Resolution keen on more acquisitions

Full-year sales data from Resolution showed a fall to £873m from £1.01bn the previous year, although this was comfortably ahead of consensus estimates of around £760m. However, the figures have been overshadowed by mounting takeover rumours. Few household names have escaped from some element of speculation, with analysts suggesting that the most likely takeover candidates include the insurance units of Lloyds Banking, Zurich UK and Axa UK.

Resolution was transformed from being a cash shell via the £1.8bn acquisition of Friends Provident last August, so these sales figures effectively relate to Friends Provident. But this is just the start; chief executive John Tiner stressed that the company will make two more significant acquisitions before 2012. The plan is to combine future acquisitions and create savings from merging back office operations. And the idea has attracted plenty of support, with consolidation within the life assurance sector seen as an important counterweight to difficult trading conditions and the probability of higher capital reserve requirements when Solvency II regulations are introduced in 2012.

And the need to conserve capital has already had an effect on sales, with Friends Provident retreating from less profitable lines and shifting towards less capital intensive insurance products. Group sales were underpinned by a solid performance from Lombard, the wealth management business, where turnover in the fourth quarter rose by 21 per cent from a year earlier to £368m.

Keefe, Bruyette & Woods says...

Market perform. Beating estimates came thanks to an Italian tax amnesty on the Lombard subsidiary, but this will be a one-off item. On the acquisition front, strong sales numbers from potential take-over targets have reduced the probability of a successful acquisition in the UK, a view supported by the appointment of three European-focused non-executive directors. When a deal is announced, the market will probably wait for evidence of synergy releases, and more specifically how much Resolution has to end up paying. For now, expect 2010 EPS on an embedded value basis of 7.91p.

Citi says...

Hold. UK sales were down by 11 per cent from a year earlier, while overall international sales rose by 42 per cent. Resolution may wish to sell the international side of what is effectively Friends Provident as a way of buying time for a suitable acquisition, preferring meanwhile to restructure the Friends business. However, Friends Provident has already tried unsuccessfully to sell off the international side. Such a move could also underpin the share price, which has fallen back on the apparent lack of traction on the restructuring project. This is important, because the low stock valuation and the need to pay cash upfront could prove to be significant hurdles to completing further acquisitions.