Acquisition by Resolution

7th Jun 2006 07:04

Resolution PLC07 June 2006 Part 1 This announcement and the information contained herein is not for release, publication or distribution in whole or in part in or into the United States, Canada, Australia, Japan or South Africa Embargoed until 7:00 a.m. Wednesday, 7 June 2006 Acquisition of Abbey National plc's Life Businesses by Resolution plc Rights Issue of new ordinary shares ("New Shares") to raise approximately£1.54 billion at an issue price of between 440 pence and 520 pence per New Share Resolution today announces that it proposes to acquire the U.K. and offshorelife insurance businesses of Abbey National plc ("Abbey") together with theassociated new business infrastructure and service companies (the "Acquisition"). These businesses had an estimated 31 December 2005 market consistentembedded value ("MCEV")(1) of £3.77 billion, with Resolution accruing any changein embedded value between that date and Completion, and reported new businessprofits before tax of £38 million in 2005. The total consideration for theAcquisition will be £3.6 billion which will initially be financed by afully-underwritten Rights Issue of approximately £1.54 billion and new debtfacilities. Separately, Resolution has also signed long term distributionagreements with Abbey whereby Resolution will provide Abbey with Abbey brandedlife and pensions products for distribution via Abbey branches and ScottishProvident branded products for distribution via Abbey broker consultants tointermediaries. The Acquisition, in summary: • Offers compelling financial benefits for Resolution Shareholders • Introduces attractive new business capability, which accelerates theroll out of Resolution's customer strategy • Enhances Resolution's strategic positioning for future transactions Acquisition of Abbey's Life Businesses for £3.6 billion, comprising: • In-force portfolio: £3.5 billion • Satisfies Resolution's 12 per cent. post-tax, pre-leverage, andincluding synergies IRR hurdle for in-force acquisitions • Benefits from leverage resulting in an expected post-tax, post-leverageIRR to equity of at least 16 per cent. • Increases Resolution's combined life company invested assets as at 31December 2005 by 72 per cent. and reinforces its position as the U.K's leadinglife insurance consolidator, with combined life company invested assets of over£63 billion and an estimated 7 million customers post Acquisition • Attractive new business capability: £100 million • The new business infrastructure of the companies acquired introduces anew business capability for life and pensions products, in particular protectionbusiness which, through the Scottish Provident brand, is a market leader • Provides life and pensions capability for the Enlarged Group'sestimated 7 million customers, targeting life maturities and surrenders, whichwere over £4 billion in 2005 for the Enlarged Group • Resolution's financially disciplined approach based on its 12 per cent.IRR target will apply overall to the writing of new business. In 2005 Abbey'sLife Businesses reported new business profits before tax of £38 million • Delivers a new business cost base that is mostly variable, with theintermediary salesforce remaining the responsibility of Abbey Partnership with Abbey • Separately, Resolution has entered into three long-term distributionagreements with Abbey under which: • Abbey will distribute through its retail network Abbey-branded life andpensions products manufactured by Resolution; • Abbey will continue to be the exclusive distributor of ScottishProvident protection products to intermediaries; and • Abbey has secured exclusive access to provide retail banking products tothe Enlarged Group's estimated 7 million customers Francisco Gomez-Roldan, Abbey's Chief Executive, said: "Through this deal, we now have a partner in Resolution whose core focus ismanaging life businesses allowing us to put all our efforts into building ourbanking business in the UK. The distribution agreements will provide continuityof service and products to our customers and we also have a great opportunity tobring our range of retail banking products directly to Resolution's customers." Financial benefits • The Directors expect the Acquisition to enhance Resolution's pro formaMCEV per Share by 8.2 per cent. as at 31 December 2005(2) (3) • The Directors also expect the Acquisition to be accretive for MCEVearnings per Share(2) from the first full financial year following Completion • The Directors believe that, subject to the anticipated restructuring ofsome of the companies and funds comprising Abbey's Life Businesses, theAcquisition will enhance dividend capacity. Resolution's current dividend policyof 13 per cent. per annum target growth rate to 2009 will be reviewed in lightof the Acquisition at the time of the interim results in September 2006. Thefuture basis of dividends per Share will be adjusted to reflect the Rights Issue • The Enlarged Group is expected to provide pre-tax cost synergies ofapproximately £10 million per annum by the end of 2008 and asset managementoperational synergies of approximately £7 million in 2007. The combined netpresent value of these synergies, post-tax, at a 12 per cent. discount rate, isexpected to be approximately £64 million • Additional financial and capital synergies with a net present value,post tax, at a 12 per cent. discount rate, of approximately £114 million areexpected to be realised over time Future strategic positioning • The Directors believe that the Acquisition will better positionResolution for future transactions, affording it the opportunity to absorb thenew business capabilities of potential sellers of in-force life businesses Customers • The Directors believe that both existing Resolution customers andcustomers of Abbey's Life Businesses will benefit from Resolution's focusedcustomer strategy which will be rolled out following Completion • As part of this transaction Resolution has entered into an agreement tomake Abbey banking products available to its customers Financing The Acquisition will be financed by a combination of equity and debt, whichtakes into account the estimated quantum of Excess Capital within Abbey's LifeBusinesses as described below and their profile of strong early cash flowrelease. Rights Issue and timing • Expected gross proceeds of approximately £1.54 billion • Issue price of between 440 pence and 520 pence per New Share with thefinal Issue Price to be determined by agreement of the Company and theUnderwriters on the day of the EGM • Rights Issue will be on the bases of 28 New Shares per 29 ExistingShares if made at the minimum Issue Price of 440 pence per New Share, and 9 NewShares per 11 Existing Shares if made at the maximum Issue Price of 520 penceper New Share • Based on the above offering ratios, an Issue Price of 440 pence per NewShare represents a 21.4 per cent. discount to the theoretical ex-rights priceand a 34.9 per cent. discount to the closing mid-market price on 6 June 2006(these discounts would reduce to 14.2 per cent. and 23.1 per cent. respectivelyat an Issue Price of 520 pence) • Proposed issue of up to 350.0 million Shares (based on an Issue Priceof 440 pence per New Share) representing approximately 96.6 per cent. ofexisting Resolution issued share capital (this would reduce to 296.6 millionShares and 81.8 per cent. of existing Resolution share capital at an Issue Priceof 520 pence) • The Rights Issue is not conditional on Completion of the Acquisitionbut is subject to certain customary conditions • Fully underwritten by Citigroup and Goldman Sachs • Nil paid trading period expected to commence on 18 July 2006 • Rights issue closes on 8 August 2006 • Dealings in New Shares, fully paid, expected to commence on 9 August2006 Debt arrangements • Fully underwritten Bridge Facility of £1.68 billion expected to berefinanced by o Approximately £1.15 billion of the Excess Capital as described below o Tier 2 hybrid capital issue of approximately £530 million expected late2006 • Fully underwritten New Facilities of £550 million to finance thebalance of the Acquisition and for working capital purposes • Existing Resolution senior debt of approximately £85 million to berepaid Excess Capital • The Directors believe there is approximately £1.5 billion of excesscapital as at 31 December 2005 within Abbey's Life Businesses surplus to thatrequired for regulatory purposes and post application of Resolution's proposedcapital management policies for those companies • Resolution expects to be able to access this excess capital and release£1.25 billion of it ("Excess Capital") by way of an intra-group loan shortlyafter Completion to repay £1.15 billion of the Bridge Facility and to provide£100 million of working capital Management and Board • Key executives of Abbey's Insurance and Asset Management divisions willjoin Resolution's management team • Given the transformational scale of the transaction, Resolution isstrengthening its Board. Ian Maidens, Group Chief Actuary & Head of CorporateDevelopment, and Brendan Meehan, Managing Director, Resolution ManagementServices, will join the Board, subject to shareholder approval • To achieve an appropriate balance of Executive and Non-ExecutiveDirectors, Clive Cowdery's status as Chairman will change from Executive toNon-Executive from the date of the EGM. This will not affect his current andcontinuing role in leading the strategic mergers and acquisitions activity ofResolution or his commitment to the Company. Clive Cowdery intends to take uphis entitlement under the Rights Issue in full Commenting, Clive Cowdery, Chairman of Resolution, said: "This transaction substantially increases the scale of Resolution's business anddelivers on our stated consolidation strategy. We see the prospect of furthervalue enhancing acquisitions in the life sector, leveraging our significantscale advantages, new product capabilities and track record of delivery." Paul Thompson, Group Chief Executive of Resolution, said: "Our experience in acquiring and integrating these businesses puts us in aposition to deliver attractive levered and unlevered returns from thistransaction. The new business capability and long term distribution agreementswith Abbey bring an exciting new partnership and value driver to Resolution. Weplan to continue to enhance our growth businesses." Resolution is being advised by Citigroup, Goldman Sachs and Lazard. This summary should be read in conjunction with the full text of theannouncement, together with its Appendices. Capitalised terms used in thissummary have the meanings given to them in the full announcement. Today there will be a newswire conference call at 7.45 a.m. and an analyst andinvestor presentation with a live webcast at the offices of Goldman SachsInternational (River Court, 120 Fleet Street, London EC4A 2QQ) at 10:00 a.m. Thedial in number for the newswire conference call is +44 (0) 1452 568 061(International) and 0845 140 0165 (U.K.), conference ID 1269816. The slidepresentation will be available from 9.30 a.m. on www.resolutionplc.com. Enquiries: Resolution 020 7489 4880Clive Cowdery Paul Thompson Steve Riley Temple Bar Advisory 07795 425 580Alex Child-Villiers Citigroup 020 7986 4000Chris Jillings Andrew Thompson Goldman Sachs 020 7774 1000John Rafter Paul Miller Lazard 020 7187 2000Jon Hack Richard Chang (1) For the purposes of European Embedded Value ("EEV") reporting, the Group hasadopted a market-consistent methodology. Within a Market Consistent EmbeddedValue ("MCEV") framework, assets and liabilities are valued in line with marketprices and consistently with each other. In principle, each cash flow is valuedusing the discount rate consistent with that applied to such a cash flow in thecapital markets. The estimated MCEV differs from the TEV reported by Abbey forits life business of £3,682 million. See section on actuarial information onAbbey's Life Businesses for a reconciliation of TEV to MCEV. (2) Adjusted for the Rights Issue on the basis of the issue of 350.0 million NewShares at 440 pence per New Share (3) Excluding the repurchase of preference shares held by Royal & Sun Allianceand the restructuring of Alba Life Each of Citigroup, Goldman Sachs and Lazard is acting for Resolution and no oneelse in connection with the Acquisition and the Rights Issue and will not beresponsible to any person other than Resolution for providing the protectionsafforded to each of their respective clients or for providing advice in relationto the Acquisition or the Rights Issue or any other matters referred to in thisdocument. This announcement does not constitute an offer to sell or the solicitation of anoffer to acquire Nil Paid Rights, Fully Paid Rights or New Shares. The Nil Paid Rights, the Fully Paid Rights, the New Shares and the ProvisionalAllotment Letters have not been and will not be registered under the SecuritiesAct or under any relevant securities laws of any state or other jurisdiction ofthe United States and may not be offered, sold, taken up, exercised, resold,renounced, transferred or delivered, directly or indirectly, within the UnitedStates or by United States persons absent registration or an applicableexemption from the registration requirements of the Securities Act and incompliance with state laws. This announcement does not constitute an offer of Nil Paid Rights, Fully PaidRights, New Shares or Provisional Allotment Letters to any Shareholder with aregistered address in, or who is resident in, the United States or the ExcludedTerritories. None of the Nil Paid Rights, the Fully Paid Rights, the New Sharesor the Provisional Allotment Letters have been or will be registered under therelevant laws of any state, province or territory of the Excluded Territories.This document does not constitute an offer to sell or a solicitation of an offerto buy New Shares or to take up entitlements to Nil Paid Rights in anyjurisdiction in which such offer or solicitation is unlawful. THIS DOCUMENT IS NOT A PROSPECTUS. IT DOES NOT CONSTITUTE OR FORM PART OF ANYOFFER OF SECURITIES, OR CONSTITUTE A SOLICITATION OF ANY OFFER OF SECURITIES.YOU SHOULD NOT PURCHASE OR SUBSCRIBE FOR SECURITIES REFERRED TO IN THIS DOCUMENTEXCEPT ON THE BASIS OF INFORMATION IN THE PROSPECTUS TO BE ISSUED IN DUE COURSE,AND ANY SUPPLEMENT OR AMENDMENT THERETO. The contents of this document must not be construed as legal, business, tax orinvestment advice. Each prospective investor should consult his, her or its ownlegal adviser, financial adviser, tax adviser or independent financial adviserfor legal, financial, tax or investment advice. The price and value of securities can go up as well as down. If you are in anydoubt as to the action you should take, you are recommended to seek your ownpersonal financial advice immediately from your stockbroker, bank manager,solicitor, accountant, fund manager or other independent financial adviserauthorised under the Financial Services and Markets Act 2000 if you are in theUnited Kingdom, or, if you are not, from another appropriately authorisedindependent financial adviser. This announcement may contain certain 'forward-looking statements' with respectto certain of Resolution's plans and its current goals and expectations relatingto its future financial condition, performance, results, strategy andobjectives. Statements containing the words 'believes', 'intends', 'expects','plans', 'seeks' and 'anticipates', and words of similar meaning, areforward-looking. By their nature, all forward-looking statements involve riskand uncertainty because they relate to future events and circumstances which arebeyond Resolution's control including among other things, U.K. domestic andglobal economic and business conditions, market related risks such asfluctuations in interest rates and exchange rates, and the performance offinancial markets generally; the policies and actions of regulatory authorities,the impact of competition, inflation, and deflation; experience in particularwith regard to mortality and morbidity trends, lapse rates and policy renewalrates; the timing, impact and other uncertainties of future acquisitions orcombinations within relevant industries; and the impact of changes in capital,solvency or accounting standards, and tax and other legislation and regulationsin the jurisdictions in which Resolution affiliates operate. This may forexample result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As a resultResolution's actual future financial condition, performance and results maydiffer materially from the plans, goals, and expectations set forth inResolution's forward-looking statements. Resolution undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. This announcement and the information contained herein is not for release, publication or distribution in whole or in part in or into the United States, Canada, Australia, Japan or South Africa Embargoed until 7:00 a.m. Wednesday, 7 June 2006 Acquisition of Abbey National plc's Life Businesses by Resolution plc Rights Issue of new ordinary shares ("New Shares") to raise approximately £1.54 billion at an issue price of between 440 pence and 520 pence per New Share Resolution today announces that it proposes to acquire the U.K. and offshorelife insurance businesses of Abbey National plc ("Abbey") together with theassociated new business infrastructure and service companies (the "Acquisition"). These businesses had an estimated 31 December 2005 market consistentembedded value ("MCEV")(1) of £3.77 billion, with Resolution accruing any changein embedded value between that date and Completion, and reported new businessprofits before tax of £38 million in 2005. The total consideration for theAcquisition will be £3.6 billion which will initially be financed by afully-underwritten Rights Issue of approximately £1.54 billion and new debtfacilities. Separately, Resolution has also signed long term distributionagreements with Abbey whereby Resolution will provide Abbey with Abbey brandedlife and pensions products for distribution via Abbey branches and ScottishProvident branded products for distribution via Abbey broker consultants tointermediaries. Resolution has conditionally agreed to acquire, directly or indirectly, the U.K.and offshore life insurance businesses of Abbey, together with the new businessinfrastructure and associated service companies. These include the fiveauthorised life insurance companies (Abbey National Life, Scottish MutualAssurance, Scottish Provident, Scottish Mutual International and ScottishProvident International Life Assurance) and the share capital of Abbey NationalFinancial and Investment Services and related service companies in Ireland, theIsle of Man and Hong Kong which together comprise the back office servicingoperations and new life business infrastructure (together, "Abbey's LifeBusinesses"). Of the £3.6 billion Resolution is paying for Abbey's Life Businesses, Resolutionis attributing £3.5 billion for net assets and in-force business and £100million for the new business capability acquired with the life businesses,including the