Resolution could split before sale

Insurance firm Resolution says it could split its business into two to attract a buyer.

Resolution was set up by finance entrepreneur Clive Cowdery in 2008 to acquire life assurance businesses that were seen to be failing or under-performing. It now owns Friends Provident, BHA and a big chunk of Axa's UK business.

Profit before tax in 2011 came in at £681m, ahead of a consensus prediction from forecasts compiled by I/B/E/S of £602m. The profits were aided by a one off £185m gain from outsourcing administration to Diligenta, and it is not clear whether the consensus forecasts take this into account; Digital Look's consensus forecast for profit before tax was £575m.

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On a Market Consistent Embedded Value (MCEV) basis, operating profit before tax rose to £517m, including £140m of operating assumption changes (primarily relating to the Diligenta outsourcing), from £412m the year before.

On an international financial reporting standards (IFRS) basis, the group's £681m operating profit before tax turned into a loss after tax of £31m (2010: profit of £820m), after the tax man took his £457m cut and various other charges were taken into account; these include non-recurring costs of £296m, amortisation and impairment charges of £759m, and investment fluctuations and suchlike of £230m.

Net earned premiums in 2011 climbed to £1,529m from £1,047m in 2010. The investment return collapsed to £1,804m from £8,426m the year before, contributing to a sharp fall in total revenue to £4,104m from £10,224m in 2010.

The group made a loss per share of 4.35p as against earnings per share of 80.47p (on a diluted basis) the year before. The market consensus forecast had been for positive earnings per share of 30.89p.

What Resolution really wants is devise an "exit strategy" from its investments, known as the Friends Life project. The group is looking to flog the whole kit and caboodle; the trouble is, there doesn't seem to be a buyer looking to acquire all the assets.

The group now says the answer may be in creating two separate companies. One would be an "open" life insurer, meaning it would still be open for new business. The other would be a business closed to new entrants and simply managed for income; a so-called "zombie fund".

The group's current chairman, Mike Biggs, said, in the meantime, the firm was "committed to returning surplus cash ...to shareholders," although it has not ruled out further acquisitions, even as it tries to sell off parts of the business it already owns. The group recently took a look at sector peer Phoenix Group but backed off from launching a full bid.

"The current macroeconomic backdrop remains uncertain particularly in Europe and is expected to result in periodic volatility in investment markets. The regulatory environment is experiencing fundamental change as new measures aimed at enhancing financial stability are implemented. However, the board is encouraged by the progress being made at Friends Life towards the achievement of the 2013 financial targets and is confident that those targets will be achieved," Biggs said.

The full year dividend was 19.89p per share, up 10% on the previous year and came after a £250m share buyback. The market had been forecasting a full year dividend of 19.68p.

Shares in Resolution fell 17.5p to 257.4p in the first 45 minutes of trading following the announcement of the results.

BS