Resolution puts its cheque book away

Insurance industry consolidator Resolution pleased the market on Wednesday by putting its cheque book away and pledging to simplify its governance structure so it can focus on delivering shareholder value.

The group surprised the market by saying it would no longer seek acquisitions and calling off plans to float off its Friends Life business.

As recently as March, Resolution had run up the flagpole the idea of splitting itself in to two entities: 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"). Nobody seemed inclined to salute once the idea had been run up the flagpole, so the company has decided instead to overhaul its complex "two-headed beast" structure, with members of the boards of Resolution Operations LLP and Friends Life plc playing musical chairs in the Resolution plc board room.

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Since founder Clive Cowdery revived the Resolution name for his latest investment vehicle when the company floated in December 2008, the company has operated under a structure whereby the limited liability partnership (LLP) Resolution Operations LLP (ROL) has provided mergers and acquisitions, strategic and oversight services and skills to the quoted entity, Resolution plc, which focused on managing the acquired assets. That arrangement is set to end by December 10th, 2013, at the latest.

The plan now is for Mike Briggs to remain Chairman of Resolution plc and for Sir Malcolm Williamson to become the deputy Chairman of the company. Company founder Clive Cowdery will join the board of the public limited company (plc), while Friends Life Chief Executive Officer (CEO) will become CEO of Resolution plc. Tim Tookey will be Chief Financial Officer of Resolution plc.

ROL has confirmed to Resolution plc that it will not make any further requests for funding out of the balance of £15 million of the £20 million funding available under the current operating agreement.

Mike Biggs, Chairman of Resolution Limited, said: "With the acquisition phase ended and to avoid the expectation of a specific exit event and time, the board and ROL believe that now is the right time to agree to end the Operating Agreement between them and move to a more conventional governance and operating structure for the company."

The change of strategic direction overshadowed the first half results, which saw operating profit before tax on an IFRS (international financial reporting standards) basis tumble to £163m from £390m in the first half of last year. The half-year profits this time round included £27m of one-off items, down from £216m on one-offs the year before.

Broker Nomura noted the IFRS operating profit was 7% below the consensus forecast, and down 22% once one-off items are excluded.

On the insurance industry specific MCEV (market consistent embedded value) basis, operating profit before tax rose to £230m from £180m at the half-way point of 2011, reflecting growth in profitable new business, partly offset by reduction in expected existing business contribution. The market had been expecting MCEV operating profit of £223m.

The MCEV of the group slipped 8% to £5,939m from £6,482m at the end of June, but was higher than the £5,869m the market had been expecting.

The value of new business at group level was up 47% year-on-year (y-o-y) to £97m, "despite lower reported figures in the non-UK businesses (Lombard and International), and 18% higher than consensus," Nomura noted.

Group available cash fell 22% to £619m from £793m in the first half of 2011.

The board has proposed an interim dividend of 7.05p, up 5% on last year, which suggests a final dividend of 14.1p if the board sticks to its policy of the interim dividend forming one-third of the full-year pay-out.

That may prove scant consolation to income investors still angered by the company's decision, announced on July 20th, to cancel a previously announced targeted £250m capital return, in order to ensure the company's capital position remains robust.

Resolution said significant progress was made in the first half of 2012 to improve the economic capital position with an estimated economic surplus at Friends Life Group (FLG) of £3.0bn, representing a coverage ratio of 174%, before the interim dividend.

Future returns of excess capital remain subject to market conditions and regulatory approval, and will also consider the more challenging regulatory environment, especially with respect to the European Union Solvency II directive.

"Sustainable DCT [distributable cash target] contribution was down 2% y-o-y to £120m; we think the ultimate target of generating £400m per annum appears no closer to being achieved," Nomura declared.

"The improvements in VNB [value of new business] within the UK Go-To-Market businesses (overall up 175% y-o-y) are evidence of the improvement in financial discipline that the FLG management team has stressed as being central to the project. The deterioration of performance of the international businesses is of concern, and we await announcements on plans for these businesses at the International investor day later in the year," the broker added.

Nomura thinks the stock is overvalued "compared with its uncertain prospects" and sticks with its "reduce" recommendation, but the market begged to differ, and chased the share price up to 239.4p at one point in the morning session from 220p overnight, before the share price ebbed back at midday to 229.3p.

JH