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12 November 2009
RESOLUTION LIMITED
Interim Management Statement - third quarter update
-
Resolution's first restructuring project was launched in August with the announcement of the recommended acquisition of the Friends Provident Group. This transaction successfully completed on 4 November 2009
-
Resolution is targeting further transactions in the UK life and asset management sector as it sees significant value opportunities from the synergies and restructuring benefits available in this sector. Resolution is working with the Friends Provident management team to best position the business for future integration with other life assurance companies
-
Resolution, whose shares were admitted to the FTSE-100 share index on 5 November 2009, will have £310 million in cash following settlement of the transaction
-
Friends Provident's third quarter new business sales, which are included in the Appendix, reflect the difficult market conditions experienced by the life insurance industry throughout the year and actions taken to improve margins. Friends Provident reports an estimated IGD surplus of £0.9 billion at 31 October 2009.
Michael Biggs, Chairman of Resolution, commented:
"Since the quarter end, we have completed the acquisition of Friends Provident. This is an important step in our first financial services restructuring project which is focused on UK life assurance and asset management.
We are pleased that many Friends Provident shareholders took shares in Resolution rather than cash. As a result, against the maximum of £500 million made available in our offer, only £312 million of cash was used in completing the acquisition. We are now focused on securing further acquisitions to build the enlarged group."
Enquiries:
Michael Biggs, Resolution Limited +44 (0)1481 745 368
John Tiner, Resolution Operations LLP +44 (0) 20 3372 2902
Investors / analysts
Steve Riley, Resolution Operations LLP +44 (0)20 3372 2908
Media
Alex Child-Villiers, Temple Bar Advisory +44 (0)20 7002 1080
Forward-looking statements
This announcement contains certain forward-looking statements with respect to Resolution Limited and its outlook. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast.
Media
There will be a conference call today for real-time media at 07:30 GMT, hosted by John Tiner, CEO of Resolution Operations, and Trevor Matthews, CEO of Friends Provident (+44 (0) 1452 555566 quoting 40736655).
Analysts / Investors
There will be a conference call today for analysts and investors at 09:00 GMT hosted by John Tiner, CEO of Resolution Operations and Trevor Matthews, CEO of Friends Provident (+44 (0) 01452 555566 quoting 40730766). A recording of this call will be available for 7 days by dialling: +44 (0) 1452 550000 replay access number 40730766#.
Financial calendar
Preliminary results for 2009 24 March 2010
Website
www.resolution.gg
Resolution Limited - third quarter interim management statement
Resolution listed on the main market of the London Stock Exchange in December 2008, with the objective to unlock and create value for shareholders through the acquisition and restructuring of financial services businesses in the UK and Western Europe. While our immediate priority is the UK life assurance and asset management restructuring project, we continue to follow developments in other sectors of the financial services industry, both in the UK and elsewhere in Western Europe.
UK life assurance and asset management restructuring project
We believe that consolidation and restructuring in the UK life and asset management sector is both desirable and inevitable. UK life assurance is a fragmented and complex industry facing considerable regulatory and structural challenges. Unsustainable business models have been built around costly distribution and unrewarded risks for investors. Payback periods are too long and returns too low.
The regulatory environment continues to be a catalyst for market restructuring. The key drivers include:
-
the upcoming EU Solvency II Directive which is likely to require life assurance businesses to set aside additional capital to reflect the risks of certain types of business;
-
the FSA's Retail Distribution Review which is likely to have a major impact on the distribution of retail investment and life assurance products and consequently the relationship between product providers and distributors; and
-
the Basel II capital accord which will require banks which own life assurance businesses to make deductions from their Tier 1 capital from 2012 onwards.
We consider the market will need to respond to these changes by creating life assurance companies which operate with a high degree of financial discipline in relation to both profitability and cash flow and are able to benefit from economies of scale in operations, customer service, distribution and capital efficiency.
Acquisition of the Friends Provident Group
We completed the acquisition of Friends Provident earlier this month. We expect this to be the first of a number of acquisitions in the UK life assurance and asset management sectors and believe that Friends Provident provides significant optionality for such transactions.
