Last month’s announcement that the Friends Provident board has agreed to Resolution’s £1.85bn bid for the insurer will have surprised nobody.
Advisers are now not only digesting what the takeover of Friends by Resolution means for its position as an on-panel group pensions provider, but also reflecting on which other insurer or insurers will be next to be swallowed up by the consolidator.
The issue with Friends, which has grown used to being the subject of speculation as to its future, has been whether it would be bought up and shut down, with investors running down its closed book instead of keeping it as a going concern. Advisers have been concerned that short term investors are more interested in the value already in the company than in writing new business.
Resolution is keen to move on from the ‘vulture scoops up zombie life fund’ tag with its latest project, which it says sees it consolidating several open life insurers into a major force, for disposal onto the market three or four years down the line. In a bid to quell nerves over Friends’ viability as a going concern, Resolution has been emphasising the fact that while its chief, Clive Cowdery, has bought many zombie funds he has never actually closed a life office down.
The new venture is being billed as very much Resolution Mark II. It is considering buying several life offices and potentially other financial services organisations and putting them together into a scaled-up insurer that would make it number three in the UK after Aviva and Legal & General.
A spokesman for Resolution says: “The idea is to acquire two or three life companies, of which Friends Provident will be at the smaller end of the scale, and then in three or four years bring the company to the market, at which point Resolution will spin out of the scene. The new entity will probably be the third-biggest insurer in the UK after Aviva and L&G.”
Some intermediaries have expressed concerns at the deal, arguing Resolution is only in it for a short term buck, but Andy Cheseldine, senior consultant at Hewitt Associates, is comforted by Matthews’ continued presence at the helm.
Cheseldine says: “There was always this nagging doubt about the takeover and now it has happened. But we saw Trevor Matthews yesterday and the story is that the model will run as it is. Clive Cowdery and his team will be focussing on the new acquisitions, leaving Trevor in charge of the day-to-day running of Friends Provident. Trevor is fundamentally believable. Cowdery has no experience running an open life office, but while Trevor is around you have got confidence that the model will not be changed.”
Hewitt says it has not formalised its position on whether Friends will remain on panel but thinks it likely that it will be.
With Friends now on course to enter the Resolution camp in a deal expected to conclude in October, speculation will now turn to who is next.
Resolution’s aims are high and wideranging. Its presentation to the market last month suggested that its focus for acquisitions is wider than just the UK-listed players. A note from analysts Keefe, Bruyette & Woods says its targets includes European players’ UK operations including Axa, Swiss Re and Aegon, bulk annuity players such as Paternoster and the UK mutuals, such as Royal London. It also covered
AIG, which is a large player in the individual life savings market. None of these companies have expressed an interest in being bought, but neither have they ruled it out.
Those who think that unlikely may want to reflect on the fact that Resolution has a war chest of around £5bn of cash, of which it is only using £500m to buy Friends, with the balance in shares.
Resolution is telling the City that Friends will continue to focus on group pensions and protection. It is also planning to roll out a wrap platform and management sees potential distribution opportunities in the IFA network space, in light of the RDR its ownership of Sesame and the proposed purchase of Bankhall.
One question that will have to be faced further down the line is branding. Resolution says there are no plans at present to lose the Friends brand, but accept that a decision will have to be made further down the line once other acquisitions have been made. If, as has been stated, larger insurers are to be added in, then it seems likely that at least one well known brand currently out in the market will go. “I am not overly concerned about branding,” says Cheseldine. “It is more a question of whether all the bits actually work together.”
The sheer amount of money available to Resolution, and its track record of achieving consolidation in the past means we could be hearing about its next target soon. It will need to satisfy corporate intermediaries that it can build an insurance giant that will function effectively, and be there for the long term, if it is going to be able to satisfy the market it is a business worth buying.
