Royal London Reaps Rewards of Pearl?s Resolution Victory

LONDON, Aug 18, 2008 (A. M. Best via COMTEX) -- RESGF | Quote | Chart | News | PowerRating -- Throughout the long battle for control of U.K. closed life fund operator Resolution plc, mutual insurer Royal London Group was more than a casual spectator.

For when the matter was officially concluded on May 1, 2008, with a victory for life insurer Pearl Group Ltd., Royal London was able to implement a side deal that allowed it to acquire those parts of Resolution that did not fit Pearl?s profile as a run-off operator.

This means the absorption by Royal London of Resolution's protection activities that are still writing life business. Royal London gets Phoenix Life Assurance Co. Ltd., formerly known as Abbey National Life. Phoenix provides mainly protection products through branches of Abbey, which describes itself as the United Kingdom?s sixth-largest bank.

The first stage of the deal involved the transfer to Royal London on June 3 of Scottish Provident International Life Assurance, Resolution?s international business based on the Isle of Man. In Royal London?s view, the status of Scottish Provident International as a stand-alone company made this fairly straightforward.

Royal London, which bills itself as the "largest mutual life and pensions company" in the United Kingdom, also acquired the protection business of Scottish Provident. Not only, Royal London said, does Scottish Provident have a strong presence among intermediaries, but it has an in-force book of protection plans. This business will exist alongside Bright Grey, the "specialist" protection business set up by Royal London in 2003.

Royal London said in a recent statement that it is now one of the United Kingdom?s ?top three providers of individual life protection insurance.?

Royal London now has more than 4 million customers, the group said, having picked up 1.25 million from Scottish Provident and Phoenix Life Assurance. Of the total, Royal London said, more than 1.1 million have life insurance policies.

Throughout the takeover struggle, Royal London had to assimilate as much information as quickly as possible about the businesses it was acquiring. And during this time, it could never be sure that Pearl would ultimately emerge as the winner.

The acquisition cost Royal London about 1.27 billion pounds (1.62 billion euros) plus access for Pearl to 300 million pounds in debt funding.

Royal London effectively funded the deal by selling assets, mainly equities, toward the end of 2007. Given the subsequent performance of the stock market, Royal London regards the timing of the equities disposals as fortunate.

?It was a combination of what I?d call a strategic deal and a financial deal,? said Stephen Shone, Royal London?s group finance director. ?Some of the deal was about creating synergies, getting a financial result. And some of it was about improving the franchise value of Royal London.?

The deal should bolster Royal London?s profile in the protection market. According to Shone, the group will have about 17% to 18% of the U.K. protection market that is supplied by independent financial advisers and about 10% of the overall market.

?That really puts us on the map with a particular product,? Shone said.

Royal London will keep the Scottish Provident and the Bright Grey brands, at least while it ponders its longer-term strategy, Shone said. Scottish Provident, he noted, is longer established in the protection business than Bright Grey.

There is also the matter of the structural differences between Scottish Provident and Bright Grey. Bright Grey, which has a payroll of about 400, operates completely in-house. Scottish Provident, which has about 130 employees, outsources much of its activities.

Royal London will also have to decide on its continuing use of the word ?Scottish,? which is generally acknowledged to have a positive connotation in the U.K. financial services arena. In these ?early days,? Shone said, the group has not gotten to the stage of talking about future employment levels.

?There are fundamental issues in terms of how we run it going forward and potential synergies there,? Shone said.

For now, Royal London is focusing on retaining, and trying to increase, new business levels at a time when the troubled economy is taking its toll on a market that is heavily dependent on mortgage protection products.

?But we knew that when we did the Scottish Provident deal,? Shone said. ?And the price reflected that.?

The potential overlap is complicated by the presence in Bright Grey of a number of former Scottish Provident employees, who came on board for its launch. Royal London, Shone recalled, had actually tried to acquire Scottish Provident in 2000-2001, losing out to Abbey.

Royal London?s recent sales figures reflect this picture. Calculated on present value of new business premiums, the group reported that total new life and pensions business increased by 6% to 1.06 billion pounds in the first six months of 2008 from 1 billion pounds in the first half of 2007.

Scottish Life saw its new business rise 4% to 779 million pounds Bright Grey?s new business fell 12% to 80 million pounds.

This is not Royal London?s first acquisition. In the late 1990s, the group began what it now characterizes as a decade of transformation. It initially sought to broaden its distribution channels, an effort that eventually would include the acquisition of Scottish Life on July 1, 2001. That came after Scottish Life had demutualized. In addition to its ?international? offshore business, Scottish Life was primarily a pension provider.

Royal London, which saw Scottish Life as bringing complementary strengths, had been what was known in the business as a home service company, with a widespread direct sales operation.

This approach had suffered in recent years through changes in both regulation and the economics of distribution. While Royal London regarded itself as financially strong, it recognized the developing weakness in its network.

(By Robert O'Connor, London editor)

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