brands. Separately, Resolution has signed long term distribution agreements with Abbey.New life business products branded Abbey will be distributed via Abbey branchesto Abbey's retail customers and products branded Scottish Provident via Abbey'sbroker consultants to intermediaries. Abbey will also have exclusive rights todistribute retail banking products to the Enlarged Group's customer base via aRetail Banking Distribution Agreement. Summaries of the Acquisition Agreement, containing usual warranties andindemnities, and the Distribution Agreements together with other transactiondocuments, are contained in Appendix 3 to this announcement. Reasons for and benefits of the Acquisition The Directors believe that the Acquisition is a transformational transactionthat delivers strong benefits for Resolution Shareholders while positioning theCompany well for future transactions. The Directors expect the Acquisition tocreate significant value and enhance the ability of Resolution to continue toexecute its strategy. Delivers strong financial benefits to Shareholders The transaction is expected to deliver strong benefits to ResolutionShareholders with accretion in key financial measures, improved dividendcapacity, and the delivery of synergies leading to a 12 per cent. IRR on thein-force acquisition. The Directors expect the Acquisition to enhance Resolution's pro forma MCEV perShare by 8.2 per cent. as at 31 December 2005(2)(3). The MCEV per share, asadjusted for the Rights Issue, was 487 pence as at 31 December 2005. Pro formafor the Acquisition, assuming the issuance of 350.0 million shares if the IssuePrice for the Rights Issue is 440 pence per share, the MCEV per share of theEnlarged Group would have been 527 pence as at 31 December 2005 based on theestimated MCEV for Abbey's Life Businesses. The Directors also expect the Acquisition to be accretive for MCEV earnings perShare(2) from the first full financial year following Completion of theAcquisition. The acquisition of the in-force portfolio is expected to meet Resolution'sstated post-tax IRR hurdle of 12 per cent. (pre-leverage, excluding deal costsand including synergies). This IRR includes, inter alia, the acquired EmbeddedValue and the delivery of synergies. It can be analysed as follows: IRR in per cent.Acquired book 9.5Asset management and expense synergies 1.1Financial synergies 1.6Total 12.2 The IRR represents the expected rate of return on an assumed £3.5 billionconsideration for the in-force portfolio. The return on the acquired bookrepresents the delivery of TEV cashflows over time. The return benefits from thediscount to embedded value at the time of the Completion of the Acquisition andthe run-off profile of the funds, with approximately 40 per cent. of VIF turninginto cash within four years. This return also includes synergy implementationcosts but excludes transaction costs. The asset management and expense synergiesand financial synergies represent the impact of these expected savings as theyare delivered over time. The Directors estimate that the IRR to Resolution Shareholders after taking intoaccount the debt funding on the Acquisition and the expected paydown of the debtwould be at least 16 per cent. The Directors believe that, subject to the anticipated restructuring of some ofAbbey's Life Businesses' Companies and funds, the Acquisition will enhancedividend capacity. The current dividend policy is to target a growth rate of 13per cent. per annum to 2009 from the 2005 base of 19.81 pence per Share, and 2per cent. growth per annum thereafter, absent any further value creatingactivities. The dividend policy will be reviewed in the light of the Acquisitionat the time of the interim results in September 2006. Future dividends per Sharewill be adjusted for the Rights Issue. Delivers on stated strategy of consolidating the in-force life sector As set out at the time of the Merger in 2005, Resolution's principal business isthe acquisition and management of in-force U.K. life funds. Acquiring Abbey'sLife Businesses is a material step in implementing this strategy and wouldconsolidate Resolution's position as the leading specialist acquiror and managerof life funds in the U.K. This Acquisition would deliver a step change in scale, increasing Resolution'scombined life company invested assets as at 31 December 2005 by 72 per cent. TheEnlarged Group will have an estimated 7 million customers, combined life companyinvested assets of approximately £63 billion (excluding Resolution's third partyfunds of £3 billion) as at 31 December 2005. As at 31 December 2005, Resolutionhad approximately 5 million customers, life company invested assets ofapproximately £36.5 billion and approximately 1,700 employees. The Enlarged Group would have had pro forma reserves, as at the same date, splitapproximately 62 per cent. with-profits, 11 per cent. non-profit and 27 percent. unit-linked. The cash flow profile of Abbey's Life Businesses has strongearly cash flow emergence. From the combined in-force business, Resolution will continue to seek to deliverefficiencies (including cost and financial) that offer benefits to shareholdersand policyholders. Introduces new business product and distribution capability as an additionalvalue driver Abbey's Life Businesses' new business capability introduces an additional valuedriver to Resolution's in-force and asset management strengths and extendsResolution's strategic options. The new business capability can also providelife and pensions products to the Enlarged Group's estimated 7 millioncustomers, targeting life maturities and surrenders which were over £4 billionin 2005. Resolution will enter into a long term Retail Distribution Agreement to provideAbbey-branded products to Abbey's customers through Abbey's bank branches, ofwhich there are more than 700. This product offering will be focusedpredominantly on the protection product and guaranteed life bonds. Abbey wrote£45 million of new life business on an APE(5) basis in 2005 through the retailchannel. The Directors expect that this distribution relationship will benefitfrom the reinvigorated Abbey business under the ownership of Banco SantanderCentral Hispano, S.A. ("Santander"). Resolution will also enter into an Intermediary Distribution Agreement toprovide products distributed through Abbey's intermediary salesforces. In 2005Abbey wrote £119 million new life business APE(5) in the intermediary channel.Resolution will focus on product innovation, service and efficiency. Theproducts will be marketed under the leading Scottish Provident brand whichachieved an 18 per cent. market share for protection sales in the U.K.intermediary market based on APE sales in 2005. Abbey will remain responsible for the intermediary salesforce distributing theScottish Provident protection products to intermediaries and will be responsiblefor compliance in respect of retail advice relating to products sold through itsbranches. In 2005 Abbey wrote £164 million of new life business APE(5) (excludingincremental sales within SPL and SML), of which £80 million was protection, andreported new business profits before tax of £38 million, principally derivingfrom protection. The Distribution Agreements described above are for a term of not less than tenyears, subject to earlier termination in certain circumstances described inAppendix 3. Abbey and Resolution will also enter into a Retail Banking DistributionAgreement to enable Abbey to provide relevant retail banking products to theEnlarged Group's estimated 7 million customers. This will provide an additionalrevenue generation opportunity for both Resolution and Abbey and will be for aterm of not less than five years, subject to termination in certain customarycircumstances. Resolution will adopt a financially disciplined approach to writing newbusiness. The Company will target a 12 per cent. IRR on any invested capital.Based upon the new business mix and volumes written, and taking into account thenew commission terms under the Distribution Agreements, the Directors believethat the new business strain would have been approximately £180 million during2005. This is expected to be more than covered by the capital emerging from thein-force business. The IRR of the protection business written by Abbey in 2005,as restated to the new commission terms under the Distribution Agreements, wasestimated to be approximately 12 per cent.. Resolution will focus on delivering new business products that are capable ofsuccessfully competing in the protection marketplace and capable of growingsales volumes via the important Abbey bancassurance channel. In doing so, itwill concentrate on product innovation and delivery of strong service andadministration, leveraging the core skills of the Company. AdditionallyResolution will invest £4 million to enhance the e-service offering to deliverthe excellent service that is demanded by intermediaries in the protectionproduct sector. The new business activities of the acquired business will bebrought together with Resolution's existing customer management activities intoa new division based in Glasgow and headed on an interim basis by Gavin Stewart. Delivers operational and financial synergies from integration and restructuringopportunities The Acquisition is expected to deliver post-tax cost and asset managementoperational synergies with a net present value of £64 million and financialsynergies with a net present value of £114 million before the cost of achievingthose synergies. The cost synergies represent a per annum saving of approximately £10 million bythe end of 2008, on a run-rate basis, although these savings are expected todecline over time, with a net present value, post-tax, at a 12 per cent.discount rate, of approximately £50 million. The operational cost synergiesarising from the acquisition of Abbey's Life Businesses are relatively low inthe context of the size of the Abbey cost base, on account of the reduction inthe annual embedded value expense allowances which fall by £17 million over thisperiod with an absolute reduction in costs of approximately 30 per cent.. Thesesynergies are predominantly delivered by IT rationalisation, scale benefits andintegration of governance functions. The companies comprising Abbey's Life Businesses primarily sub-contract assetmanagement to State Street and other managers on mostly indexed terms, limitingthe opportunities to enhance asset management profits. Total asset managementsynergies are expected to be approximately £7 million per annum in 2007(although these are expected to decline over time) including synergies arisingfrom the anticipated internalisation of approximately £2.5 billion ofnon-passively managed assets and back office economies of scale. The decline ofasset management synergies implies a net present value at a 12 per cent.discount rate of £14 million. The financial synergies are expected to be delivered by the restructuringopportunities that arise from the acquisition of the new insurance companiescomprising Abbey's Life Businesses, with net present value of future savings of£114 million. Resolution will focus on enabling optimal use of capital acrossall insurance companies. The existing Resolution fund merger process will becontinued, and further fund mergers will be contemplated. In addition theEnlarged Group is expected to benefit from scale effects of the in-force lifefunds of Resolution and Abbey's Life Businesses under common ownership, whilstthe cash flow profile of Abbey's Life Businesses will accelerate cashflowemergence in the Enlarged Group. Costs to achieve total operational synergies are expected to be approximately£24 million. The life company management and governance aspects of Abbey's Life Businesseswill form a separate unit of the Life Division within the Enlarged Group, basedin Glasgow. Following Completion, the Enlarged Group will retain existingoperations in Glasgow. The customer services and IT operations in Glasgow willbe brought under the management of Resolution's existing management servicesgroup. The current Resolution operation in Liverpool will close (with the exception ofa team managing Resolution's relationship with outsource partners) and itsgovernance and other responsibilities will transfer to Wythall. Asset management Resolution's total funds under management as of 31 December 2005 and reflectingthe internalisation of the Phoenix Life Group assets, were £38 billion,including approximately £3 billion of third party funds. Total life company invested assets of Abbey's Life Businesses are approximately£26 billion as of 31 December 2005. Resolution Asset Management is expected to internalise approximately £2.5billion of actively-managed assets, but is expected to retain the currentapproach of outsourcing the passive management of the bulk of Abbey's LifeBusinesses' assets to State Street, although this may change over time.Resolution Asset Management will take over the functions of Abbey AssetManagers, which is not included in the Acquisition, including asset allocationand supervision of the sub-contracting managers. The management of substantiallyall of Abbey's Life Businesses' life fund assets is subcontracted to other fundmanagers. In addition Resolution Asset Management will retain the current arrangement withAbbey National Treasury Services plc to provide cash management services for themajority of cash holdings of Abbey's Life Businesses (see the description of thecash management agreement in Appendix 3). Resolution Asset Management willcontinue to manage the cash for other life company and third party clients. Resolution Asset Management is performing strongly with gross retail sales of£320 million in the first five months of 2006, which exceed retail sales for thefull calendar year for 2005 by 29 per cent.. The Directors intend to continue tofocus on providing quality investment performance for all clients and securingand maintaining flows from third party investors who are expected to generatearound 40 per cent. of Resolution Asset Management's revenues in 2006, as wellas seeking to ensure life fund assets are optimally invested. Positions Resolution well for future transactions The Directors expect the U.K. life sector to continue to consolidate, given thebenefits to policyholders and shareholders from economies of scale inadministration and from financial and capital efficiencies. As a result of the Acquisition, the Directors expect the Enlarged Group toparticipate more effectively in such consolidation as a result of its expandedrange of capabilities. The Directors believe that Resolution retains acompetitive advantage for future acquisitions through being able to offerholistic solutions to a potential vendor. The capabilities that Resolution canoffer include asset management which can drive synergies, the proven trackrecord of the Resolution management team in acquiring, integrating and operatingin-force books of life policies in the U.K., but now also the ability to addressthe new business element that may be attached to future consolidationopportunities. Benefits for customers Resolution is committed to managing its in-force business in a way that treatscustomers fairly and provides a proactive service environment through to policymaturity. Resolution has put in place various communication and informationinitiatives that are designed to help policyholders make informed decisionsabout their policies, including: • in December 2004, Resolution gave Phoenix Group with-profits bondholderstransparency and flexibility in exercising 10 year guarantees; • in February 2005, Resolution assisted Phoenix Life Group policyholderswith contracting back into the State Second Pension; • reduced longevity risks for with-profit customers from the sale of £3.6billion annuity books (May and June 2005); • over 130,000 policyholders received significantly higher payouts ontheir with-profit policies following the restructuring of the life funds in2005; • fixed cost per policy administration costs for with-profit customers(from January 2006) reducing the expense risks in a run-off closed fund; and • expected increased with-profit bonuses for Britannic Assurance'sIndustrial Branch policyholders of between 5-20 per cent. at the next bonusreview following the Alba Life fund restructuring. The Directors expect further, similar initiatives will be facilitated by theAcquisition. Benefits for employees The employees of the Enlarged Group are expected to benefit from the combinationby being part of an expanding and growing life insurance consolidator. Objectives and strategy of the Enlarged Group The objectives and strategy of the Enlarged Group will be to focus on thefollowing five key areas: Delivery of value from Life Division and Service Company Resolution will focus on the delivery of the integration benefits both of thisAcquisition and from the Merger. It will continue to seek ways to optimisecapital and improve efficiencies in all areas of business, to create value forboth shareholders and policyholders. Future acquisitions Whilst Resolution will be engaged in the integration of Abbey's Life Businesses,it will nonetheless continue to seek acquisitions of insurance businesses thatmeet its appraisal criteria. By drawing upon its core capabilities instructuring and administering in-force life insurance blocks, complemented byits developing strengths in asset management and new business, the Directorsbelieve that the Enlarged Group will be better placed to take advantage of widerconsolidation in the life sector. Should attractive acquisitions not be found, it is the Directors' intention toreturn surplus capital to investors in due course, consistent with prudentfinancial management and maintaining a strong credit rating. Further development of growth businesses Building on the success of the strong progress in asset management, especiallyretail sales, Resolution will apply this expertise to the sale of new lifebusiness via the Abbey branches and intermediary channel. Whilst retaining itskey financially disciplined approach to use of capital, Resolution will seek toimprove its competitive position and service proposition in the core protectionproducts to drive volume. Delivery of customer strategy The Enlarged Group will seek to extract further value from the customer revenuepotential of the enlarged customer base so far as it has access to thesecustomers. It will aim to offer a broad range of financial services productsincluding banking, general insurance, financial planning and protection throughits partners. Treat customers fairly The Enlarged Group will continue to be committed to treating its customersfairly and will continue to take the positive steps that Resolution has beentaking to improve the provision of information to its policyholders, both inresponse to specific enquiries and more generally in web-based and othercommunications. Pro forma information on the Enlarged Group Embedded Value of the Enlarged Group In assessing the transaction, the Directors place particular emphasis on itsimpact on the MCEV of the Enlarged Group. The Enlarged Group's pro