Resolution hit by 'below par' international trading and IT costs

published 15 November 2012

Resolution, the FTSE-100 life insurer, has produced a mixed update, saying that new business profitability is continuing to improve, but that its international business is 'below par' and it will incur higher costs from IT updates.

The value of new business for the nine months to September 30th increased to £138m (September 30th 2011: £95m) and new business cash strain produced a loss of £172m (2011: 239m). The improvement in group new business performance was largely driven by the UK business, which targeted UK platforms and also cut costs.

The target for UK cost reductions has been raised to a £160m run-rate by the end of 2015 (previous target £143m) and 78% of this total has been secured. The majority of the increase is expected to be achieved by the end of 2013. Run-rate cost reductions achieved as at September 30th 2012 are £78m (30 June 2012: £65m from synergy programmes).

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However, Resolution also said it would incur more than £65m of extra costs over the next two years from programmes to modernise its IT systems and outsource back-office functions.

Its International division, which comprises Friends Provident International (FPI), Amlife and Lombard, continues to target an internal rate of return (IRR) of 20% by the end of 2013, although FPI on its own is now expected to achieve IRRs more in line with the overall group target of 15%.

The group estimates that revisions to actuarial assumptions for the international division to reflect the outcome of the strategic review and to adjust for recent business performance will result in a £50-100m reduction in the division's market consistent embedded value (MCEV), which was £1.2bn as at June 30th. This is net of likely positive changes of around £45m in Lombard's MCEV principally as a result of its successful expense reduction programme launch. The reductions largely relate to FPI's German business - this business is performing poorly and is experiencing reduced business sales volumes, expense overruns and rising embedded guarantee costs.

In addition, the proposed MCEV revisions exclude any adjustments which may arise from the completion of the German business restructuring review and also from the decision to no longer accept business from Japanese nationals.

Andy Briggs, group Chief Executive Officer designate said: "Overall, these results demonstrate our continued momentum, with the group delivering significantly improved new business profitability despite the challenges in the wider economy. The capital position remains robust and I am pleased with the success of our recent debt offering which has enhanced our financial flexibility and further de-risked cash flow to shareholders.

"We continue to make good progress implementing our strategy and are seeing the benefits of this in the strong UK performance in the period. In contrast, the performance of our International division remains below par as a whole, with the continued uncertainty in Europe and other markets weighing on overall performance.

"We have set out today the strategic direction of these businesses and remain confident that we can, through a rigorous focus on costs and new business profitability, generate the returns required to contribute to the achievement of the group's financial targets."

Resolution was set up in 2008 by entrepreneur Clive Cowdery to make money buying, merging and selling on underperforming life insurers, but failed to complete as many takeovers as hoped because falling share prices deterred owners from doing deals.