David Prosser: The market doubters undermining Resolution's insurance experiment

(BLOOMBERG)

Outlook There has been a sudden change of tack from John Tiner, chief executive of Resolution. Since this endeavour first floated two years ago next month, its ambition has been to build a portfolio of British life insurance businesses worth £10bn. Having got almost two-thirds of the way with the acquisitions of Friends Provident and the UK life business of Axa, a third big buy has been promised and is keenly awaited. Yesterday, however, Mr Tiner said the company might now opt for a series of smaller deals to achieve its goals and that another big takeover was not inevitable.

There has already been one small deal, the £100m purchase of certain Bupa businesses, unveiled last month, and clearly there will be plenty more opportunities. But Resolution has a tight deadline in mind – the end of 2013 – for realising the gains from the £10bn business it is building. If there is no big fish on the hook, Mr Tiner is going to need to do an awful lot of smaller deals very quickly if the deadline is not to be missed.

What seems to have spooked Resolution is the decline in its share price since its listing – the stock is off by more than 40 per cent. Investors just aren't rating it in the same way as rival insurance operations: probably because they're conscious they will be asked to stick their hands in their pockets at least once more to fund the acquisition programme. Looking past the valuation, however, Resolution remains a fascinating experiment for the insurance industry. While Prudential weeps over its inability to buy sufficient exposure to the Asian growth story, Resolution is busy building a business almost entirely focused on the domestic market, betting that the opportunities of scale will compensate for the racier returns that might be available elsewhere in the world.

In other words, the interesting story at Resolution is not so much how the end business is built, but its prospects. Will consolidation really deliver the benefits promised in this mature market?

Don't be surprised if Mr Tiner finds himself able to overcome his concerns about the share price and pull off one more big acquisition after all. Then we'll have a better idea about the relative merits of growth versus scale in life insurance.