formacombined MCEV as at 31 December 2005 is as follows and shows a pro forma MCEVper Share accretion of 8.2 per cent. (after adjusting for the Rights Issue): Pro forma information on the Embedded Value of the Enlarged Group Resolution plc Abbey's Life Adjustments Total at 31 December Businesses at 31 2005 December 2005 £m £m £m £m Net worth before debt, preference shares and 1,812 2,506 4,318hybrid capitalValue of in-force 1,019 1,483 2,502Gross MCEV 2,831 3,989 6,820Debt, preference shares and hybrid capital (700) (219) (2,145) (3,064)MCEV 2,131 3,770 (2,145) 3,756Adjustment for proceeds raised through issue of 2 2Shares since 31 December 2005MCEV adjusted for Shares issued since 31 2,133 3,758December 2005 Number of issued Shares (m) (6) 362.5 712.5(8)EV per Share 588pEV per Share, adjusted for the Rights Issue 487p 527passuming 440 pence Issue PriceEV per Share accretion in per cent. as at 31 8.2December 2005 Please see Appendix 5 for the notes that attach to the table above The expected accretion in EV per Share as at 31 December 2005 is calculatedassuming the Issue Price of 440 pence. Should the Issue Price be determined tobe 520 pence this accretion would marginally improve. The EV per Share accretiondoes not take into account movements during the year or events occurring post 31December 2005, and does not include adjustment for harmonisation of assumptionswithin Abbey's Life Businesses to assumptions consistent with those adopted byResolution, which the Directors believe, net of release of provisions, isunlikely to be material. Capital position of the Enlarged Group Following the European Union's Insurance Groups Directive, implemented in theU.K. via the Integrated Prudential Sourcebook, U.K. insurance companies arerequired to perform a Group Capital Adequacy Calculation ("GCAC") at parentcompany level. As at 31 December 2005, Resolution Group had a surplus of £651million over requirements at parent company level. This figure does not reflectthe Life Division restructuring which resulted in ownership of Alba Lifetransferring from Britannic Assurance to Resolution Life Limited and therepurchase of the RLG Preference Shares issued to RSA, which occurred subsequentto this date. Following the Completion of the Acquisition and Rights Issue it is anticipatedthat the Enlarged Group will continue to exceed its GCAC requirements evenbefore the planned issuance of Tier 2 hybrid capital. Resolution has been assigned the long-term counterparty credit rating of 'BBB+'with stable outlook by S&P, and a long-term issuer default rating of 'A-' withstable outlook by Fitch. Since the Merger, neither Resolution nor itssubsidiaries have solicited insurer financial strength ratings from S&P orFitch. Resolution does not have an interactive ratings relationship withMoody's. S&P is expected to affirm the long-term counterparty credit rating of Resolutionat 'BBB+'. However, the outlook on the rating is expected to change from stableto negative. The credit rating of Resolution's 6.5864 per cent. Perpetual ResetCapital Securities is expected to be maintained at 'BBB-'. Fitch is expected to affirm the issuer default rating of Resolution at 'A-' withstable outlook and the credit rating of Resolution's 6.5864 per cent. PerpetualReset Capital Securities 'BBB' with stable outlook. The capital quality of the Enlarged Group will be maintained by an appropriateuse of gearing matched to the cash flows emerging from the Enlarged Group'sbusiness. The Directors believe that the financial metrics resulting from theAcquisition will be consistent with the delivery of medium term targets andthat, at Completion, Resolution will achieve the following: • a prudent GCAC surplus; • debt (including senior debt and hybrid capital but after the repaymentof £1.15 billion of the Bridge Facility out of Excess Capital) to gross MCEV nohigher than 35 per cent. trending towards 25 per cent. in the medium term; • liquid resources at holding company level exceeding two years' interestpayments after the repayment of £1.15 billion of the Bridge Facility out ofExcess Capital; and • fixed charge coverage (cash flows including capital distributions fromsubsidiaries divided by interest payments) exceeding five times. Current trading Since 31 December 2005, Resolution has continued to operate profitably.Resolution's asset management business has experienced strong third partyinflows in the year to date and has internalised the significant majority of theassets of the Phoenix Life Group companies from F&C Asset Management. The integration of the Britannic Group and Resolution Life Group businesses hascontinued to remain in line with management expectations. Resolution remains ontrack to deliver the estimated cost synergies of £20 million per annum by theend of 2007 with an estimated one-third of those savings being achieved in 2006. Since 31 December 2005 Abbey's Life Businesses' sales performance hassignificantly improved on the same period last year. Protection new businesssales are broadly flat across the same period with branch based retailprotection sales marginally higher for the first five months of 2006, offset bya slight reduction in intermediary protection sales across the same period.Total new business sales through the retail channel for the first five months of2006 are significantly up on those for the same period in 2005. New businesssales through the intermediary channel are marginally lower across thecorresponding period. Overall, new business margins have reduced from the prioryear due to changes in underlying product mix. In addition, whilst lapseexperience has continued above expectations this has been offset by reducedcosts following the successful implementation of Group wide cost reductionstrategies. Financing structure Resolution expects to raise approximately £3.8 billion as set out in thefollowing table. Uses £m Sources £mAcquisition price 3,600 Rights Issue 1,540Existing Resolution senior debt 85 Bridge Facility 1,680(to be refinanced)Deal costs 85 New Facilities 550 3,770 3,770 The Acquisition price, the estimated deal costs and the refinancing of theexisting Resolution senior debt, are to be financed by the estimated grossproceeds of the Rights Issue of £1.54 billion and debt, initially comprising ashort-term bridging facility of up to £1.75 billion (the "Bridge Facility") andnew debt facilities of £550 million (the "New Facilities"). Bridge Facility The Bridge Facility is expected to be repaid as follows: (i) £1.25 billion of loans from Abbey's Life Businesses is expected to beavailable shortly after Completion, of which up to £100 million will be retainedfor working capital purposes. As a result of due diligence, the Directorsbelieve that there is approximately £1.5 billion of excess capital as at 31December 2005 within Abbey's Life Businesses surplus to that required forregulatory purposes and post application of Resolution's proposed capitalmanagement policies for Abbey's Life Businesses. For structural reasons, theExcess Capital cannot currently be paid by Abbey's Life Businesses as a dividendto Abbey. However, Resolution intends that, subject to discussions with the FSAand the fulfillment of certain legal requirements, Abbey's Life Businesses will,once they are part of the Enlarged Group, be able to lend an amount equal to£1.25 billion, representing the "Excess Capital", to Resolution for it to repay,in part, the Bridge Facility and for working capital purposes; and (ii) the Directors intend that the balance of the principal amount of theBridge Facility will be refinanced by the issue of Tier 2 hybrid capitalfollowing Completion. The terms and conditions and the amounts of any hybridcapital will depend, in part, on market conditions at the time of issuance. Rights Issue Resolution proposes to raise a gross amount of approximately £1.54 billionthrough the Rights Issue. The New Shares will be offered to QualifyingShareholders, other than, subject to certain exceptions, those with registeredaddresses in the United States or in the Excluded Territories, held on theRecord Date, at an issue price (the "Issue Price") of between 440 pence and 520pence per New Share, payable in full on acceptance of the offer. The Issue Pricewill be finally determined on the day of the EGM by agreement of the Company andthe Underwriters in accordance with the terms of the Underwriting Agreement. Atthe minimum underwritten price of 440 pence per New Share, the Rights Issuewould be on the basis of 28 New Shares for every 29 Existing Shares held byQualifying Shareholders on the Record Date, and on the basis of 9 New Shares forevery 11 Existing Shares if made at the maximum underwritten price of 520 penceper New Share. If a Qualifying Shareholder does not take up the offer of NewShares in whole or in part, such Qualifying Shareholder's holding will bediluted by approximately 49 per cent. (assuming an Issue Price of 440 pence perNew Share) and by approximately 45 per cent. (assuming an Issue Price of 520pence per New Share). Fractions will not be allotted to Qualifying Shareholdersbut will be aggregated and sold for the benefit of Resolution. The final Issue Price, and therefore the number of New Shares, will bedetermined on the day of the EGM. An Issue Price of 440 pence per New Share at an offering ratio of 28 New Sharesper 29 Existing Shares would represent a discount of approximately 21.4 percent. to the theoretical ex-rights price and a 34.9 per cent. discount to theclosing middle market price as derived from the London Stock Exchange's DailyOfficial List of 676.0 pence per Share on 6 June 2006, being the latestpracticable date prior to announcement of the Rights Issue. These discountswould be 14.2 per cent. and 23.1 per cent. at an Issue Price of 520 pence perNew Share at an offering ratio of 9 New Shares per 11 Existing Shares. The Rights Issue is conditional upon, inter alia: (i) Resolutions 1 and 3 being passed at the Extraordinary General Meeting; (ii) the Underwriting and Sponsorship Agreement having become unconditionalin all respects (save for the condition relating to Admission) and not havingbeen terminated in accordance with its terms; and (iii) Admission having occurred by no later than 8.00 a.m. on 1 August 2006(or such time and/or date as the Underwriters and Resolution may agree), but isnot conditional upon Completion of the Acquisition. The New Shares will, when issued and fully paid, rank pari passu in all respectswith the Existing Shares, including the right to receive all dividends(including Company's 2006 interim dividend anticipated to be declared inSeptember 2008) or distributions made, paid or declared after the date of issueof the New Shares. Applications will be made for the maximum number of New Shares that may beissued to be admitted to the Official List and to trading on the London StockExchange's main market for listed securities. Admission is expected to occur anddealings to commence in the New Shares, nil paid, at 8.00 a.m. on 18 July 2006.The latest time and date for acceptance and payment in full under the RightsIssue is expected to be 11.00 a.m. on 8 August 2006. Definitive share certificates for the New Shares to be held in certificated formare expected to be despatched by post by no later than 17 August 2006 to personsentitled at their registered address (unless lodging agent details aresupplied). New Shares will be issued in uncertificated form to those personsregistered as holding Fully Paid Rights in CREST as at the close of business on8 August 2006 and will be credited to the appropriate stock accounts of thosepersons at 8.00 a.m. on 9 August 2006. In the unlikely event that the Rights Issue proceeds but Completion does nottake place, the Directors' current intention is that the proceeds of the RightsIssue will be invested on a short-term basis while the Directors evaluate otheracquisition opportunities and, if no acquisitions can be found on acceptableterms, the Directors will consider how best to return surplus capital toShareholders. Such a return could carry fiscal costs for certain ResolutionShareholders. If, before despatch of the PALs, the Acquisition Agreement hasterminated or a material breach has occurred in relation to the Acquisition, theUnderwriters' obligations under the Underwriting and Sponsorship Agreement maybe terminated and therefore it is highly unlikely that the Rights Issue wouldproceed. Each of the Directors intends either to take up in full his rights to subscribefor New Shares under the Rights Issue or to sell sufficient of his Nil PaidRights during the nil paid dealing period to meet the costs of taking up thebalance of his entitlement to New Shares. Information on Abbey's Life Businesses Overview and history Abbey's Life Businesses comprise the life insurance businesses of Abbey, theU.K. retail bank, which have been acquired or established by Abbey since 1992.Abbey's Life Businesses operate in the life assurance and pensions markets, andcertain companies continue to write life and pensions business in the UnitedKingdom and in various offshore jurisdictions. There are five principalcompanies which comprise Abbey's Life Businesses that are the subject of theAcquisition: (i) Scottish Mutual Assurance (or "SMA") was established in 1992 toacquire the former Scottish Mutual life insurance business from its mutualmembers. It has become the principal vehicle for writing intermediary businessin the Abbey Group. It is the largest life company in the Abbey Group with totaladmissible long-term business assets of approximately £12.4 billion as at 31December 2005. The company has a closed with-profit sub-fund, which has bothconventional and unitised with-profit policies. The with-profit sub-fundre-insures the investment element of all of the unitised with-profit policies ofAbbey National Life and some of the unitised with-profit policies of ScottishMutual International. The non-profit sub-fund is currently open to new businesswhich comprises unit-linked investment products and non-linked protectionbusiness and annuities. (ii) Abbey National Life (or "ANL") was established in 1993 to sell lifeand pensions products to Abbey's customers via Abbey's branches. ANL hadadmissible long-term business assets of £2.2 billion as at 31 December 2005.ANL's long-term business fund is a non-profit fund. The company sellsunit-linked investment products, non-linked protection products, annuities andpensions. ANL historically sold unitised with-profit bonds but ceased to do soat the end of 2002. The investment element of ANL's unitised with-profitpolicies is re-insured into SMA's with-profit sub-fund. (iii) Scottish Mutual International (or "SMI") is a Dublin based offshorelife company set up in 1996, which is closed to new business. SMI has anon-profit fund and a with-profit fund (called the "Dublin fund"). Like ANL, SMIre-insures the investment element of its unitised with-profit policies intoSMA's with-profit sub-fund, although in SMI's case some unitised with-profitliabilities are retained within the Dublin fund. SMI had total assets ofapproximately £2.3 billion as at 31 December 2005. (iv) Scottish Provident Limited (or "SPL") was established by Abbey in 2001to acquire the former Scottish Provident life insurance business. SPL was closedto new business in 2001. The company and its predecessor Scottish Providenttraditionally targeted the intermediary distribution channel. Its brand iscurrently used to sell new protection policies via intermediaries but thepolicies are written in the SMA non-profit sub-fund. SPL also has a branch inIreland that is closed to new business. SPL has two with-profit sub-funds whichhave both conventional and unitised with-profit policies. The company also hastwo non-profit funds which, like the SMA non-profit sub-fund, have unit-linkedinvestment products, non-linked protection business and annuities. SPL hadadmissible long-term business assets of approximately £7.2 billion as at 31December 2005. (v) Scottish Provident International Life Assurance (or "SPILA") is anIsle of Man based life insurance company, which was established in 1991 andacquired by Abbey in 2001 at the time of the Scottish Provident acquisition. Itmarkets offshore products to U.K. customers and also markets products in theIsle of Man and the Channel Islands and has a Hong Kong office and insurancelicense. SPILA provides a selection of bespoke investment (single premiumoffshore investment bonds, single and regular premium unit-linked whole of lifeinsurance policies), trust and tax planning products. The Hong Kong office isclosed to new business. SPILA had total assets of approximately £1.3 billion asat 31 December 2005. In 2004, Abbey was acquired by Santander, the Spanish retail and commercialbank. It is envisaged that some 2,000 Abbey employees will transfer to Resolution aspart of the transaction. Distribution Abbey's Life Businesses have two principal forms of distribution which focus onobtaining new business: Retail distribution Abbey's Life Businesses have exclusive access for the sale of life and pensionsproducts to Abbey's U.K. branches, of which there are over 700. Mortgage andrelated protection products are sold direct to customers through mortgageadvisers based in the branches and other life and pensions products throughbranch-based financial advisers. Intermediary distribution Abbey's Life Businesses' products are also distributed via "Abbey forIntermediaries", which comprises broker consultants focused on the mortgagemarket, offering mortgage and protection products to intermediaries, and aspecialist wealth management broker consultant sales force offering a range ofinvestment and pension products to intermediaries. Products The main products which Resolution will continue to distribute through Abbey viathe Distribution Agreements include: Protection Protection includes life insurance and critical illness products. These productsare sold via intermediaries under the Scottish Provident brand, which hasapproximately 18 per cent. of the U.K. intermediary protection market segmentbased on APE sales in 2005. The Scottish Provident brand is well known amongstthe intermediary community and enjoys a high level of market recognition. Inaddition to Scottish Provident protection products sold through intermediaries,Abbey's Life Businesses manufacture protection products sold through the Abbeyretail channels under the Abbey brand. Offshore bond The offshore bond product is a niche long-term savings investment and ismanufactured by SPILA. It is distributed to intermediaries by Abbey's wealthmanagement sales force which also sells self invested personal pensions and wrapproducts. Structured investment products A range of structured investment products is manufactured by Abbey National Lifeand distributed to Abbey retail customers. The products include the GuaranteedIncome Bond which is a life bond which gives customers the certainty of aregular fixed income plus a guaranteed return of the initial investment atmaturity, and the Guaranteed Growth Bond which gives customers a return againstan equity index plus a guaranteed return of