26th Oct 2007 09:33
Pearl Assurance PLC26 October 2007 Not for release, publication or distribution in or into any jurisdiction whereto do so would constitute a violation of the relevant laws of such jurisdiction 26 October 2007 Statement re Resolution plc ("Resolution") and Standard Life plc ("Standard Life") Pearl Group Limited ("Pearl") notes the announcement yesterday by Standard Lifeconfirming that it is in discussions with the Board of Resolution on a possibleoffer for Resolution. Further, Pearl notes that the proposal from Standard Life would contain a largeelement of Standard Life equity. Consequently, Pearl believes that the proposalwould expose both Standard Life and Resolution shareholders to significantdownside risks from their current level. In particular: - Resolution would be a poorly conceived acquisition for Standard Lifewith very limited strategic fit • Standard Life's stated strategy has centred around organic development of "capital-lite" new business, leveraging its investment management expertise and efficient administration. A substantial majority of Resolution's business comprises closed, capital intensive blocks of business. Given Standard Life management statements since IPO, Pearl believes that acquiring Resolution will be a strategic u-turn for Standard Life and a drag on Standard Life's returns to shareholders; • Standard Life's attempts to build a profitable UK protection business have failed, as evidenced by its negative new business margins in protection products. By acquiring Resolution's new business operations in protection products, Standard Life is exposing itself to a highly competitive market in which it has no successful track record; • Based on Pearl's own experience, cross-selling potential into closed life funds is limited and adds to the risk of increased churning of policies by IFAs. Furthermore, the likely IFA overlap between Standard Life and Resolution, as well as the fact that Resolution's distribution partner Abbey is a key competitor of Standard Life in the SIPP administration arena, reduces the scope for new business synergies; • Administration of Resolution's life and pensions business has already been outsourced to a number of providers including most recently to Capita, and Pearl views the scope for cost savings in this area to be minimal. In any event, as Resolution Management Services will be sold to Swiss Reinsurance Company ("Swiss Re") under Standard Life's offer, life and pension synergies that may arise are likely to accrue to Swiss Re; and • Pearl understands that under the proposed Standard Life acquisition of Resolution, the merger of Resolution's LDN and LDS funds will no longer occur and the envisaged £250 million of fund merger benefits announced by Resolution will not arise. Consequently, unless Standard Life is able to re-create these synergies, it will effectively have paid a further £250 million in goodwill, approximately 6 per cent. of Resolution's tangible embedded value, thereby diluting Standard Life shareholder value. - Emerging issues within Standard Life's own business which Pearlbelieves are not fully reflected in Standard Life's share price • Standard Life's new business is primarily driven by pensions products, including individual and group SIPPs and group pensions. Whilst Standard Life has built up a strong position in this market, Pearl believes that Standard Life's overall new business margins (before acquisition costs) are largely flat and that growth is vulnerable to increasing competition and wider issues in the pensions market; • Lapses remain a significant issue. Since 2004, experience variances and operating assumption changes have resulted in write-downs to embedded value of £307 million or 174 per cent. of the cumulative value added by new business. Life business claims have exceeded premiums over the past three years; and • Pursuant to arrangements put in place at the time of its demutualisation, Standard Life shareholders are exposed to the longevity risk of approximately £12.7 billion of annuities in payment but receive no upside benefit from the return on the assets backing these annuities. Pearl believes that changes to Standard Life's actuarial assumptions to reflect increasing longevity could have a significant impact on returns. - The risk that Standard Life's own nascent recovery will be derailed • Standard Life has in recent years begun a path to recovery following significant investment losses and capital constraints in the early part of the decade, its unprofitable experience in the stakeholder pensions space, and the major senior management and strategic changes that have followed; • Pearl believes that the uncertainty regarding the achievement of Standard Life's targeted cost savings of £146 million by 2009 would increase following an acquisition of Resolution. This is in addition to managing issues faced by Standard Life Bank in turbulent mortgage and funding markets, as well as the management of its wider international businesses in Canada, Europe and Asia-Pacific; and • Given Standard Life's inexperience of managing a large, complex acquisition and subsequent business separation, Pearl believes that there are significant risks of a failed Standard Life recovery as well as potential for value leakage from the acquired business. - A further downward re-rating of the Standard Life shares • Standard Life's proposal values Resolution at a multiple of approximately 1.19x tangible embedded value per share; • At this level, Pearl estimates that the proposed acquisition will be materially dilutive to Standard Life embedded value per share and that the drag of large in-force blocks unwinding at a weighted discount rate of 7.6 per cent. will further reduce Standard Life's overall returns