The orchestrator

Did he leap or was he pushed? That was the question everybody was asking when Royal & SunAlliance (R&SA) announced its UK chief executive Paul Spencer was leaving the company less than two weeks ago. The company line was the equivalent to the music industry's artistic differences excuse. "He wants to pursue other interests," R&SA said.

What is the real reason? Was Spencer a scapegoat for the recently announced 2001 results, which showed a profit of £16m compared with Norwich Union's £900m plus for the same period?

Bob Mendelsohn, chief executive of R&SA worldwide, isn't giving much away. "Paul was not a scapegoat. We had poor results this year because of the World Trade Centre and asbestos. The asbestos reserve increase comes out of business written generations ago. We're not going to blame today's manager for having to raise reserves for something that was written years ago."

Sources close to Spencer said he left because Mendelsohn snubbed him in favour of US chief executive Bob Gunn for the newly created chief operating officer position. The allegation hits a raw nerve. Mendelsohn looks away sharply. Now gazing out of his office window into a sunlit Berkeley Square, he replies: "It is true we appointed a chief operating officer on 10 September. That is a role to which all operating companies report. So it is true that the UK, which did report to me, now reports to Bob Gunn.

"Certainly looking around at the potential people to fill the role - all our senior executives would be considered."

Gunn's appointment marked a change in direction for Mendelsohn. Since his appointment in 1998, Mendelsohn says he has been trying to exit business that would not provide good returns in the future and focus on five core territories.

He says: "During this period I thought it was essential that I had direct operational control of the business.

"By the middle of last year, we had pretty much completed the reorganisation and had a clear path to completion. The challenge is now about execution. The chief operating officer will drive change in performance levels."

That means a new role for Mendelsohn. He is disaffected with UK investment houses and will spend more time courting overseas investors. He says 80- 85% of shareholders are UK institutions .

"They value insurance companies the lowest of all major western economies. Clearly, continental Europe, Japan and US investors value insurance companies higher. I'm going to tell them the new R&SA story. Everybody knows what it used to be. Not everyone knows what it is or what it will be."

One story Mendelsohn will be telling is how R&SA is using its money in clever ways that ever-conservative insurers have traditionally shied away from. Called risk-based capital, the idea is simple: investing in stocks and shares is not the best way to make money work for shareholders. So R&SA is running at a low solvency margin - currently 37%, compared with more traditional insurers who maintain a solvency ratio of 45%. The money that is freed up can be used to write more policies or invested in making claims handling more efficient.

Critics argue the solvency level is dangerously low. Indeed the Financial Services Authority (FSA) takes action when solvency margins dip below 30%. So what would happen if we had another World Trade Centre event?

Mendelsohn isn't worried. "We've stress-tested the model and there is a 99.99% chance that it will never go below 25%," he says.

The idea is gaining favour with some analysts. "We don't like triple A-rated companies. Why are they sitting on so much capital? There are far better uses," one analyst says.

With his investment banking approach to capital use, it is unsurprising that Mendelsohn is backing plans for a merger between the Association of British Insurers (ABI) and the British Banking Association (BBA). "The finance industry has got to speak to government and the regulator with one voice," he says. But many insurers are worried they will be drowned out by behemoths like HSBC and Citigroup.

"People are too hung up on size. It's more about the overall picture," he says dismissively.

While Mendelsohn is pushing a clear and innovative vision, he has come under fire for alleged gaffes in execution of the plan. The life business was due to be sold by the end of 2001. "Negotiations were put on hold because of 11 September, but a sale will go through this year," he says.

While GE and Aegon are said to be contenders, one intriguing rumour has it that CGNU will swap its non-life business for R&SA's life operation. Mendelsohn dismisses this emphatically.

"This is a non-starter, the EU would become interested very quickly about competition issues and we would have to sell off large parts of the business."

Mendelsohn has been attacked for trying to restructure the executive bonus system at a time when poor results were being announced. Critics said R&SA directors were trying to create a system that would provide them with rewards even though the company missed its 10% return on capital target by some way.

Mendelsohn says everyone got the wrong end of the stick. The new bonus scheme is due to kick in from 2003 to 2005 and is intended to reward consistent, year-on-year performance. He explains each executive will be given a bonus for meeting the 10% return on capital target; if they meet the target again in the next year, the bonus goes up and if they meet it again in 2005, it goes up again. He says this will replace the existing scheme which is negotiated on an annual basis.

The ABI investment committee is still running a thumb over the plan. When Mendelsohn came to power in 1998, he promised to make R&SA best in class. Has that comment come back to haunt him?

"Not at all. We are best in class in a number of places. Clearly we are not best in class in world terms.

"We are best in class in Australia, Scandanavia and in some parts of specialty business. In the UK we're very good at healthcare, life and claims initiatives," he says.