the initial investment at maturity. Other products which will be included in the Distribution Agreements includeregular and single premium stakeholder pension products. Life assurance new business premiums The table below shows reported new business volumes, by distribution channel andproduct type, for life and pensions products sold by Abbey's Life Businesses in2005. The figures include incremental sales by SMI and SPL, which are closed tonew business (this explains the difference from the APE(5) of £164 milliondetailed elsewhere in this announcement), but exclude sales of ISA and unittrust products (which formed part of Abbey's insurance and asset managementdivision but will not form part of the ongoing distribution arrangements). Abbey's life assurance new business premiums as at 31 December 2005 31 December 2005£m Retail Intermediary TotalSinglePension 24 204 228Life and other bonds 151 293 444 175 497 672AnnualPension 10 12 22Life and other bonds - 1 1Term assurance and other protection 18 64 82Total annual premiums 28 77 105 Total new business premiums 203 574 777 APE 45 127 172 Capital position of Abbey's Life Businesses The capital requirements of all of those of Abbey's Life Businesses which areU.K. based are assessed under the FSA's Prudential Sourcebook regime. Capitalrequirements are assessed on a statutory basis (Pillar 1), and by an IndividualCapital Assessment methodology taking into account an assessment of all risks bythe company (Pillar 2). Capital requirements for life companies assessed underthis methodology are based on the higher of each Pillar. In the case of Abbey'sLife Businesses, the Pillar 1 tests are higher for each U.K. life company. Abbey's Life Businesses' summary Pillar 1 capital position as at 31 December2005 £m SMA SPL ANL TotalSurplus assetsWith-profits subfund 441 1,140 0Non-profit subfund 281 156 129 Shareholders' fund 870 482 207Total surplus assets 1,592 1,778 336 3,706 Capital Resource Requirement ("CRR") (605) (1,199) (86) (1,890) 987 579 250 1,816Application of Resolution's proposed (217) (87) (30) (334)capital policyExcess assets after CRR and 770 492 220 1,482Resolution capital policy The proposed capital management policies which Resolution expects to apply inrelation to Abbey's Life Businesses are as follows: For closed with-profits funds, sufficient capital will be held to cover thegreater of: (i) 100 per cent. of Pillar 1 CRR plus 50 per cent. of (LTICR + RCR); (ii) 140 per cent. of ICA; and (iii) 110 per cent. of (ICA + ICG) For closed non-profit funds, sufficient capital will be held to cover thegreater of: (i) 125 per cent. Pillar 1 CRR; (ii) 140 per cent. of ICA; and (iii) 110 per cent. of (ICA + ICG) For open non-profit funds, sufficient capital will be held to cover the greaterof: (i) 135 per cent. of Pillar 1 CRR; (ii) 150 per cent. of ICA; and (iii) 110 per cent. of (ICA + ICG) Based on the above assessment of the Pillar 1 capital requirements as adjustedfor the application of Resolution's proposed capital management policies, as at31 December 2005, there was in aggregate £1.5 billion capital in excess of theminimum capital requirements across all the three U.K. life companies. Inaddition, as at 31 December 2005, SMI had £95 million of assets in excess of therelevant regulatory capital requirements. The excess capital in SPILA is notmaterial. Allowing for Resolution's proposed capital management policy, actionstaken in the context of the Acquisition, and for agreements made with the FSA,it is the opinion of the Directors that there remains a significant amount ofexcess capital within Abbey's Life Businesses. Prior to the proposed Acquisition, Abbey's Life Businesses had initiateddiscussions with the FSA over possible reorganisation options to release some ofthis excess capital to the parent. Subordinated debt The £200 million of undated 7.25 per cent. subordinated debt redeemable by theissuer in 2021, issued by SMA in 2001, and the £125 million of undated 8.75 percent. subordinated debt redeemable by the issuer in 2007, issued in 1997 by anSPL predecessor company (via a special purpose vehicle), did not qualify as Tier2 capital resources debt as at 31 December 2005 following changes in therelevant FSA rules and are therefore not reflected in the table above. The £125million SPL bonds are obligations of the with-profit fund. Abbey's Life Businesses' credit ratings Companies in Abbey's Life Businesses have been assigned insurer financialstrength and credit ratings from S&P, Fitch and Moody's. ANL has been assigned the long term counterparty credit and insurer financialstrength ratings of 'A' by S&P. ANL's S&P ratings were downgraded from 'A+' on 4May 2006 following confirmation of talks between Abbey and Resolution over thefuture of the life businesses due to S&P's view that it was no longer a coresubsidiary of Abbey. At the same time, the ratings on ANL, together with allratings on related entities SMA and SPL, were placed on CreditWatch withnegative implications. Both SMA and SPL have been assigned the long termcounterparty credit and insurer financial strength ratings of 'BBB+' by S&P. S&P is expected to downgrade the long-term counterparty credit rating and theinsurer financial strength ratings of ANL from 'A' to 'BBB+'. The ratings onANL, together with the ratings on the related entities SMA and SPL, are expectedto remain on CreditWatch with negative implications. ANL has been assigned the insurer financial strength rating of 'A' with stableoutlook by Fitch. SMA and SPL have been assigned the long term issuer defaultrating of 'A-' with stable outlook and the insurer financial strength rating of'A' with stable outlook by Fitch. Fitch is expected to affirm these ratings attheir current levels. ANL does not have ratings assigned by Moody's. SMA and SPL have been assignedthe insurer financial strength rating of 'A3' with negative outlook by Moody's.Resolution does not have an interactive ratings relationship with Moody's and itis possible that Moody's may review or change their ratings on SMA and SPLfollowing announcement of the transaction. Actuarial information on Abbey's Life Businesses The Embedded Value information below represents the information published byAbbey in its 2005 year-end report and accounts adjusted for businesses notacquired by Resolution, principally Abbey National Asset Managers Limited, AbbeyNational PEP and ISA Managers Limited and Abbey National Unit Trust ManagersLimited, offset by the impact of liabilities which are outside the scope of thetransaction. The majority of Abbey's Life Businesses' value of in-force stemsfrom unit-linked and non-profit business. Abbey's Life Businesses' reserveswere, as at 31 December 2005, split approximately 56 per cent. with-profits, 8per cent. non-profit and 36 per cent. unit-linked. Value of long-term assurance business on TEV basis: £m At 31 December 2005Discounted value of future profits (net of tax) (7) 1,421Net assets held by long-term assurance funds 1,414Total value of long-term assurance business 2,835Other net assets of shareholder funds 847Total value of long-term assurance businesses 3,682Adjustments for businesses not being acquired and liabilities outside the scope of the 11transaction 3,693Resolution adjustments arising from alignment of TEV (31)Value of long-term assurance business acquired (TEV) 3,662 Appendix 5 sets out further details on the adjustments for businesses notacquired. The following table sets out the adjustments required to align Abbey's LifeBusinesses' 2005 Traditional Embedded Value with Resolution's Embedded Valuemethodology by applying Market Consistent Embedded Value principles. Adjustmentshave not been made to the underlying assumptions. In particular, mortality,expense and lapse assumptions remain as assumed by Abbey's Life Businesses. TheDirectors believe that harmonisation of assumptions between the two groups, netof release of provisions, is unlikely to be material to the estimated MCEV ofAbbey's Life Businesses. Reconciliation of TEV to MCEV: £m At 31 December 2005Value of long-term assurance business acquired (TEV) 3,662Mark-to-market subordinated debt (19)Intrinsic burn-through costs (net of tax relief) (26)Certainty equivalent adjustments 183Allowance for non-market risks (115)Cost of required capital adjustment 105Group cost of capital (20)Estimated MCEV of Abbey's Life Businesses 3,770 Appendix 5 sets out in detail the explanation of these movements. The breakdown of Abbey's Life Businesses' VIF of approximately £1.5 billion is30 per cent. unit-linked, 34 per cent. with-profit and 36 per cent. non-profit.The breakdown of this VIF by business is 7 per cent. SPILA and SMI, 16 per cent.ANL, 25 per cent. Scottish Provident and 51 per cent. SMA. The breakdown of Abbey's Life Businesses' approximately £26.4 billion of lifecompany invested assets is 15 per cent. cash and cash equivalents, 42 per cent.fixed interest and 43 per cent. equities. The table below shows the 2005 pre-tax new business contribution of £38 millionfor Abbey's Life Businesses as reported in Abbey's 2005 report and accounts. New business added value (excluding incremental sales within SPL and SMI): 31 December 2005 Retail Intermediary TotalNew business contribution (£ million) 12 26 38APE (£ million) 45 119 164New business margin (per cent.) 26 22 23 Resolution has assessed Abbey's 2005 new business contribution by reference to,inter alia, the new commission rates set out in the Distribution Agreements andthe new reinsurance terms. The Directors believe that on this basis Abbey's LifeBusinesses' new business contribution would not be materially different fromthat reported by Abbey in its 2005 reports and accounts. Resolution will adopt a financially disciplined approach to writing newbusiness. The Company will target a 12 per cent. IRR on any invested capital.Based upon the new business mix and volumes in 2005, and taking into account thenew commission terms under the Distribution Agreements, the Directors believethat the new business strain would have consumed approximately £180 million ofcapital. The Directors expect that, when combined with the strong early cashflow release profile of Abbey's Life Businesses' in-force book, this strainwould be more than covered by capital emerging from the in-force portfolio. TheIRR of the protection business written by Abbey in 2005, restated to the newcommission terms under the Distribution Agreements, was estimated to beapproximately 12 per cent.. Financial information on Abbey's Life Businesses The businesses being acquired had gross assets of £29.4 billion as at 31December 2005. The audited trading profit before tax for companies included inscope included in Abbey's financial results for the year ended 31 December 2005was £278 million. The difference (£150 million) between the published tradingprofit before tax of £128 million is due to the exclusion of trading profit ofcompanies outside the scope of the transaction and the cost of capital chargedto the life insurance operations. Information on Resolution Group Resolution is the largest specialist manager of in-force U.K. life funds. It wasformed on 6 September 2005 when the merger of Britannic Group plc and ResolutionLife Group Limited ("RLG") completed. Resolution's Head Office is in London, with significant administrationoperations in Wythall and Liverpool. Resolution's asset management operationsare based in Glasgow. Britannic's heritage dates back to 1866, but it was only in 2003 that it closedfor new business to focus on acquiring closed life funds. Britannic acquired thelife operations of Allianz Cornhill in December 2004 for £115 million and theCentury Group in March 2005 for £45 million. RLG was formed for the purpose of buying and managing closed life funds. Itacquired the Royal & Sun Alliance life companies in September 2004 for £850million and Swiss Life UK for £205 million in March 2005. Resolution had total policyholder assets of approximately £35 billion at 31December 2005, with total funds under management of £38 billion. Resolutionreported embedded value of £2,131 million as at 31 December 2005, Life divisionEEV profits before tax for 2005 of £225 million, and IFRS profit before taxattributable to equity holders of £260 million. Resolution plans to announce interim results for the six months to 30 June 2006on 20 September 2006. Management and Board of the Enlarged Group Key executives of Abbey's Insurance and Asset Management divisions will joinResolution's executive management team. Given the transformational scale of the transaction, Resolution is strengtheningits Board. Ian Maidens, Group Chief Actuary & Head of Corporate Development, andBrendan Meehan, Managing Director, Resolution Management Services, will join theBoard, subject to shareholder approval. These appointments will not affect theircurrent roles within the Resolution Group but will add to the depth and strengthof the current Board. Ian Maidens' and Brendan Meehan's appointments to theBoard are subject to shareholder approval as, under Article 89 of Resolution'sArticles of Association, the maximum number of Directors on the Board is eleven.Their appointments will mean that the total number of Directors will be twelve.A special resolution will be proposed at the EGM to amend the Articles ofAssociation so that the maximum number of Directors going forwards is fifteen. Clive Cowdery's status as Chairman will change from Executive to Non-Executivefrom the date of the EGM. This will not affect his current and continuing rolein leading the strategic mergers and acquisitions activity of Resolution or hiscommitment to the Company. This change will create a better balance on the Boardbetween executive and non-executive Directors in anticipation of the increasedmarket capitalisation of the Enlarged Group propelling Resolution into the FTSE100 companies. Clive Cowdery intends to take up his entitlement under the RightsIssue in full. The new business activities of the acquired business will be brought togetherwith Resolution's existing customer management activities into a new divisionbased in Glasgow and headed on an interim basis by Gavin Stewart. Over time,Resolution will seek to strengthen its management team through the recruitmentof an experienced sales and marketing executive to head this new business unit.Graham Singleton, who is currently responsible for Resolution's existing lifedivision in Wythall, will move to Glasgow to head up a new unit comprising theAbbey life businesses. He will be replaced in Wythall by Keith Greenfield, hiscurrent deputy and former Managing Director of Royal & SunAlliance Life. There are no matters to be disclosed pursuant to paragraphs 9.6.13 (2) to (6) ofthe Listing Rules of the U.K. Listing Authority in respect of the ProposedDirectors. Details of the Proposed Directors' service contracts, once agreed, will beincluded in the Prospectus. Approvals, implementation and timetable The Acquisition and Rights Issue are subject to, most notably, approval byResolution Shareholders and the receipt of the requisite regulatory and listingconsents. The Rights Issue is not conditional upon Completion of theAcquisition. A Prospectus in connection with the Acquisition and the RightsIssue containing the Notice of meeting is expected to be despatched on or around23 June 2006. Completion is expected to take place in mid to late August 2006.Appendix 1 contains a summary timetable. Resolution has negotiated an appropriate package of warranties and indemnitiesthat is tailored to reflect the specific circumstances of Abbey's LifeBusinesses. Share Schemes The entitlement of participants to options and awards granted under the ShareSchemes may be adjusted in such a way as the Directors consider appropriate as aresult of the Rights Issue, with a view to neutralising the effect onparticipants in the Share Schemes. These adjustments, if any, will not be madeuntil after the Rights Issue and will be subject to approval of HM Revenue &Customs, as appropriate. Participants in the Share Schemes will be contactedseparately with further information on how their options and awards may beaffected by the Rights Issue. Ernst & Young reporting Ernst & Young has reported on the pro forma IFRS financial information on theEnlarged Group included in this announcement. The full report is included inAppendix 5. Resolution is being advised by Citigroup, Goldman Sachs and Lazard. Enquiries: Resolution 020 7489 4880Clive CowderyPaul Thompson Steve Riley Temple Bar Advisory 07795 425 580Alex Child-Villiers Citigroup 020 7986 4000Chris Jillings Andrew Thompson Goldman Sachs 020 7774 1000John Rafter Paul Miller Lazard 020 7187 2000Jon Hack Richard Chang Notes: 1) For the purposes of European Embedded Value ("EEV") reporting, the Grouphas adopted a market-consistent methodology. Within a Market Consistent EmbeddedValue ("MCEV") framework, assets and liabilities are valued in line with marketprices and consistently with each other. In principle, each cash flow is valuedusing the discount rate consistent with that applied to such a cash flow in thecapital markets. The estimated MCEV differs from the TEV reported by Abbey forits life business of £3,682 million. See section on actuarial information onAbbey's Life Businesses for a reconciliation of TEV to MCEV. 2) Adjusted for the Rights Issue on the basis of the issue of 350.0 millionNew Shares at 440 pence per New Share 3) Excluding the repurchase of preference shares held by Royal & SunAlliance and the restructuring of Alba Life 4) The proposed release of Excess Capital has no impact on combined net MCEV 5) Annual Premium Equivalent. Calculated as 10 per cent. of single premiumnew business premiums, plus annual new business premiums 6) Number of issued Shares includes 1.4 million Shares issued since 31December 2005 7) The discounted value of future profits is based on a risk discount rateof 7.0 per cent. and calculated post tax and cost of solvency on a TraditionalEmbedded Value basis 8) Based on the maximum number of New Shares issued assuming an issue priceof 440 pence Each of Citigroup, Goldman Sachs and Lazard is acting for Resolution and no oneelse in connection with the Acquisition and the Rights Issue and will not beresponsible to any person other than Resolution for providing the protectionsafforded to each of their respective clients or for providing advice in relationto the Acquisition or the Rights Issue or any other matters referred to in thisdocument. This announcement does not constitute an offer to sell or the solicitation of anoffer to acquire Nil Paid Rights, Fully Paid Rights or New Shares. The Nil Paid Rights, the Fully Paid Rights, the New Shares and the ProvisionalAllotment Letters have not been and will not be registered under the SecuritiesAct or under any relevant securities laws of any state or other jurisdiction ofthe United States and may not be offered, sold, taken up, exercised, resold,renounced, transferred or delivered, directly or indirectly, within the UnitedStates or by United States persons absent registration or an applicableexemption from the registration