Picking up the pieces of an accident-prone insurer: After losses, lawsuits and a Lautro fine, Guardian is seen as on the mend. Peter Rodgers reports

AFTER seven weeks as the new chief executive of Guardian, the insurance group, John Robins has some explaining to do.

The company has had mixed fortunes in the past few years. On top of heavy losses suffered in common with the rest of the insurance industry, it lost pounds 68m on a disastrously conceived acquisition in Italy and encountered persistent problems in its life insurance business.

Last year it suffered a pounds 100,000 fine from the life assurance regulator, Lautro, and a series of highly publicised legal disputes with disgruntled sales agents and clients.

But contrary to the public perception, the City has been warming to Guardian, which changed its name from Guardian Royal Exchange earlier this year. It is widely seen to be on the mend from years of weak management and public hammerings.

The company is also brushing up its act. It has at last moved heavily into direct selling, the dynamic new area of the business pioneered by Royal Bank of Scotland's Direct Line.

Mr Robins said: 'I believe the management has done a very good and competent job in the last three or four years in getting the ship upright. That same management is very capable of getting the wind in the sails and getting the ship moving.' He plans few changes to the youthful and skilled team he says he found when he arrived.

But just as Guardian begins to benefit strongly from the boom conditions that have returned to the insurance market, Mr Robins - brought in from the insurance broker Willis Corroon when his predecessor, Sid Hopkins, retired - has something else from the past to explain.

Guardian jumped the gun last year on new European Union reporting requirements for insurance companies by including changes in the paper value of its investment portfolio in its profit and loss account.

It has made the headline results and price/earnings ratios almost meaningless, and turned a pounds 751m profit for the whole of last year - when the equity and bond markets were booming - into a thumping great loss of pounds 286m before tax in the first half of this year.

Insurance analysts, of course, ignored the headline figures and concentrated on the trading results on mainstream insurance, which were a healthy pounds 131m compared with pounds 65m a year earlier and pounds 183m in the whole of last year. The shares rose 2p to 184p.

The pounds 417m plunge in the value of investments during the bond and equity market routs of the first six months of the year was 8 per cent of the total compared with a 15 per cent decline in UK equity indices. In the equity market, Guardian used options on the FT- SE 100 index to limit the downside.

And since June, there has been a sharp recovery. The solvency ratio, measuring the value of funds backing the business, fell 16 percentage points to 48 per cent in the first six months but has recovered to 53 per cent since then, James Morley, the finance director, said.

There is no evidence that Guardian did that much worse on investment than its peers. Indeed, excluding the value of life subsidiaries, Guardian's net asset value per share has fallen 20 per cent in six months, which is comparable with Royal and rather less than Commercial Union and General Accident.

The other insurers' results could equally be accused of misleading, because they failed to reflect the market falls this year.

From next year the other insurers will have to count changes in investment values as profits or losses. This makes sense, since insurers are in many ways similar to investment trusts, with long-term performance dominated by investment returns.

But most companies are resisting Guardian's example because it makes profits highly volatile year by year. They are seeking a compromise that smooths the results, rather as actuaries minimise the impact of short-term fluctuations in pension funds.

The Association of British Insurers is debating the options, including using a rolling five-year investment return, pioneered by Eagle Star. But Mr Morley reckons any smoothing technique will be too open to manipulation.

Meanwhile, after a tour of the business, Mr Robins says he is encouraged that 'the ethos of profit before volume is everywhere'. In the old days, UK insurers went for volume whatever the profit prospects.

(Photograph omitted)