These are the first set of interim results from Resolution that include any actual trading, as the acquisition of Friends Provident only took place last November. Since then, the life insurance group has for £2.75bn, financed through a £2.06bn rights issue and a £400m bridging facility. And there are more deals to come, with a further acquisition expected by the middle of next year, as Resolution looks to take advantage of insurance companies seeking to divest non-core or poorly performing assets.
Essentially, figures for the first half of the year were the figures for Friends Provident, without which the group made an operating loss of £8m before FP's contribution turned this into an operating profit of £203m. Profits on a market consistent embedded value basis (MCEV) for Friends Provident rose 55 per cent to £188m, with the value of new business rising 153 per cent from £32m to £81m. Group cash resources have also improved, up from £510m at the end of 2009 to £605m, thanks principally to strong net cash generation and a reduction in regulatory capital requirements. Resolution's balance sheet remains in good shape, with a surplus of £1bn over the minimum laid down by the Insurance Group Directive.
The Axa acquisition looks a smart deal with the purchase price equivaluent to just 72.7 per cent of pro-forma embedded value and Resolution expects to achieve annualised cost synergies of around £75m. The acquisition is expected to create a leading player in targeted product areas such as protection and corporate pensions, and will also increase the group's exposure to the annuity business.
Analysts are currently reviewing their estimates.
|ORD PRICE:||254p||MARKET VALUE:||£ 3.7bn|
|TOUCH:||253-255p||12-MONTH HIGH:||383p||LOW: 220p|
|DIVIDEND YIELD:||6.3%||PE RATIO:||6|
|NET ASSET VALUE:||430p*||EMBEDDED VALUE:||416p**|
|Half-year to 30 Jun||Gross life premiums (m)||Pretax profit (£m)||Earnings per share (p)||Dividend per share (p)|
* stated on a pro-forma basis and includes intangible assets of £3.02bn, or 208p a share
**Calculated on a market consistent embedded value basis and on a pro-forma basis
Resolution is already showing that its brand of financial discipline can improve operational performance and release cash from a combined life operation. And more should come from the integration of Axa's business, while further acquisitions can be expected. Resolution has already indicated a plan to create a £10bn company, with significant cost synergies arising from the consolidation of back-room operations, although this will probably involve tapping shareholders for more cash. Trading around 40 per cent below embedded value, the shares rate good value.
Last IC View: Good value, 243p 16 June 2010.