requirements of the Securities Act and incompliance with state laws. This announcement does not constitute an offer of Nil Paid Rights, Fully PaidRights, New Shares or Provisional Allotment Letters to any Shareholder with aregistered address in, or who is resident in, the United States or the ExcludedTerritories. None of the Nil Paid Rights, the Fully Paid Rights, the New Sharesor the Provisional Allotment Letters have been or will be registered under therelevant laws of any state, province or territory of the Excluded Territories.This document does not constitute an offer to sell or a solicitation of an offerto buy New Shares or to take up entitlements to Nil Paid Rights in anyjurisdiction in which such offer or solicitation is unlawful. THIS DOCUMENT IS NOT A PROSPECTUS. IT DOES NOT CONSTITUTE OR FORM PART OF ANYOFFER OF SECURITIES, OR CONSTITUTE A SOLICITATION OF ANY OFFER OF SECURITIES.YOU SHOULD NOT PURCHASE OR SUBSCRIBE FOR SECURITIES REFERRED TO IN THIS DOCUMENTEXCEPT ON THE BASIS OF INFORMATION IN THE PROSPECTUS TO BE ISSUED IN DUE COURSE,AND ANY SUPPLEMENT OR AMENDMENT THERETO. The contents of this document must not be construed as legal, business, tax orinvestment advice. Each prospective investor should consult his, her or its ownlegal adviser, financial adviser, tax adviser or independent financial adviserfor legal, financial, tax or investment advice. The price and value of securities can go up as well as down. If you are in anydoubt as to the action you should take, you are recommended to seek your ownpersonal financial advice immediately from your stockbroker, bank manager,solicitor, accountant, fund manager or other independent financial adviserauthorised under the Financial Services and Markets Act 2000 if you are in theUnited Kingdom, or, if you are not, from another appropriately authorisedindependent financial adviser. This announcement may contain certain 'forward-looking statements' with respectto certain of Resolution's plans and its current goals and expectations relatingto its future financial condition, performance, results, strategy andobjectives. Statements containing the words 'believes', 'intends', 'expects','plans', 'seeks' and 'anticipates', and words of similar meaning, areforward-looking. By their nature, all forward-looking statements involve riskand uncertainty because they relate to future events and circumstances which arebeyond Resolution's control including among other things, U.K. domestic andglobal economic and business conditions, market related risks such asfluctuations in interest rates and exchange rates, and the performance offinancial markets generally; the policies and actions of regulatory authorities,the impact of competition, inflation, and deflation; experience in particularwith regard to mortality and morbidity trends, lapse rates and policy renewalrates; the timing, impact and other uncertainties of future acquisitions orcombinations within relevant industries; and the impact of changes in capital,solvency or accounting standards, and tax and other legislation and regulationsin the jurisdictions in which Resolution affiliates operate. This may forexample result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As a resultResolution's actual future financial condition, performance and results maydiffer materially from the plans, goals, and expectations set forth inResolution's forward-looking statements. Resolution undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. List of Appendices 1. Expected timetable of principal events and share capital statistics 2. Risk factors 3. Summaries of Acquisition, Distribution and Related Agreements 4. Summaries of Underwriting and Sponsorship and New FacilitiesAgreements 5. Ernst & Young report on pro forma financial information 6. Definitions and glossary Appendix 1 Expected timetable of principal events Each of the times and dates in the table below is indicative only and may besubject to change. 2006Announcement of the Acquisition and Rights Issue 7 June Publication of the Prospectus 23 June Record Date for entitlement under the Rights Issue close of business on 14 July Latest time and date for receipt of Forms of Proxy 15 July Extraordinary General Meeting 17 July Despatch of Provisional Allotment Letters by no later than 7.30 a.m. 18 July Dealings in New Shares, nil paid commence on the London Stock Exchange 8.00 a.m. on 18 July Existing Shares marked "ex" by the London Stock Exchange 8.00 a.m. on 18 July Nil Paid Rights and Fully Paid Rights enabled in CREST by 8.00 a.m. on 18 July Recommended latest time for requesting withdrawal of Nil Paid Rights and 4.30 p.m. on 1 AugustFully Paid Rights from CREST (i.e. if your Nil Paid Rights and Fully PaidRights are in CREST and you wish to convert them to certificated form) Latest time for depositing renounced Provisional Allotment Letters, nil or 3.00 p.m. on 3 Augustfully paid, into CREST or for dematerialising Nil Paid Rights or Fully PaidRights into a CREST stock account Latest time and date for splitting Provisional Allotment Letters, nil or 3.00 p.m. on 4 Augustfully paid Latest time and date for acceptance, payment in full and registration of 11.00 a.m. on 8 Augustrenunciation of Provisional Allotment Letters Results of Rights Issue to be announced by 8.00 a.m. on 9 August Dealings in New Shares, fully paid, commence on the London Stock Exchange by 8.00 a.m. on 9 August New Shares credited to CREST stock accounts 9 August Despatch of definitive share certificates for the New Shares in certificated by no later than 17 Augustform Expected date of Completion of the Acquisition and expected date of the second half of Augustreadmission of the Existing Shares and New Shares SHARE CAPITAL STATISTICS Minimum Issue Price per New Share 440 penceMaximum number of New Shares to be issued2 350.0 millionGross proceeds of the Rights Issue1 £1.540 billionNet proceeds receivable by Resolution, after deduction of expenses1 £1.505 billionNew Shares as a maximum percentage of the Enlarged Share Capital of the Company following 96.6 per cent.the Rights Issue1, 2Maximum number of Shares in issue immediately following the Rights Issue2, 3 712.5 million Notes: 1. Based on the maximum number of New Shares being issued under theRights Issue. 2. Assuming an Issue Price of 440 pence per New Share. 3. On the assumption that no further Shares are issued as a result ofthe exerciseof any options under the Share Schemes between the date of this announcementand the closing of the Rights Issue. Appendix 2 Risk factors Any of the risks described below could have a material adverse impact onResolution's or, following the Acquisition, the Enlarged Group's business,financial condition and results of operations and could therefore have anegative effect on the trading price of the Shares and affect a prospectiveinvestor's investment (and, accordingly, all references to the Enlarged Group inthis section shall also be construed as references to Resolution, for the periodprior to the Acquisition, unless the context otherwise requires). Theinformation below does not purport to be exhaustive. Additional risks anduncertainties not presently known to Resolution or that Resolution currentlydeems immaterial may also have an adverse material effect on Resolution's or,following the Acquisition, the Enlarged Group's business, financial conditionand operating results. If this occurs, the price of the Shares may decline andinvestors could lose all or part of their investment. 1. Economic conditions and financial markets Fluctuations in fixed income and equity markets will affect reported financialresults, the EV and capital requirements of the Life Division The Enlarged Group has substantial exposure to fixed interest securities, equitysecurities and property returns via its constituent life insurance portfolios.While the investment risk is often shared in whole or in part withpolicyholders, fluctuations in the fixed income and equity markets will directlyor indirectly affect the reported financial results, the EV and the capitalrequirements of the Life Division where substantial falls in the value ofinvestment securities may cause additional shareholder capital to be required orretained. A reduction in long-term interest rates would increase the amount of theEnlarged Group's insurance liabilities Reductions in the level of long-term interest rates may adversely affect theEnlarged Group's business, results of operations and/or financial condition.Under relevant U.K. insurance regulation, the rate at which future actuarialliabilities can be discounted is based on the level of long-term interest rates.As a result, a reduction in long-term interest rates would increase the amountof the Enlarged Group's insurance liabilities and could thereby reduce itsfinancial strength. Sustained interest rate fluctuations could have a material adverse effect on theEnlarged Group's business, results of operations and/or financial condition tothe extent that asset liability matching is not practicable or fully achieved The liabilities in respect of certain products, notably annuities, vary asinterest rates fluctuate and so life insurance companies often attempt to matchthe liabilities with assets whose sensitivity to interest rates is the same as,or similar to, that of the liabilities. However, to the extent that such assetliability matching is not practicable or fully achieved there may befluctuations in the difference between assets and liabilities as interest rateschange. Sustained interest rate fluctuations could therefore have a materialadverse effect on the Enlarged Group's business, results of operations and/orfinancial condition. Investment portfolios are susceptible to changes in general economic conditions Investment portfolios are also susceptible to changes in general economicconditions, including changes that impact the general creditworthiness of theissuers of debt securities and equity securities and the value and returns fromproperties held in the portfolios. The value of fixed income securities may beaffected by changes in issuers' credit ratings. 2. Insurance risks Success of the long-term insurance business within the Enlarged Group depends toa significant extent on the values of claims paid in the future relative to theassets accumulated to the date of the claim The success of the long-term insurance business within the Enlarged Groupdepends to a significant extent on the values of claims paid in the futurerelative to the assets accumulated to the date of claim. Typically, over thelifetime of a contract, premiums and investment returns exceed claim costs inthe early years and it is necessary to set aside these amounts to meet futureobligations. The amount of such future obligations is assessed on actuarialprinciples by reference to assumptions with regard to the development ofinterest rates, mortality rates, persistency rates (being the extent to whichpolicies remain in-force and are not for any reason surrendered or transferredprior to maturity) and future levels of expenses. These assumptions may turnout to be incorrect. In addition, it is necessary for the boards of directors of the relevantcompanies to make decisions, based on actuarial advice, which ensure anappropriate build-up of assets and liabilities relative to one another. Thesedecisions include the allocation of investments among equity, fixed income,property, other internal and external unlisted investments and other assetclasses, the setting of policyholder bonus rates (some of which are guaranteed)and the setting of surrender terms. While the boards of directors of thecompanies within the Life Division seek to ensure that such decisions areconsistent with their regulatory obligations, there is a risk that policyholdersmay argue that their interests or reasonable expectations have been adverselyaffected by such decisions. Changes in actuarial assumptions used by the companies within the Life Division,which are driven by estimates which have ultimately differed from actualliabilities, may lead to changes in the level of capital required to bemaintained Although the companies within the Life Division monitor their actual experienceagainst the actuarial assumptions they use and apply that outcome to refinetheir long-term assumptions, because of the underlying risks it is not possibleto determine precisely the amounts which it will ultimately be necessary to payto meet these liabilities. Amounts may vary from estimates, particularly whenthose payments do not occur until well into the future. The life insurancecompanies evaluate their liabilities at least annually, allowing for changes inthe assumptions used to establish their liabilities, as well as for the actualclaims experience. Changes in assumptions may lead to changes in the level ofcapital required to be maintained. To the extent that actual claims experience is less favorable than theunderlying assumptions, or it is necessary to increase provisions inanticipation of a higher rate of future claims, the amount of additional capitalrequired (and therefore the amount of capital which can be released from thebusinesses) and the ability of the Enlarged Group to manage its businesses in anefficient manner may all be materially adversely affected. In a closed/in-force book, any divergence in persistency rates from thoseassumed may have a greater impact (whether positive or negative) than in an openbook, where other factors may offset some of this risk. Additionally, differentpersistency rates across certain types or classes of policyholders may have agreater impact than across others. The life insurance companies within the Enlarged Group have made a number ofassumptions regarding mortality and morbidity risks rates, which may or may notprove to be correct. In particular, there is uncertainty as to the rate offuture improvements in mortality for holders of annuity policies anddeteriorating morbidity rates with respect to protection policies. If the assumptions underlying the reserving basis were shown to be incorrect,the Enlarged Group may have to increase the amount of its reserves or the amountof risk reinsured, which could have a material adverse impact on the EnlargedGroup's business and results and/or financial condition. Increases in liabilities relating to product guarantees and benefits maynegatively effect the Enlarged Group In the 1970s and 1980s, when interest rates were higher than they have been inrecent years, life insurance companies (including the Life Division) soldpension contracts that contained certain guarantees or options, includingguaranteed annuity options that allowed the policyholder to elect to take thelump sum payable upon the maturity of the pension and apply the funds topurchase an annuity at a minimum guaranteed rate. During the last decade,interest rates and inflation have fallen and life expectancy has increased morerapidly than originally anticipated. As a result, in many cases the guaranteedrate applicable to these contracts is more favorable than annuity ratescurrently available in the market. There has been significant market concern as to the implications of suchguarantees and options on reserving and bonus declarations. The Life Divisionwithin the Enlarged Group seeks to manage this issue in accordance with both theterms of the issued policies and the interests of customers, and has obtainedexternal advice supporting the manner in which it operates the long-term fundsin this respect. In addition, there are substantial maturity guarantees written within Abbey'sLife Businesses with profits funds for both life and pension contracts. Abbey'sLife Businesses have purchased derivatives within the funds with a view toproviding protection against adverse market movements. The Life Division has existing liabilities relating to guarantees and optionscontained in policies, which are increased by downward movements in interestrates, increasing life expectancy and the proportion of customers exercisingtheir option. In order to address the interest rate risk, companies within thePhoenix Life Group, Alba Life and Abbey's Life Businesses have purchasedderivatives that provide some protection against an increase in liabilities andthe sensitivity of profit to movements in interest rates. The Enlarged Groupwill inevitably be exposed to counterparty risk in respect of the financialinstruments and reinsurance arrangements to which certain of its group companiesare party. The Enlarged Group seeks to mitigate that counterparty risk byobtaining collateral to support the obligations of its counterparties, but therecan be no guarantee that the collateral obtained will be sufficient or effectivein all circumstances in order to protect against those risks. The most significant factors affecting the cost of these liabilities relative tothe provisions made are the number of customers electing to exercise theiroption to take the more favourable annuity rates and the relative value of thehedge derivatives and the liabilities. 