Building on the work we started prior to completion of the acquisition, we have established a number of initiatives to best position Friends Provident for future integration with other life assurance businesses and to ensure its governance, internal control, finance and assurance processes are well aligned with Resolution's.
Achieving our target returns and value realisation
Resolution is targeting a mid-teen gross internal rate of return1 over the medium term from its consolidation and restructuring projects.
We expect the target return to emerge from the returns earned on acquired portfolios, the value of selected new business written and synergies from the combination and integration of the life assurance businesses we acquire. We anticipate synergies arising in three areas:
-
building scale in selected new business lines enabling a more coordinated and disciplined approach to sales and distribution, combined with the necessary financial rigour on rates of return and payback periods;
-
expense synergies through economies of scale and the elimination of duplication in sales and marketing, customer services, information systems and central infrastructure; and
-
capital and financial synergies generated through the merger of acquired life assurance entities.
Resolution plans to create a major life assurance and asset management group with a clear value proposition, including a new business platform capable of delivering attractive returns with acceptable payback periods. It will then look to realise value for its shareholders through an IPO, strategic sale, demerger or capital restructuring of the enlarged business.
Financing transactions
Resolution plans to raise and recycle substantial capital sums through its restructuring projects. There are a number of potential sources of acquisition financing available:
-
surplus cash held in the Group;
-
cash raised from further share issues;
-
the issue of shares in exchange for shares held by investors in target public companies;
-
the issue of shares and other financing instruments to vendors in private transactions; and
-
the issue of regulatory debt and other forms of borrowings.
We anticipate that the value investors and vendors place on Resolution shares as an acquisition currency will be a key factor in the success of our consolidation strategy. We are pleased that many Friends Provident shareholders took shares in Resolution rather than cash, resulting in just £312 million of cash being utilised against the maximum of £500 million made available in our offer, with the balance of the consideration being settled by the issue of 1.75 billion Resolution shares.
Financial review
As the acquisition of Friends Provident was completed after the end of the third quarter, we are giving separate financial reviews for the period for Resolution and Friends Provident. We will publish fully consolidated results for the enlarged group on an IFRS and European Embedded Value (EEV) basis covering the post acquisition period for Friends Provident in March 2010. In addition, we will publish full year EEV results for Friends Provident on a pro forma basis.
The acquisition of Friends Provident brings with it certain obligations in respect of loans and borrowings and the step-up tier one capital securities (STICS). Resolution acknowledges those obligations and, in particular, will develop with Friends Provident a proposal to maintain an "alternative coupon satisfaction mechanism", as set out in the terms and conditions for the STICS, following the acquisition. As stated in the joint announcement of Friends Provident and Resolution on 5 November 2009, Friends Provident will make the coupon payments that are due on 21 November 2009 and we confirm that ongoing access to the debt capital markets is an important part of the financing strategy of the group.
The value of Resolution's short term investments at 30 September 2009 was £639 million (31 December 2008 £653 million; 30 June 2009 £645 million). Under the terms of the offer for Friends Provident, Resolution was committed to providing a maximum cash component of £500 million with the balance being met by the issuance of new shares. As announced on 5 November 2009, the actual cash component was £312 million which will be settled on 18 November 2009. After allowing for the cash component, routine outgoings and assuming the settlement of acquisition costs, Resolution expects to have approximately £310 million of cash and short term investments.
Outgoings on operating expenses for the third quarter exceeded the investment return on the short term investments. A conservative investment mandate, together with the current low levels of interest available to the market, limit the return that Resolution is able to earn on its surplus cash. The investment mandate remains unchanged from that previously disclosed for its short term investments.
The unaudited net assets per share at 30 September 2009 (i.e. before completion of the acquisition of Friends Provident and before payment of the expenses of the acquisition), were 96.8 pence.
The Board and corporate governance
We were delighted to announce the appointment of Sir Mervyn Pedelty and Gerhard Roggemann as independent non-executive directors of Resolution. Both were members of the Friends Provident Group plc board and bring a wealth of experience in the financial services sector generally. They will also serve on the Friends Provident Holdings (UK) Ltd board (the new holding company of the Friends Provident group) where Sir Mervyn has assumed the role of Chairman.
