance business to concentrate on life, while Royal & SunAlliance took the opposite step by selling its life operations (to Resolution). The rationale then was that running both life and general operations was too demanding on capital.

Of the UK-quoted majors, only Aviva carried on doing both on a large scale. However, the benefits of riding life’s and general’s separate and often conflicting cycles are well demonstrated in insurance history.

Indeed, AIG, Zurich and AXA all still operate successfully in this manner. Should we be surprised, therefore, if the slimmed-down Royal were to one day emerge as part of a larger group with both activities in its portfolio?

Similarly, look at the change of direction taken by AXA in the UK. Until a few years back, it was praising the virtues of its direct general insurance operation; now it has gone on a risky buying spree, snapping up brokers as part of a wholesale change of its distribution model.

Zurich made mistakes too. Remember those adverts with flying pigs? Indeed, the most fascinating potential play in the spate of consolidation prompted by Resolution’s friendly move is not a counter bid for the zombie funds group by Pearl, Standard Life or Prudential, but a much bigger tie-up between two of Europe’s largest composite insurers.

What price an AXA-Zurich merger? And please let’s not simply call it a U-turn if it ever happens.