3. Legal and regulatory risks Regulatory compliance and minimum capital requirements: all insurance companiesface the risk that the FSA could find that they have failed to comply withapplicable regulations or have not undertaken corrective action as required, andan inability to meet regulatory capital requirements in the future could lead tointervention by the FSA which could be expected to require the Enlarged Group totake steps for the security of policyholders with a view to restoring regulatorycapital to acceptable levels The Enlarged Group's business is subject to regulation by the FSA as well as theIsle of Man Government Insurance and Pensions Authority and the Irish FinancialServices Regulatory Authority, and, to a lesser extent, the Jersey FinancialServices Commission, the Guernsey Financial Services Commission, the InsuranceAuthority in Hong Kong and the South Africa Financial Services Board. The FSA isthe most significant of these regulators in respect of the Enlarged Group, andit is discussed further below (although each of the other regulators has broadlysimilar powers and responsibilities. The FSA has broad regulatory powers dealing with all aspects of financialservices including, among other things, the authority to grant and, in specificcircumstances, to vary or cancel permissions, to ensure Resolution treatscustomers fairly, to investigate marketing and sales practices, and to requirethe maintenance of adequate financial resources. One of the FSA's principalregulatory objectives in the context of the regulation of insurance companies isthe protection of policyholders, rather than shareholders or general creditors. The FSA may, from time to time, make enquiries or conduct inspections of thecompanies which it regulates regarding compliance with regulations governing theconduct and operation of business. The Directors believe each of Resolution'sand Abbey's Life Businesses' regulated businesses dedicates sufficient resourcesto its compliance programme and endeavours to respond to regulatory enquiries inan appropriate way and takes corrective action when warranted. However, allinsurance companies face the risk that the FSA could find that they have failedto comply with applicable regulations or have not undertaken corrective actionas required. The FSA has wide powers to supervise and intervene in the affairs of aninsurance company. It can, for example, require firms to provide particularinformation or documents to it, require a "skilled persons" report or formallyinvestigate a firm. It has the power to take a range of disciplinary orenforcement actions, including public censure, restitution, fines or sanctionsand the award of compensation. As noted above, the FSA also has the power tovary or impose limitations on a company's Part IV permissions. Regulatory proceedings could result in adverse publicity for, or negativeperceptions regarding, the Enlarged Group, as well as diverting management'sattention from the day-to-day management of the business. A significantregulatory action against a member of the Enlarged Group could have a materialadverse effect on the business of the Enlarged Group, its results of operationsand/or financial condition. Firms which are permitted to carry on insurance business in the U.K. arerequired to maintain a minimum level of assets (referred to as regulatorycapital) in excess of their liabilities. Resolution and Abbey's Life Businessessatisfy all of the current regulatory requirements in this regard. However,fluctuations in the fixed income and equity markets would, directly orindirectly, affect levels of regulatory capital held by the Enlarged Group. Aninability to meet regulatory capital requirements in the future could lead tointervention by the FSA which could be expected to require the Enlarged Group totake steps for the security of policyholders with a view to restoring regulatorycapital to acceptable levels. The FSA has introduced a new capital regime under which all insurance firms arerequired to carry out an Individual Capital Assessment (an "ICA") in relation tothe level of regulatory capital which they hold. The ICA assists the FSA inproviding Individual Capital Guidance ("ICG") to firms. The requirements of theICG which will, in due course, be issued to each of the life companies in theEnlarged Group as at 31 December 2005 cannot be predicted with any certainty.There is currently no standard market practice as to the preparation of an ICA.The emergence of "best practice" standards within the market may have an adverseimpact on the Enlarged Group if it is required to alter materially the basis ofpreparation of its ICA. There are also similar rules in overseas jurisdictionswhich will be relevant to the Enlarged Group including the Insurance GroupsDirective and through the development and implementation of the EU Solvency IIrules. There have been significant changes in relevant legislation and regulation, eachof which has had a significant impact on the U.K. life assurance industry overthe last few years. Various new reforms to the relevant legislation andregulation have also been proposed which could involve significantimplementation costs and may create uncertainty in the application of relevantlaws or regulation The legislation and regulation affecting members of the Enlarged Group governmatters with respect to a wide number of areas. The Enlarged Group will writenew life assurance and pensions business and will be exposed to the associatedlegislative and regulatory risks, including regulation by overseas regulators,including, in particular, the Isle of Man Government Insurance and PensionsAuthority, and the Irish Financial Services Regulatory Authority, as well as,albeit to a lesser extent, the Jersey Financial Services Commission, theGuernsey Financial Services Commission, the Insurance Authority in Hong Kong andthe South Africa Financial Services Board. There have been significant legislative and regulatory changes in recent yearsin the U.K. life assurance and pensions market, including simplification of thepensions regime which was implemented on 6 April 2006 and the FSA's "depolarisation" reforms, each of which has had a significant impact on the U.K.life assurance industry and, as a consequence, Abbey's Life Businesses' U.K.life assurance and pensions business. The FSA has also proposed to reform theproduct disclosure regime for investment products. If the FSA proposals areimplemented, there could be significant costs involved in implementing theproposals, particularly in relation to changes to projections and product andcharges documentation. Treating Customers Fairly ("TCF") is a regulatory initiative that has been anincreasing focus of FSA activity in recent years. In response to high-profileregulatory failures and a perceived divergence between the sophistication offinancial products and the financial literacy of consumers, the FSA hasincreased its emphasis on the need for consumer protection. In particular, theFSA has stated that its approach to TCF will be governed by high-levelprinciples rather than a strict interpretation of the FSA Rules. Consequently,the failure by a financial services firm to implement a TCF policy aligned withthe FSA's approach may lead to enforcement action by the regulator. In December 2002, in response to a perceived need to reassess pensionprovisioning and retirement saving in the United Kingdom, the U.K. governmentestablished the independent Pensions Commission chaired by Adair Turner (the "Turner Commission") to review long-term trends in pension savings and todetermine whether there was any need to reform the current voluntary system ofpension contribution. The Turner Commission has issued a number ofrecommendations in this respect, certain of which, if eventually accepted, couldresult in a material change in the legislative framework for pensions and demandfor group pensions products offered by Abbey's Life Businesses and otherproviders. Further changes are expected over coming years. The Enlarged Group will not always be able to predict accurately the impact offuture U.K. or overseas legislation or regulation or changes in theinterpretation or operation of existing legislation or regulation on itsbusiness, results of operations and/or financial condition. Further changes toU.K. or overseas financial services legislation or regulation may be enacted andsuch changes could have a material adverse effect on the Enlarged Group'sbusiness, results of operations and/or financial condition and may result inincreased costs to the Enlarged Group due to it being required to set upadditional compliance controls or due to the direct cost of compliance. It mayalso restrict the Enlarged Group's ability to complete successfully furtheracquisitions of in-force life insurance fund businesses. Changes in taxation law may impact the Enlarged Group and may impact upon thedecisions of policyholders U.K. and overseas taxation law includes rules governing business taxes, personaltaxes, capital taxes and indirect taxes. The Enlarged Group will be unableaccurately to predict the impact of future changes in U.K. and overseas taxlegislation on its business. From time to time changes in the interpretation ofexisting U.K. and overseas tax laws, amendments to existing tax rates, or theintroduction of new tax legislation in the U.K. or overseas may adversely impactthe business, results of operations and financial condition of the EnlargedGroup. Further, there is specific U.K. and overseas legislation that governsthe taxation of life insurance companies, changes to which might adverselyaffect life insurance companies. Whilst those risks may impact on the insurancesector as a whole, the impact on the Enlarged Group in particular would dependupon the mix of long-term business within its portfolio and other relevantcircumstances at the time of the change. The Finance Bill 2006, ordered to be printed on 28 March 2006, contains a numberof provisions which impact upon the taxation of life insurance companies. Theprovisions of the Finance (No. 2) Bill 2006 may lead to an acceleration of taxon certain non-profit business in the Enlarged Group which would otherwise havebeen deferred until the release of the investment reserve. The provisions arestill subject to change, and Royal Assent is expected to be given during July2006. The U.K. government has also commenced consultation on a number of otherareas which will impact upon the taxation of insurance companies, and theoutcome of the consultation is intended to be included in the Finance Bill 2007. At this stage it is not possible to predict what the potential impact on theEnlarged Group may be. There are also specific rules governing the taxation of policyholders. TheEnlarged Group will be unable to predict with certainty the impact of futurechanges in tax law on the taxation of life insurance and pension policies in thehands of policyholders. Amendments to existing legislation (particularly ifthere is the withdrawal of any tax relief or an increase in tax rates) or theintroduction of new rules may impact upon the future long-term business and thedecisions of policyholders. The impact of any changes upon the Enlarged Groupthereafter might depend on the mix of in-force business at the time of thechange and could have a material adverse effect on the Enlarged Group'sbusiness, results of operations and/or financial condition. The effect of future changes in tax legislation on specific products may have amaterial adverse effect on the financial condition of the relevant long-termfund of Resolution or Abbey's Life Businesses and may lead to policyholdersattempting to seek redress where they allege that a product fails to meet thereasonable expectations of the policyholder The design of long-term insurance products is predicated on tax legislationextant at that time. However, future changes in tax legislation orinterpretation of the legislation may, when applied to these products, have amaterial adverse effect on the financial condition of the relevant long-termfund of Resolution or Abbey's Life Businesses in which the business was writtenand therefore have a negative impact on policyholder returns. Long-term product design, including new business, will take into account, amongother things, risks, benefits, charges, expenses, investment return (includingbonuses) and taxation. A policyholder or group of policyholders may seek legalredress where the product fails to meet the reasonable expectations of thepolicyholder or policyholders. Given the inherent unpredictability oflitigation, it is possible that an adverse outcome in some matters could have amaterial adverse effect on the Enlarged Group's business, results of operationsand/or financial condition arising from the penalties imposed, together with thecosts of defending any action. The terms of the Abbey Schemes may limit the ability of SMA and SPL to takecertain courses of action in relation to the with profit sub-funds The with profit sub-funds of SMA and SPL were established under the terms of thedemutualisation schemes of their predecessor companies. Those schemes containrestrictions on the actions that may be taken by the companies in relation tothose sub-funds which may in certain circumstances limit the ability of SMA andSPL to take particular courses of action. In the case of SPL, the with profitssub-funds are subject to the supervision of the SPI Fund Supervisory Committeeand certain decisions (including in particular the investment policy and bonuspolicy) are the responsibility of that committee. 4. Exposure to certain industry risks Potential FSA (or overseas regulator) intervention on industry wide issues From time to time there are issues and disputes which arise from the way inwhich the insurance industry has sold or administered an insurance policy orotherwise treated policyholders, either individually or collectively. Theseissues and disputes may typically, for individual policyholders, be resolved bythe Financial Ombudsman Service (the "FOS") or litigation. However, where largergroups or matters of public policy are concerned, the FSA may intervenedirectly. In recent years there have been several industry-wide issues in whichthe FSA has intervened directly. These include the sale of personal pensions,the sale of mortgage-related endowments and investments in split capitalinvestment trusts. The FSA may identify future industry wide mis-selling issueswhich could affect the Enlarged Group. As mentioned above, the FSA is alsocurrently leading an industry wide "Treating Customers Fairly" initiative. Underthis initiative all existing practices of the FSA regulated firms are beingreviewed to ensure that they treat customers fairly in accordance with the FSA'sprinciples for businesses. This may lead from time to time to changes in theEnlarged Group's practices which benefit policyholders at a cost toshareholders. However, the Board is not currently aware of any such futureissues which could affect the Enlarged Group. In addition to the FSA, certainmembers of the Enlarged Group are regulated in overseas jurisdictions resultingin potential policyholder claims and regulatory intervention in thosejurisdictions. The need to respond to FSA requirements in relation to personal pensions Companies within both the Resolution and Abbey's Life Businesses have conductedthorough reviews related to the sale of personal pensions in accordance with FSArequirements. The review and compensation payment process is substantiallycomplete. The success of the Enlarged Group may be affected by issues associated with themis-selling of mortgage endowment policies The trend for endowment policies to be used as a repayment vehicle for mortgagesbegan in the 1970s. However, the decline in inflation and the absolute level ofinvestment returns, and the concomitant fall in the actual and prospectivematurity values of these policies in recent years, has led to the prospect ofsignificant shortfalls at the time a mortgage is due for repayment. Theexistence of a shortfall does not, in itself, prove a case for compensation. Thepolicyholder must demonstrate that he was "mis-sold" the policy and that thepotential risk of a shortfall was not made clear at the point of sale. Resolution has written to relevant policyholders in accordance with FSArequirements. Although Abbey's Life Businesses has written endowment mortgages,the exposure of the life companies to this industry risk is limited compared tothe exposure of the Resolution Group, since direct sales of Abbey Nationalproducts were carried out by Abbey and sales of these products by SMA and SPLwere substantially made through intermediaries who were responsible for adviceto policyholders. Where applicable, Abbey's Life Businesses have written torelevant policyholders in accordance with FSA requirements. The FSA requirements permit the time-barring of claims subject to a three-yearwindow, which is now in effect. Until such time as all policies are time-barredand all potential claims have been determined, the provisions held by companiesin the Enlarged Group are based on a combination of experience and modelling andare, therefore, only estimates of the expected final outcome. Any increase ordecrease in the provisions would be recognised in the relevant long-term fundwhere all such provisions are held. Resolution negotiated certain "pain-sharing" mechanisms to share the potentialcost of mis-selling with the counterparties to certain of the acquisitions ithas made. Subject to the pain-sharing mechanisms which remain in-force, anysignificant change in the provision for these acquisitions could have a materialadverse effect on the Enlarged Group's business, results of operations and/orfinancial condition. Further falls in investment markets could increase the aggregate exposure of theEnlarged Group to potential endowment mis-selling claims. As part of the terms of the Acquisition, Abbey has agreed to provide anindemnity to Resolution Life Limited, which is sufficiently broad to coveradvice-related mortgage endowment mis-selling claims against Abbey's LifeBusinesses in respect of pre-Completion sales through Abbey retail channels. Decisions of the Financial Ombudsman Service may have a material adverse effecton the Enlarged Group's business The FOS exists to resolve individual or small business policyholder disputes.Decisions are not made public but applicants are allowed normal legal remediesif its decisions are considered unacceptable. From time to time decisions takenby the FOS may, if extended to a particular class or grouping of policyholders,have a material adverse effect on the Enlarged Group's business, results ofoperations and/or financial condition. The Enlarged Group's success will depend upon its ability to retain keypersonnel The continued success of the business of the Enlarged Group depends on itsability to attract, motivate and retain highly skilled management. The currentResolution management team has considerable experience in the in-force sectorand in particular of integrating large acquisitions. As a result, the inabilityto retain the necessary highly skilled personnel could have a material adverseeffect on the Enlarged Group's business, results of operations and/or financialcondition. In addition, if the Enlarged Group loses any of its key investmentmanagers, whether due to the Acquisition or not, it may also lose certaininvestment management mandates and funds and/or be "put on hold" by consultantsand other controllers of investments, making the retention and winning ofmandates and funds more difficult. 