We anticipate strengthening the board further through the appointment of new board members who bring additional experience of both international markets and wider sectors of the financial services industry.
Since Resolution's formation, the board has been committed to best practice standards of corporate governance. As a primary listed company it will report annually on the group's compliance with the Combined Code, a process which was previously performed on a voluntary basis.
Dividend policy
We expect that returns for our shareholders will derive primarily from capital appreciation and the return of proceeds from disposals. Following the Friends Provident acquisition, our dividend policy has been revised and the Board now expects to recommend a final dividend of 2.72 pence per Resolution share in respect of the second half of 2009 assuming that the financial performance of Friends Provident is in line with expectations. Thereafter, we expect to pay a dividend of 4.08 pence per share in respect of each subsequent year, subject to the Friends Provident business being able to support this level, with one one-third of this dividend being paid as an interim dividend and two thirds as a final dividend. The dividend policy will be reviewed following subsequent acquisitions.
Outlook
We are evaluating further opportunities in the UK life and asset management industry and see opportunities for significant value creation from synergies and scale benefits.
-
The gross internal rate of return is the rate of interest such that the present value of all investor cash flows is zero. Investor cash flows are the net investor outflows and investor inflows. The investor outflows include the initial fund raising (including issue costs), fuure shareholder investments (for example, by way of rights issues or issue of shares as consideration for an acquisition); the investor inflows include all dividends and returns of capital made by the Company whether by cash or the distribution in specie of shares in acquired businesses to shareholders or otherwise.
Appendix 1
Friends Provident - third quarter 2009 update
Trading Highlights
-
Strong estimated IGD surplus maintained at £0.9 billion as at 31 October 2009 after payment of dividend of £30 million.
-
Sales (measured as APE) in the third quarter amounted to £183 million (Q2: £173 million, Q1: £149 million). Sales for the year to date were £505 million, compared to £701 million for the same period last year.
-
Distribution capability to be further enhanced through new arrangements with Tesco Bank and Virgin Money.
-
Expenses savings remain on target to deliver a UK expense base of £215 million in 2010.
New Business
Sales on an annual premium equivalent (APE) basis for the third quarter 2009 were £183 million maintaining a quarter on quarter increase throughout this year, both for total UK and overseas sales. For the first nine months of the year, sales on the APE basis were £505 million, compared to £701 million for the same period last year, reflecting the difficult market conditions experienced by the life insurance industry and the actions taken by Friends Provident to improve margins.
UK Sales
UK corporate sales mainly relate to pensions business and at £81 million for the quarter on an APE basis are up £8 million on the second quarter of 2009 and £1 million on the third quarter of 2008. The new business is derived mainly from increments on existing schemes as shown in the table below. The results have benefited from conversion of a significant amount of pipeline business but a number of new mandates have also been won.
|
Group pensions new business APE
|
Q3 2009
£m |
Q3 2008
£m |
|
Transfers in and lump sum contributions
|
18
|
8
|
|
Regular contributions
|
|
|
|
- from increments to existing schemes
|
50
|
61
|
|
- from new schemes with unfunded commission
|
-
|
2
|
|
- from new schemes in target segment
|
11
|
6
|
|
Total
|
79
|
77
|
Funds under management (including unit-linked individual and group pensions) were £9.1 billion at 30 September, up from £7.7 billion at 30 June with the benefit of a strong contribution from investment returns.
UK individual business at £24 million for the quarter on an APE basis is down £4 million on the preceding quarter. Protection business has shown a small increase throughout the year. Friends Provident are looking to new distribution arrangements such as those recently announced with Tesco Bank and Virgin Money for future growth as well as to an improvement in the housing market. Friends Provident has increased its market share of the individual protection IFA market from 7% to 7.6% based on market data for this business in the second quarter.