on embedded value going forward. Pearl therefore questions Standard Life's assertion that its proposal, ifsuccessful, will deliver "compelling value" to Standard Life shareholders andResolution Shareholders. Terms used but not defined in this announcement shall have the meanings given tothem in the announcement of Pearl's Offer for Resolution on 19 October 2007. Enquiries Pearl Group LimitedTerry Eccles +44 (0) 20 7677 4054 Citigate Dewe Rogerson (PR adviser to Pearl and Impala)Anthony Carlisle +44 (0) 20 7638 9571 +44 (0) 7973 611 888 (mobile) Deutsche Bank (Financial Adviser and Corporate Broker to Pearl)Tadhg Flood / Mike Lamb / Omar Faruqui +44 (0) 20 7545 8000Louise Miller (Corporate Broking) Morgan Stanley (Financial Adviser and Corporate Broker to Pearl)Simon Robey / Jason Windsor / Laurence Hopkins +44 (0) 20 7425 8000Mark Brooker (Corporate Broking) ABN AMRO (Financial Adviser to Pearl)Fiona Clutterbuck / Andrew Owens / Samuel Perowne +44 (0) 20 7678 8000 Deutsche Bank AG is authorised under German Banking Law (competent authority:BaFin - Federal Financial Supervising Authority) and with respect to UKcommodity derivatives business by the Financial Services Authority; and isregulated by the Financial Services Authority for the conduct of UK business.Deutsche Bank AG is acting exclusively for Impala and Pearl and no-one else inconnection with the Offer and will not be responsible to anyone other thanImpala and Pearl for providing the protections afforded to clients of DeutscheBank AG nor for providing advice in relation to the Offer or any matter referredto in this announcement. Morgan Stanley & Co. Limited is acting exclusively for Impala and Pearl andno-one else in connection with the Offer and will not be responsible to anyoneother than Impala and Pearl for providing the protections afforded to clients ofMorgan Stanley & Co. Limited nor for providing advice in relation to the Offeror any other matter referred to in this announcement. ABN AMRO Corporate Finance Limited is acting as financial adviser for Impala andPearl and no-one else in connection with the Offer and will not be responsibleto any other person for providing the protections afforded to clients of ABNAMRO Corporate Finance Limited nor for providing advice in relation to the Offeror any other matter referred to in this announcement. AppendixBases and Sources (a) The number of Resolution Shares is based on 686,402,970million shares in issue on 12 October 2007 as announced by Resolution in its2.10 announcement on that date. (b) References to the terms of the Standard Life offer are takenfrom the announcement released by Standard Life on 25 October 2007. (c) The Resolution tangible embedded value per share is extractedfrom the Resolution unaudited results for the six months to 30 June 2007. It isbased on £4,340 million embedded value as at 30 June 2007 adjusted to deduct£144 million of goodwill and £63 million in respect of the dividend paid for thesix months to 30 June 2007. (d) Unless otherwise stated, all prices for shares, andcalculations thereof or relating thereto have been derived from Datastream andrepresent closing middle market prices on the relevant date. (e) Reference to Standard Life's strategy of organic developmentof "capital-lite" new business, leveraging investment expertise and efficientadministration is based on Standard Life's 2006 Annual Report and Accounts and2007 Interim Results Presentation. (f) Reference to a substantial majority of Resolution's businesscomprising of closed, capital intensive, with-profit and annuity blocks ofbusiness is based on Resolution's 2007 Interim Results press release. (g) Reference to Standard Life's negative new business margins inprotection products is based on Standard Life's Annual Reports and Accounts andNew Business Results for 2005, 2006 and Interim Results for 30 June 2007, andthe Summary Prospectus for Standard Life. (h) Reference to increased churning of policies by IFAs is basedon FSA 2006 Survey of Persistency of Life and Pension policies. (i) Reference to the £250 million fund merger benefits issourced from the Merger announcement on 10 September 2007. (j) Reference to Standard Life's new business being primarilydriven by pensions products and overall new business margins (pre-acquisitioncosts) being largely flat are based on Standard Life's Annual Reports andAccounts, New Business Results for 2005, 2006 and Interim Results for 30 June2007, and the Summary Prospectus for Standard Life. (k) Reference to write-downs to embedded value of £307 million or174 per cent. of the cumulative value added by new business is based on StandardLife's Annual Reports and Accounts, New Business Results for 2005, 2006 andInterim Results for 30 June 2007, and the Summary Prospectus for Standard Life. (l) Reference to Life business claims exceeding premiums overthe past three years is based on Standard Life's New Business Results for 2006and Interim Results for 30 June 2007. (m) Reference to the longevity risk of approximately £12.7 billionof annuities in payment is based on Standard Life's 2006 FSA returns. (n) Reference to the Standard Life's significant investmentlosses and capital constraints is based on Standard Life's Annual Reports andAccounts for 2001, 2002 and 2003. (o) Reference to Standard Life's targeted cost savings of £146million by 2009 is sourced from Standard Life's 30 June 2007 Interim ResultsPresentation. (p) Reference to Resolution's weighted discount rate of 7.6 percent. is sourced from its Interim Results for 30 June 2007. (q) Reference to Standard Life's H1 2007 return on embedded valueof 9.1 per cent. is sourced from its Interim Results for 30 June 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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