5. Resolution's involvement in new business will expose Resolution tonew risks Risks not currently associated with Resolution's current business model will beencountered At present, Resolution is closed to new life assurance business, but doeshowever write limited new business related to policies used to contract out ofthe State Second Pension and allows existing policyholders to top up theirpolicies or exercise other rights embedded in their policies. It is also activein seeking new business in its asset management business. The Enlarged Group intends to write a material amount of new non-profit lifeassurance, pensions and protection business. Abbey's Life Businesses'distribution network consists of more than 700 U.K. branches (the BranchNetwork) and an intermediary sales force (together the Distribution Network).Under the Distribution Agreements, the Enlarged Group has the right to supplycertain life and pensions products to the Branch Network on an exclusive basisand will supply protection and other products to intermediaries via the AbbeyGroup's intermediary sales force, also on an exclusive basis. These distributionarrangements are for a term of 10 years subject to earlier termination incertain circumstances (including a review after 5 years in respect of the RetailDistribution Agreement). There are significant risks associated with the writing of new life assurancebusiness which are not associated with Resolution's current business model. Therisks associated with new business are highlighted where relevant above, andinclude underwriting risk, operational risk from processing new business,competition risk and the risk of increased FSA (and other regulatory)supervision and regulatory capital requirements. The U.K. market for life assurance new business is highly competitive andcompetition is likely to intensify The U.K. market for life assurance new business is highly competitive, withseveral factors affecting the Enlarged Group's ability to sell its products,including price and yields offered, financial strength and ratings, range ofproduct lines and product quality, brand strength and name recognition, andinvestment management performance. The Enlarged Group faces competitors that arelarger, have greater financial resources or a greater market share, or offer abroader range of products. Within the U.K., the Enlarged Group's principalcompetitors in the life market include many of the major retail financialservices companies including, in particular Norwich Union and Legal and General. Resolution believes competition will intensify across all products it intends tomanufacture, in response to consumer demand, technological advances, the impactof consolidation, regulatory actions and other factors. Resolution's ability togenerate an appropriate return depends significantly upon its capacity toanticipate and respond appropriately to these competitive pressures. There is a risk of the Distribution Agreements being varied or terminated earlyand Resolution losing a core source of new business Resolution believes that the continuation of its relationship with Abbey via theDistribution Agreements is a critical component of its new business strategy,as, in the short term at least, all of its new business income (except DSSrebates and investments on in-force policies) will come via Abbey. If theDistribution Agreements were terminated early, Resolution would lose this sourceof new business. Summaries of the Distribution Agreements are contained in Appendix 3. 6. Asset management Loss of customer mandates may have a material adverse effect on the EnlargedGroup's business In the event that the Enlarged Group's asset management business does notprovide satisfactory or appropriate investment returns in the future, or doesnot sell an investment product which a customer requires, existing customers maydecide to reduce or liquidate their investment or, alternatively, whererelevant, transfer mandates to other investment managers and new customers maynot be attracted. If the Enlarged Group underperforms its competitors orrelevant benchmarks, there may be a material adverse effect on the EnlargedGroup's business, results of operations and/or financial conditions due toexisting customers reducing or liquidating mandates or moving mandates to othermanagers and to an inability to sell new products to existing or new customers. Failure to address risks associated with managing customer assets could lead tothe loss of customers or a liability to pay compensation There are risks associated with the process of managing customer assets. Forexample, failure properly to define the investment remit applicable to customerassets as a result of unclear agreed guidelines or inaccurate recording ofcustomer communications could lead to investments being made in breach ofmandate. Similarly, failure to manage the investment process or execute thetrading activities properly could lead to poor investment decisions and poorasset allocation, the wrong investments being bought or sold and the incorrectmonitoring of exposures. Failures of this nature could lead to the loss ofcustomers or a liability for the Enlarged Group's asset management division topay compensation. 7. Expense management In order to protect shareholder returns, it will be necessary to reduce thecosts of managing Resolution and the Enlarged Group's long-term business atleast in line with the run-off profile The main business of Resolution, by its nature, is currently in long-termrun-off. In order to protect shareholder returns, it will be necessary to reducethe costs of managing Resolution and the Enlarged Group's long-term business atleast in line with the run-off profile. The Enlarged Group is exposed to therisk that it may be unable to reduce costs proportionately and/or to adjust toan appropriate new balance of fixed and variable costs. This exposure couldarise, for example, from deficient management (particularly during businessintegration), significant changes in the regulatory environment, the requirementto pay VAT on services received or material sector-specific inflationarypressures. The current expense assumptions for policy charges are based ongovernance costs and the underlying administration services contracts, whetherwith intra-group or external providers. Significant changes in the actualexpenses could have a material impact on the Enlarged Group's business andresults. There are additional expenses associated with writing new business, namely,acquisition expenses incurred in marketing and selling new policies, andmaintenance expenses associated with the administration of these new policies.The Enlarged Group is exposed to the risk that it may underestimate the quantumof these costs. 8. Integration and future strategy The Enlarged Group will encounter numerous integration challenges as aconsequence of the Acquisition The Enlarged Group will encounter numerous integration challenges as aconsequence of the Acquisition and implementing the acquisition will alsoinvolve some degree of separation of the services provided to and from Abbey andAbbey's Life Businesses. In particular, following Completion, the EnlargedGroup's management and resources may be diverted from its core business activityof administering in-force life insurance fund business and/or its fundmanagement business due to personnel being required to assist in the integrationprocess and, in particular, the process of assimilating the new businessdivisions of Abbey's Life Businesses. This process may prove to be all the morechallenging in view of the fact that Resolution is currently in the process ofintegrating other recent acquisitions. The integration process may lead to anincrease in the level of errors with the possibility of an increase in clientcomplaints and/or regulatory action. Furthermore, it may not prove possible toachieve the expected level of synergy benefits on integration of the businessesof Resolution and Abbey's Life Businesses and/or the cost of delivering suchbenefits may exceed the expected cost. There is, therefore, a risk that theexpected enhancement to shareholder returns is not fully achieved. There will inevitably be a cost involved in overhauling the current systems andstructures of Abbey's Life Businesses following Completion (includingimplementing potential offshoring, outsourcing and infrastructure changes). One of the principal strategies of the Enlarged Group is to make further valueenhancing in-force life insurance fund acquisitions. Failure to be in aposition to acquire in-force life insurance fund targets as a consequence of theAcquisition, increased competition from other potential buyers or regulatorypressure may delay, or prevent entirely, the achievement of one of the perceivedbenefits of the Acquisition. The Enlarged Group's ability to access the capital markets may be affected byweak markets The Enlarged Group intends in due course to access the capital markets to raisefurther capital to pursue its strategies. The ability of the Enlarged Group toaccess the capital markets may be affected by weak markets. This may in turnrestrict the ability of the Enlarged Group to pursue acquisitions of furtherin-force life insurance fund businesses. In this respect see paragraph 14"Refinancing and extraction of Excess Capital" below. 9. Accounting Change in rules or in the interpretation of IFRS could have a negative effect onthe Enlarged Group's financial results, distributable reserves or net assets Until 31 December 2004, Britannic Group and Resolution Life Group each preparedits financial statements in accordance with U.K. GAAP. Resolution prepared its2005 year end consolidated financial statements in accordance with IFRS asadopted by the European Union and presented the 2004 comparatives on the samebasis except as noted here. The 2005 financial statements included theapplication of IFRS 4 (Insurance Contracts), IAS 32 and IAS 39 (FinancialInstruments), which were not required to be applied to the 2004 comparatives.IFRS is currently being applied in Europe and in other parts of the worldsimultaneously for the first time. Due to a number of new and revised standardsincluded within the body of standards that comprise IFRS, there is not yet asignificant body of established practice on which to draw in forming judgmentsregarding interpretation and application of IFRS. Change in rules or in theinterpretation of IFRS could have a negative effect on the Enlarged Group'sfinancial results, distributable reserves or net assets. 10. Pensions Defined contribution schemes Resolution participates in the defined contribution section of the BritannicGroup pension scheme which is open to new members and, since 6 September 2005,the Phoenix Life Group pension scheme. Defined benefit schemes: there are inherent funding risks associated withResolution's participation in defined benefit schemes Resolution participates in the defined benefit section of the Britannic Grouppension scheme and, since 6 September 2005, the Phoenix Life Group pensionscheme. The Phoenix Life Group pension scheme is closed to new members and tofuture service accrual, and the Britannic Group scheme is closed to new members. There are inherent funding risks associated with Resolution's participation indefined benefit schemes. Specifically, certain factors could result in thefunding position of the schemes being materially reduced, and, in some cases, adeficit between the pension scheme's assets and liabilities could occur. These factors include: (i) poor investment performance of pension fundinvestments, including equities, bonds and other forms of investment; (ii)greater life expectancy than assumed (which will make pensions payable forlonger and therefore more expensive to provide, whether paid directly from thedefined benefit schemes or secured by the purchase of annuities); (iii) adverseannuity rates (which tend in particular to depend on prevailing interest ratesand life expectancy) which make it more expensive to secure benefits with aninsurance company; and (iv) other events occurring which make past servicebenefits more expensive than predicted in the actuarial assumptions by referenceto which funding requirements have been assessed. The U.K. government has recently introduced significant changes to theregulatory framework for retirement benefits. One such change was theestablishment with effect from April 2005 of the Pensions Regulator. ThePensions Regulator has significant powers, including the ability to issue acontribution notice to any company connected or associated with the employer ofa defined benefit scheme where such company has been involved in any act ordeliberate omission intended to reduce the level or recovery of the statutorydebt which the employer would be required to pay in order to fully fund benefitson the winding up of the scheme. The regulator also has power to requirefinancial support to be put in place by other group members where the employerof a scheme is a service company or is insufficiently resourced (within themeaning of the legislation). The Regulator's powers in this regard, and therestrictions on their use, are set out in sections 38 and 43 of the Pensions Act2004. In relation to valuations carried out since 23 September 2005, schemes are alsosubject to the Statutory Funding Objective ("SFO") which replaces the statutoryMinimum Funding Requirement ("MFR"). The SFO requires employers to agreefunding arrangements with the scheme trustees. If agreement cannot be reached,the matter will be referred to the Pensions Regulator. In addition, where an employer ceases to participate in a multi-employer scheme,it is required to fund the scheme to the extent that would be required in orderto buy out the benefits of the scheme in respect of the members (includingdeferred, pensioner and orphan members) attributable to that employer, bypurchasing annuities from an insurance company (this is sometimes known as "exitdebt"), unless the Regulator has approved alternative arrangements forsatisfying this debt. This obligation to fund benefits to insurance companybuy-out levels also applies under section 75 of the Pensions Act 1995 where apension scheme enters a winding-up process when its sponsoring or participatingemployers are solvent. Therefore, if the defined benefit section of eitherscheme is wound up with a solvent employer, the cost of buying out the benefitsfor all scheme members is likely to be considerably more than the value placedon the liabilities (on an MFR or SFO valuation basis or the ongoing fundingbasis) while the scheme is ongoing. Abbey's defined benefit schemes: there may still be a risk that the PensionsRegulator could, in certain circumstances, impose a contribution notice orfinancial support direction on Abbey's Life Businesses Companies for a periodfollowing Completion Under the terms of the Acquisition Agreement, Abbey will retain the range ofdefined benefit and defined contribution schemes from which the U.K. employeesof Abbey's Life Businesses benefit. These pension schemes are currently heldwithin Abbey's Life Businesses and in the Abbey Group, however followingCompletion, all of the relevant schemes will remain with Abbey who will continueto be responsible for the funding of those schemes. Therefore, pursuant to the Acquisition, Resolution will acquire a number ofcompanies which were formerly participating employers in Abbey defined benefitpension schemes, or which were "associated" or "connected" with such employers.As discussed above, pursuant to the Pensions Act 2004, the Pensions Regulatoris, in certain circumstances, empowered to impose contribution notices andfinancial support directions on companies which participate in defined benefitpension schemes, and on entities which are associated or connected with thesecompanies. Notwithstanding that Abbey's Life Businesses Companies will no longerbe members of the Abbey Group, there may still be a risk that the PensionsRegulator could, in certain circumstances, impose a financial support directionon these companies for up to 12 months following Completion or a contributionnotice for up to 6 years following Completion. In practice, those liabilitiesare the subject of an indemnity given by Abbey to Resolution in the AcquisitionAgreement. Abbey's defined benefit scheme: certain Abbey Life Businesses Companies will berequired to pay an "exit debt" on their withdrawal from Abbey pension schemes Pursuant to the Acquisition, Resolution will acquire a number of companies whichwere formerly participating employers in Abbey defined benefit pension schemes.As a result of their withdrawal from those schemes, these companies will each beliable for a "Section 75 debt "or "exit debt" (as discussed above) in respect oftheir participation in the defined benefit schemes. In practice, Abbey hasagreed to reimburse Resolution Life Limited for such payments which thewithdrawing Abbey Life Businesses Companies are liable to make. Abbey's defined benefit schemes: there may be a risk of other liabilitiesarising for Abbey's Life Group Companies as a result of their participation inAbbey pension schemes Abbey's Life Businesses Companies may also have liabilities in respect of anydiscriminatory practices which may have occurred in the past in respect of thedefined benefit pension schemes in which they participated. Such discriminationmay include, for example, discrimination against part-time workers in respect ofmembership of the defined benefit pension schemes. These potential liabilitiesare also the subject of an indemnity given by Abbey to Resolution Life Limitedin the Acquisition Agreement. 11. The Enlarged Group is vulnerable to reputational damage The Enlarged Group is vulnerable to adverse market perception as it operates ina highly-regulated industry where it must display a high level of integrity andhave the trust and the confidence of its customers The Enlarged Group is vulnerable to adverse market perception as it operates ina highly-regulated industry where it must display a high level of integrity andhave the trust and the confidence of its customers. Any mismanagement, fraud orfailure to satisfy fiduciary responsibilities, or any negative publicityresulting from its activities (whether well founded or not), or the accusationby a third party in relation to its activities (whether well founded or not)which are associated with the Enlarged Group or a relevant investment sectorgenerally (such as mortgage endowments or split capital investment trusts),could have a material adverse effect on the Enlarged Group's business, resultsof operations and/or financial condition. In addition, the publicitysurrounding the Acquisition may result in policyholder actions or complaints tothe regulatory authorities combined with an increased lapse or surrender rate.Negative publicity in respect of the Enlarged Group could adversely affect thewillingness of counterparties to sell in-force life insurance fund businesses tothe Enlarged Group or its ability to obtain approval from the FSA for furtheracquisitions in respect of such businesses. Reputational damage to Abbey could adversely affect new business sales andmargins via the Abbey Branch Network and so could have a material adverse effecton the Enlarged Group's business, results of operations and/or financialcondition or impact on revenues under the Retail Banking Distribution Agreement.Further, negative publicity in respect of the Enlarged Group could have amaterial adverse effect on new business sales and margins on products sold viathe distribution channel. There are also specific risks associated with the newbusiness Distribution Agreements described above. 12. Reinsurance The Enlarged Group has substantial exposure to reinsurers through reinsurancearrangements The Enlarged Group has substantial exposure to reinsurers through reinsurancearrangements. Under those reinsurance arrangements, other insurers assume aportion of the costs, losses and expenses associated with policy claims andmaturities and reported and unreported losses in exchange for a portion ofpolicy premiums. The availability, amount and cost of reinsurance depend ongeneral market conditions and may vary significantly. Any decrease in the amountof reinsurance cover purchased will increase the Enlarged Group's risk of loss.When reinsurance is obtained, the Enlarged Group is still liable for thosetransferred risks if the reinsurer does not meet its obligations. Therefore, theinability or failure of reinsurers to meet their financial obligations couldmaterially adversely affect the Enlarged Group's business, results of operationsor financial condition. In addition, as a proportion of insurance risk arising on new business is likelyto be reassured, changes in reassurance rates available may impact the futureprofitability of any new business. The availability of reinsurance cover fromappropriate counterparties may be restricted and may affect the ability to writenew business on the basis envisaged. 