International Sales
International business is written mainly through Friends Provident International (FPI) and Lombard. Both businesses have shown positive quarter on quarter sales growth this year but in aggregate new business at £209 million (FPI: £129 million, Lombard £75 million, AmLife £5 million) is down 24% compared to the year to date figures for 2008, all measured on an APE basis.
For FPI, quarter on quarter growth in 2009 is driven by sales in Asia, predominantly in Hong Kong where third quarter sales at £26 million were up £4 million on the second quarter.
For Lombard, the international estate planning life assurer, business has been affected by volatile investment markets and their impact on client confidence. The number of large cases (each greater than 10 million Euros) is down by two thirds on a year to date basis. Furthermore, the German and Spanish markets have been adversely impacted by taxation related issues. However, a number of markets have held up in the third quarter including Belgium, France and the UK (resident non-domiciled business).
Lombard's business is traditionally weighted towards the fourth quarter. Opportunities exist particularly in Italy where a recently announced tax amnesty is now in force, and the tax related issues in Germany have been clarified.
IFA Businesses
On 15 October, Sesame, FP's wholly-owned IFA subsidiary, acquired the Bankhall Group. This acquisition will increase FP's distribution capability and position Sesame as the number one player in each of its chosen markets - IFA networks, IFA regulatory services and mortgage clubs.
Capital
As at 31 October 2009, Friends Provident maintained a strong IGD surplus estimated at £0.9 billion after payment of the £30 million interim dividend. This has remained stable, notwithstanding the strong performance of equities over the period, to which shareholder funds have limited exposure.
During the last quarter, Moody's, Standard & Poor's and Fitch have reaffirmed their insurer financial strength ratings for Friends Provident Life & Pensions. These remain in the A range for each of the three rating agencies.
Analysis of Life and Pensions New Business
In classifying new business premiums the following basis of recognition is adopted:
-
single new business premiums consist of those contracts under which there is no expectation of continuing premiums being paid at regular intervals;
-
regular new business premiums consist of those contracts under which there is an expectation of continuing premiums being paid at regular intervals, including repeated or recurrent single premiums where the level of premiums is defined, or where a regular pattern in the receipt of premiums has been established;
-
non-contractual increments under existing group pensions schemes are classified as new business premiums;
-
transfers between products where open market options are available are included as new business; and
-
regular new business premiums are included on an annualised basis.
Life & Pensions New Business - Regular and Single Premiums
|
|
Regular premiums |
Single premiums |
|||||
|
|
9m |
9m |
|
9m |
9m |
|
|
|
|
2009 |
2008 |
Change |
2009 |
2008 |
Change |
|
|
|
£m |
£m |
% |
£m |
£m |
% |
|
|
UK Corporate |
|
|
|
|
|
|
|
|
|
- pensions |
187.1 |
280.1 |
(33) |
316.0 |
389.8 |
(19) |
|
|
- protection |
6.7 |
5.9 |
14 |
0.0 |
0.0 |
- |
|
Total UK Corporate |
193.8 |
286.0 |
(32) |
316.0 |
389.8 |
(19) |
|
|
UK Individual |
|
|
|
|
|
|
|
|
|
- protection |
31.1 |
34.8 |
(11) |
0.0 |
0.0 |
- |
|
|
- annuities |
0.0 |
0.0 |
- |
187.8 |
205.5 |
(9) |
|
|
- pensions |
4.3 |
9.3 |
(54) |
140.8 |
281.4 |
(50) |
|
|
- investments |
0.1 |
0.6 |
(84) |
20.7 |
63.3 |
(67) |
|
Total UK Individual |
35.5 |
44.7 |
(21) |
349.3 |
550.2 |
(37) |
|
|
Total UK Life & Pensions |
229.3 |
330.7 |
(31) |
665.3 |
940.0 |
(29) |
|
|
|
|
|
|
|
|
|
|
|
FPI |
108.1 |
134.1 |
(19) |
207.4 |
343.0 |
(40) |
|
|
Lombard |
- |
- |
- |
749.4 |
1,082.2 |
(31) |
|
|
AmLife (30% share) |
4.6 |
N/a |
- |
8.7 |
N/a |
- |
|
|
Total International Life |
112.7 |
134.1 |
(16) |
965.5 |
1,425.2 |
(32) |
|
|
|
|
|
|
|
|
|
|
New Business - Annual Premium Equivalent
Annualised Premium Equivalent represents annualised new regular premiums plus 10%
of single premiums.
