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Resolution has open and shut case for exit

John Tiner
John Tiner: ’There is merit in looking at spilitting the business. If you look ath financial charcteristics, you see a back end with a very large cost base and a business that is running off and generating cash, whereas the front end is out in the marketplace, striving to win new business but requires a lot of cost to be dedicated to it in comparison’

Resolution could split its operations between an open front book and a closed back book as it considers an exit strategy for its UK life sector consolidation project.

Chief executive John Tiner says the idea is one of a number of options being put to shareholders as the firm prepares an exit plan for when it concludes its consolidation project. Resolution’s ultim- ate objective is to return the “restructured and sustainable” businesses to their “natural” long-term owners.

Tiner says: “There is merit in looking at splitting the businesses. If you look at the financial characteristics, you see a back end with a very large cost base and a business that is running off and generating cash, whereas the front end is out in the marketplace, striving to win new business but requires a lot of cost to be dedicated to it in comparison.”

He says the idea will be put to shareholders as “research”, although a number of alternative options are under consideration.

Yellowtail Financial Planning managing director Dennis Hall says: “They might be looking to close down parts of their book from a regulatory perspective in terms of where the liabilities lie but they must take into account what will happen to the client at the coalface.”

Informed Choice managing director Martin Bamford says: “I think it is a sensible way of approaching it. Life companies have to recognise that open book and closed book business have different requirements when it comes to supporting and servicing them.

“Exiting the sector seems like it will be a lot easier to achieve than the entry.”

Other potential solutions include a cash sale, together or in parts, of the Friends Provident businesses, a direct listing of Friends Provident as a standalone entity or a merger of Friends Provident with another life company.

In a trading update issued last week, Resolution also revealed a significant strategic swing towards corporate pensions and annuities, as Tiner all but ruled out further large-scale acquisitions. The firm says current financial returns on Friends Life’s corporate pensions business are “unacceptably low”, and has set a target of improving the value of new business to £25m by 2013.

Resolution says: “Friends Life is not prepared to write loss-making new business in anticipation of future reward. It will reshape the sales and marketing teams into more focused distribution and selectively migrate schemes to the more efficient Friends Provident platform to improve returns on new business.”

Tiner concedes that the integration of the Friends, Axa and Bupa businesses would inevitably lead to job losses due to duplication of roles. He says: “There is a huge amount of work to do in delivering cost savings and those include payroll savings.”

Resolution has increased its annual cost synergies target from £75m a year to £112m a year by 2013 but the one-off costs of these synergies has risen from £74m to £117m.

The life consolidation firm has also put the brakes on its aggressive acquisition strategy, although further bolt-on deals, specifically within its annuity business, remain a possibility.

Resolution says it is “confident” it will achieve its targeted mid-teen returns on the UK life project without further acquisitions.

Tiner says: “We closed the Axa deal and announced the Bupa acquisition in September last year, so in the last six months we have been doing a strategic review of the enlarged business.

“That sets a hurdle in terms of future acquisitions because we do not want to dilute our returns with future purch- ases. Of course, if there are transactions that will enable us to add to those returns, then we will look at them.”

One of those areas could be annuities, where Resolution is keen to increase its exposure. Friends Life intends to build its own capability in annuity underwriting, credit management and longevity risk management but Resolution suggests that it may look to “acquire capability” through a bolt-on deal if the opportunity arises.

It says that both Axa and Friends Provident had previously failed to invest in the expertise required to underwrite and manage annuity business profitably.

Resolution says Friends Life will look at ways of marketing its annuity business through the open market option.

Away from retirement markets, the company says Friends Life plans to grow its individual protection business through the introduction of simplified term insurance, propositions for the over-50s and the development of profitable distribution segments and exclusive partnerships.

Exit options for Resolution

  • A cash sale, together or in parts, of Friends Provident Holdings businesses
  • A direct listing of FPH as a standalone entity
  • A separation of the UK open business from the UK back book, leading to a separate sale or listings
  • A merger of FPH with another life company

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