13. Credit rating Resolution has been assigned the long-term counterparty credit rating of 'BBB+'with stable outlook by S&P and a long-term issuer default rating of 'A-' withstable outlook by Fitch. Since the Merger, neither Resolution nor itssubsidiaries have solicited insurer financial strength ratings from S&P orFitch. Resolution does not have an interactive ratings relationship withMoody's. On 4 May 2006, S&P announced that the ratings and outlook assigned toResolution were unaffected following confirmation of talks between Abbey andResolution over the future of Abbey's Life Businesses. Companies in Abbey's Life Businesses have been assigned insurer financialstrength and credit ratings from S&P, Fitch and Moody's. ANL has been assigned the long-term counterparty credit and insurer financialstrength ratings of 'A' by S&P. ANL's S&P ratings were downgraded from 'A+' on 4May 2006 following confirmation of talks between Abbey and Resolution over thefuture of Abbey's Life Businesses due to S&P's view that it was no longer a coresubsidiary of Abbey. At the same time, the ratings on ANL, together with allratings on related entities SMA, SPL and SPI, were placed on CreditWatch withnegative implications. Both SMA and SPL have been assigned the long termcounterparty credit and insurer financial strength ratings of 'BBB+' by S&P. ANL has been assigned the insurer financial strength rating of 'A' with stableoutlook by Fitch. SMA and SPL have been assigned the long-term issuer defaultrating of 'A-' with stable outlook and the insurer financial strength rating of'A' with stable outlook by Fitch. ANL does not have ratings assigned by Moody's. SMA and SPL have been assignedthe insurance financial strength rating of 'A3' with negative outlook byMoody's. Rating agencies may, at their discretion, change any of the ratings assigned toany member of the Enlarged Group. A downgrade in the Enlarged Group's financialstrength ratings or a downgrade in its credit ratings, or the announcedpotential for a downgrade of any of these ratings, could have a material adverseeffect on the Enlarged Group's business, results of operations or financialcondition in many ways, including: (i) reducing demand for its new businesslife, pensions and protection products; (ii) adversely affecting the EnlargedGroup's relationships with its intermediaries and its corporate partners andmaterially weakening its competitive position; (iii) reducing public confidencein the Enlarged Group; (iv) increasing its costs of borrowing, including debtcapital markets transactions; and (v) adversely affecting the Enlarged Group'sability to obtain reinsurance or to obtain reasonable pricing on reinsurance. Fitch is expected to affirm the ratings of Resolution, ANL, SMA and SPL at theircurrent levels. S&P is expected to maintain the long-term counterparty credit rating ofResolution at its current level and to change the outlook from stable tonegative. S&P is expected to downgrade the long-term counterparty credit ratingand the insurer financial strength ratings of ANL from 'A' to 'BBB+'. Theratings on ANL, together with the ratings on the related entities SMA and SPL,are expected to remain on CreditWatch with negative implications. Resolution does not have an interactive ratings relationship with Moody's and itis possible that Moody's may review or change their ratings on SMA and SPLfollowing announcement of the transaction. 14. Refinancing and extraction of Excess Capital Extraction of Excess Capital depends upon discussions with the FSA andcompliance with various legal procedures There is approximately £1.5 billion of capital within Abbey's Life Businessesthat is considered by the Directors to be surplus to the minimum capitalrequirements (the "Excess Capital"). It is intended that £1.25 billion of thisExcess Capital will be released in cash shortly after Completion, dependent upondiscussions with the FSA and compliance with various legal procedures. TheDirectors understand that for structural reasons within Abbey's Life Businesses,the Excess Capital cannot currently be distributed by the relevant companieswithin Abbey's Life Businesses as a dividend to Abbey. Subject to discussionswith the FSA and compliance with the necessary legal procedures, Resolution isproposing to procure the release of an amount equal to the Excess Capital by therelevant companies to Resolution Life Limited, and then to Resolution, by way ofan intra-group loan as soon as possible following Completion. This impacts onShareholders as, in the short term, this increases financing costs for theAcquisition and affects the Enlarged Group's cash flow. The amount released(less up to £100 million, which will be retained by Resolution for workingcapital purposes) will immediately be applied to the repayment of an equivalentamount of the Bridge Facility. Although the Directors expect the discussions with the FSA in this regard to beconcluded satisfactorily, it is possible that this may not occur, or that it maynot occur within a timeframe acceptable to Resolution, or that it may only besubject to certain conditions or undertakings which may not be acceptable toResolution. In the event that these discussions cannot be concludedsatisfactorily, and as a result the FSA's approval for the Acquisition is notobtained on terms which are reasonably satisfactory to Resolution or Abbey (eachacting reasonably and in good faith), the Acquisition may not complete. There is a risk that the Excess Capital cannot be extracted at all. Therelevant companies within Abbey's Life Businesses will be required to undergo afinancial assistance "white-wash" pursuant to sections 155 to 158 of theCompanies Act 1985. The necessary statutory requirements for the implementationof a white-wash (including the making of a declaration by each of the directorsof the relevant companies and the production of auditor's reports supporting theopinions of the directors expressed in their declarations) may not be obtained. Under the terms of the Bridge Facility Agreement Resolution may, at itsdiscretion, extend the maturity of the Bridge Facility to 31 December 2007 ifrefinancing difficulties occur. There is a risk of the amount of Excess Capital falling below expectations It is possible that the amount of the Excess Capital reduces prior to the dateon which the Bridge Facility is repaid. If the amount of the Excess Capitalreduces materially, the Company will need to apply alternative funds to repaythe equivalent amount of the Bridge Facility. This may result in the Companybeing significantly more highly geared than it is at present. Incorrect calculation of Excess Capital There is a risk that the amount of Excess Capital has been wrongly calculated.If the actual amount of Excess Capital is less than anticipated, the amountavailable to be extracted following Completion and applied to repay the BridgeFacility will be reduced. In such circumstances, the Company will need to applyalternative funds to repay the equivalent amount of the Bridge Facility. Thismay result in the Company being significantly more highly geared than it is atpresent. Policyholder claim in respect of Excess Capital Whilst the Directors believe that the Excess Capital is surplus to regulatoryrequirements and therefore not subject to any potential claim by policyholders,there is a risk that one or more policyholders may attempt to claim that some orall of the Excess Capital should not be loaned or otherwise released from one ormore of the relevant Abbey's Life Businesses companies so that it remainsavailable to provide capital support to the long term business fund if needed.If successful, such a claim could result in the expected amount not beingavailable to be applied to repay the Bridge Facility. In such circumstances, theCompany will need to apply alternative funds to repay the equivalent amount ofthe Bridge Facility. This may result in the Company being significantly morehighly geared than it is at present. The ability to access capital markets may be affected by weak markets and thecredit rating of the Enlarged Group Resolution also intends to refinance the Bridge Facility in part through thecapital markets and to raise further capital to pursue its strategies. Theability of the Enlarged Group to access the capital markets may be affected byweak markets and the credit rating of the Enlarged Group among other things. General risks relating to the generation of cash and the service of debt Resolution requires a significant amount of cash to service its debt. Itsability to generate sufficient cash depends on many factors beyond Resolution'scontrol. Resolution's ability to make payments on and to refinance its debt, and to fundworking capital and capital expenditures, will depend on future operatingperformance and ability to generate sufficient cash. This depends, to someextent, on general economic, financial, competitive, market, legislative,regulatory and other factors, many of which are beyond the Group's control, aswell as the other factors discussed in these "Risk factors" and elsewhere inthis document. If Resolution's future cash flows from operations and other capital resourcesare insufficient to pay obligations as they mature or to fund liquidity needs,it may be obliged to: • reduce or delay its business activities and capital expenditures; • sell assets; • obtain additional debt or equity capital; or • restructure or refinance all or a portion of its debt on or beforematurity. 15. Other operational exposures The increase in scale of the Enlarged Group and the possible impact of theoverall business separation and subsequent integration may expose the businessto greater specific operational risks The increase in scale of the Enlarged Group and the possible impact of theoverall business separation and subsequent integration may expose the businessto greater specific operational risks including: • business continuity: Resolution has regularly tested business continuityplans which are considered adequate and requires its material outsourcers tomaintain similar arrangements; • IT systems integrity: the business is dependent on the effectiveoperation of its information systems. Core controls are in place to maintain theintegrity and efficiency of these systems; • customer data security: clear customer data security measures existwithin the business and over the transmission of customer-specific data. Thesemeasures include the annual requirement for all staff to attend data protectiontraining; and • internal control or compliance weaknesses: procedures and structures arein place to monitor the internal control and compliance environments includingrisk management, internal audit and compliance functions throughout the EnlargedGroup. The occurrence of any or all of the above risk exposures, despite the managementcontrols in place, could result in material reputational damage, the loss ofcustomers and a consequent material adverse effect on the Enlarged Group'sbusiness. The success of the Enlarged Group is dependent on continued performance ofoutsourcing arrangements Key customer service, administration, IT and back office functions are providedby third party providers. The Enlarged Group will be reliant in part on thecontinued performance and security of these providers. Comprehensive outsourcermanagement functions are in place along with detailed contractual protections inthe event of service failures or contractual defaults. Further, as a result of the Acquisition, some back office and support serviceswill be provided to the Enlarged Group by Abbey for a transitional period.Therefore, during this transitional period, the Enlarged Group will be reliantin part on the continued performance of Abbey in relation to its obligationsunder the TSA. 16. Risks related to the Acquisition and Rights Issue Completion is subject to a number of conditions Although the Acquisition Agreement has been signed prior to publication of thisannouncement, Completion is conditional upon, among other things, obtaining therelevant regulatory clearances from the FSA and other regulators, clearancesfrom the appropriate competition authorities and the passing of the Resolutionsat the EGM. Completion is subject to the obtaining of FSA and other regulators' change ofcontrol clearance. Although the Directors believe that the clearances should beforthcoming, it is possible that Resolution may not obtain these clearances, orthat they may not be obtainable within a timescale acceptable to Resolution, orthat they may only be obtained subject to certain conditions or undertakingswhich may not be acceptable to Resolution. In the event that FSA clearance isnot obtained on terms which are reasonably satisfactory to Resolution and Abbey(each acting reasonably and in good faith), the Acquisition may not becompleted. If any of the conditions are not satisfied (or not waived), the Acquisition willnot complete. However, the Rights Issue is not conditional upon Completion ofthe Acquisition (see "the Rights Issue is not conditional upon the Acquisition"below). The Rights Issue is not conditional upon Completion of the Acquisition It is possible that following Admission of the New Shares, nil paid, and theRights Issue becoming wholly unconditional, the Acquisition could cease to becapable of Completion; in particular, if the FSA or other regulatory clearanceis not received, or (as described above) if the conditions of any clearance makethe terms of the Acquisition unacceptable to Resolution or to Abbey. In thiscase, as the Rights Issue is not conditional upon Completion of the Acquisition,the Rights Issue would still be completed and funds would be raised byResolution. In the unlikely event that the Rights Issue proceeds but Completion does nottake place, the Directors' current intention is that the proceeds of the RightsIssue will be invested on a short-term basis while the Directors evaluate otheracquisition opportunities and, if no acquisitions can be found on acceptableterms, the Directors will consider how best to return surplus capital toshareholders. Such a return could carry fiscal costs for certain ResolutionShareholders. The Underwriters obligations under the Underwriting andSponsorship Agreement are conditional (although these conditions can be waived)upon, amongst other things, the Acquisition Agreement not having been terminatedin accordance with its terms. If, before Admission, the Underwriting andSponsorship Agreement is terminated, it is highly unlikely that the Rights Issuewould proceed. The Enlarged Group's success will be dependent upon its ability to integrateAbbey's Life Businesses and other businesses The current operations of Resolution and Abbey's Life Businesses will beintegrated to form the combined operations of the Enlarged Group. To the extentthat the Enlarged Group is unable efficiently to integrate the operations,realise cost reductions, retain qualified personnel or customers and to avoidunforeseen costs or delay, there may be an adverse effect on the business,results of operations and/or the financial condition of the Enlarged Group. Theintegration of Resolution and Abbey's Life Businesses will be supported by astrong management team with experience of large integration processes. However,no assurance can be given that the integration process will deliver all orsubstantially all of the expected benefits. 17. Risks related to the Rights Issue pricing structure The New Shares to be issued pursuant to the Rights Issue will be issued at anIssue Price of between 440 pence and 520 pence per New Share. The Issue Pricewill be finally determined on the day of the EGM by agreement of the Company andthe Underwriters in their respective absolute discretions, but in any eventshall not be below 440 pence per New Share. Statistics in relation to the RightsIssue included in this Announcement assume a final Issue Price of 440 pence perNew Share unless the context otherwise requires. If the final Issue Price is setat an amount above 440 pence per New Share, the result will be to reduce boththe ratio of New Shares to Existing Shares to which Qualifying Shareholders areentitled under the Rights Issue and to reduce the discount that the Issue Pricerepresents to the closing middle market price of the Company's Shares on 6 June2006 from those stated in this Announcement at an Issue Price of 440 pence perNew Share. An increase in the Issue Price above 440 pence per New Share wouldnot increase the dilutive effect of the Rights Issue on the holding of anyQualifying Shareholder who does not take up the offer of New Shares. 18. Risks related to an investment in the Nil Paid Rights and the Shares The market value of listed securities may fluctuate and may not reflect theunderlying asset value of Resolution or, following Completion, the EnlargedGroup Prospective investors should be aware that the value of an investment inResolution may go down as well as up. The market value of the Shares canfluctuate and may not always reflect the underlying asset value. A number offactors outside the control of Resolution may impact on its performance and theprice of the Shares. Such factors include the operating and share priceperformance of other companies in the industry and markets in which Resolutionoperates, speculation about Resolution's business in the press, media orinvestment community, changes to Resolution's profit estimates, the publicationof research reports by analysts and general market conditions. An active trading market in Nil Paid Rights may not develop on the London StockExchange An active trading market in the Nil Paid Rights may not develop on the LondonStock Exchange during the trading period. In addition, because the trading priceof the Nil Paid Rights depends on the trading price of the Shares, the Nil PaidRights price may be volatile and subject to the same risks as noted in theparagraph above. The existing volatility of the Shares may also magnify thevolatility of the Nil Paid Rights. Resolution's ability to pay dividends is dependent on the availability ofdistributable reserves The ability of Resolution to pay dividends on the Shares is dependent upon theavailability of distributable reserves and therefore, amongst other things, uponreceipt by it of dividends and other distributions of value from itssubsidiaries and companies in which it has an investment. Any future Share issues and sales of Shares by major Shareholders may have anadverse effect on the market price of the Shares Resolution has no current plans for a subsequent offering of Shares. However,it is possible that Resolution may decide to offer additional Shares in thefuture. An additional offering or a significant sale of Shares by any ofResolution's major Shareholders could have an adverse effect on the market priceof the outstanding Shares. 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