|
|
9m |
9m |
|
Q3 |
Q3 |
|
|
|
|
2009 |
2008 |
Change |
2009 |
2008 |
Change |
|
|
|
£m |
£m |
% |
£m |
£m |
% |
|
|
UK Corporate |
|
|
|
|
|
|
|
|
|
- pensions |
218.7 |
319.1 |
(31) |
78.5 |
77.9 |
1 |
|
|
- protection |
6.7 |
5.9 |
14 |
2.4 |
1.7 |
41 |
|
Total UK Corporate |
225.4 |
325.0 |
(31) |
80.9 |
79.6 |
2 |
|
|
UK Individual |
|
|
|
|
|
|
|
|
|
- protection |
31.1 |
34.8 |
(11) |
11.5 |
10.2 |
13 |
|
|
- annuities |
18.8 |
20.5 |
(8) |
6.3 |
6.6 |
(5) |
|
|
- pensions |
18.4 |
37.4 |
(51) |
5.4 |
7.7 |
(30) |
|
|
- investments |
2.2 |
7.0 |
(69) |
0.9 |
1.0 |
(10) |
|
Total UK Individual |
70.5 |
99.7 |
(29) |
24.1 |
25.5 |
(5) |
|
|
Total UK Life & Pensions |
295.9 |
424.7 |
(30) |
105.0 |
105.1 |
0 |
|
|
|
|
|
|
|
|
|
|
|
FPI |
128.8 |
168.4 |
(24) |
47.8 |
51.2 |
(7) |
|
|
Lombard |
74.9 |
108.2 |
(31) |
28.3 |
38.0 |
(26) |
|
|
AmLife (30% share) |
5.4 |
- |
- |
2.3 |
- |
- |
|
|
Total International Life |
209.1 |
276.6 |
(24) |
78.4 |
89.2 |
(12) |
|
|
|
|
|
|
|
|
|
|
|
Total Life & Pensions |
505.0 |
701.3 |
(28) |
183.4 |
194.3 |
(6) |
|
New Business Annual Premium Equivalent
Quarterly Progression
|
|
Q3 |
Q2 |
Q1 |
|
|
|
2009 |
2009 |
2009 |
|
|
|
£m |
£m |
£m |
|
|
UK Corporate |
|
|
|
|
|
|
- pensions |
78.5 |
70.6 |
69.6 |
|
|
- protection |
2.4 |
2.1 |
2.2 |
|
Total UK Corporate |
80.9 |
72.7 |
71.8 |
|
|
UK Individual |
|
|
|
|
|
|
- protection |
11.5 |
10.5 |
9.1 |
|
|
- annuities |
6.3 |
6.8 |
5.7 |
|
|
- pensions |
5.4 |
9.5 |
3.5 |
|
|
- investments |
0.9 |
0.8 |
0.4 |
|
Total UK Individual |
24.1 |
27.6 |
18.7 |
|
|
Total UK Life & Pensions |
105.0 |
100.3 |
90.5 |
|
|
|
|
|
|
|
|
FPI |
47.8 |
44.1 |
36.9 |
|
|
Lombard |
28.3 |
26.2 |
20.4 |
|
|
AmLife (30% share) |
2.3 |
2.0 |
1.1 |
|
|
Total International Life |
78.4 |
72.3 |
58.4 |
|
|
|
|
|
|
|
|
Total Life & Pensions |
183.4 |
172.6 |
148.9 |
|
Friends Provident International
|
APE by region (£m, actual exchange rates) |
9m 2009 |
9m 2008 |
Q3 2009 |
Q2 2009 |
|
Asia |
64.4 |
86.1 |
25.7 |
22.1 |
|
Middle East |
30.3 |
31.7 |
9.4 |
11.7 |
|
Europe (Excl UK) |
20.9 |
24.7 |
7.1 |
6.6 |
|
UK |
4.1 |
10.6 |
2.1 |
0.9 |
|
Rest of World |
9.1 |
15.3 |
3.5 |
2.9 |
|
Total |
128.8 |
168.4 |
47.8 |
44.2 |
Lombard
|
APE By Region (£m, actual exchange rates) |
9m 2009 |
9m 2008 |
|
UK and Nordic |
22.0 |
32.6 |
|
Northern Europe |
22.0 |
35.0 |
|
Southern Europe |
29.2 |
35.7 |
|
Rest of World |
1.7 |
4.9 |
|
Total Including Large cases |
74.9 |
108.2 |
|
Of which: Large cases (greater than €10m) |
11.5 |
30.0 |
|
Total Excluding Large Cases |
63.4 |
78.2 |
New business APE at constant exchange rates
All amounts in currency in the tables above other than Sterling are translated into Sterling at a monthly average exchange rate. The estimated new business assuming constant currency rates would be as follows:
|
|
|
9m |
|
|
Q3 |
|
|
|
|
2008 |
|
|
2008 |
|
|
|
9m |
(as |
|
Q3 |
(as |
|
|
|
2009 |
reported) |
Change |
2009 |
reported) |
Change |
|
|
£m |
£m |
% |
£m |
£m |
% |
|
FPI |
109.2 |
168.4 |
(35) |
43.4 |
51.2 |
(15) |
|
Lombard |
66.9 |
108.2 |
(38) |
26.5 |
38.0 |
(30) |
New Business - Present Value of New Business Premiums (PVNBP)
PVNBP equals new single premiums plus the expected present value of new regular premiums. Premium values are calculated on a consistent basis with the EEV contribution to profits from new business. Start of period assumptions are used for the economic basis and end of period assumptions are used for the operating basis. A risk free rate is used to discount expected premiums in future years. The impact of operating assumption changes across a whole reporting period will normally be reflected in the PVNBP figures for the final quarter of the period that the basis changes relate to. No change in operating assumptions will be reflected in the PVNBP for the first and third quarters, when the contribution to profits from new business is not published. All amounts in currency other than Sterling are translated into Sterling at a monthly average exchange rate.
|
|
9m |
9m |
|
Q3 |
Q2 |
Q1 |
|
|
|
2009 |
2008 |
Change |
2009 |
2009 |
2009 |
|
|
|
£m |
£m |
% |
£m |
£m |
£m |
|
|
UK Corporate |
|
|
|
|
|
|
|
|
|
- pensions |
1,053 |
1,537 |
(31) |
401 |
333 |
319 |
|
|
- protection |
21 |
21 |
0 |
7 |
6 |
8 |
|
Total UK Corporate |
1,074 |
1,558 |
(31) |
408 |
339 |
327 |
|
|
UK Individual |
|
|
|
|
|
|
|
|
|
- protection |
198 |
219 |
(10) |
73 |
66 |
59 |
|
|
- annuities |
188 |
205 |
(8) |
63 |
68 |
57 |
|
|
- pensions |
157 |
315 |
(50) |
47 |
86 |
24 |
|
|
- investments |
22 |
67 |
(67) |
9 |
8 |
5 |
|
Total UK Individual |
565 |
806 |
(29) |
192 |
228 |
145 |
|
|
Total UK Life & Pensions |
1,639 |
2,364 |
(31) |
600 |
567 |
472 |
|
|
|
|
|
|
|
|
|
|
|
FPI |
774 |
1,059 |
(27) |
293 |
262 |
219 |
|
|
Lombard |
749 |
1,082 |
(31) |
283 |
262 |
204 |
|
|
AmLife (30% share) |
37 |
- |
- |
17 |
14 |
6 |
|
|
Total International Life |
1,560 |
2,141 |
(27) |
593 |
538 |
429 |
|
|
|
|
|
|
|
|
|
|
|
Total Life & Pensions |
3,199 |
4,505 |
(29) |
1,193 |
1,105 |
901 |
|
This information is provided by RNS
 |
 |
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