Firm Cash Offer for Resolution plc November 2007 Disclaimer By - - PowerPoint PPT Presentation

Firm Cash Offer for Resolution plc November 2007

1

Disclaimer

By attending this presentation, or reading the presentation slides, you agree to be bound by the following disclaimer. You should not forward, transmit or show this presentation to any person. In particular, you should not forward or transmit it into any jurisdiction where to do so would constitute a violation of the relevant laws of such jurisdiction. In particular: (a) no warranty or representation is given (express or implied), and no responsibility or liability is accepted, by Pearl Group Limited (“Pearl”) or any of its subsidiaries, officers, employees, advisers

• r agents as to the accuracy, completeness or reasonableness of its contents, including any
• pinions or forecasts in it or any other written or oral information made available to any interested

party or its advisers; (b) no person has nor is held out as having any authority to give any statement, warranty, representation, or undertaking on behalf of Pearl in connection with the potential transaction; (c) this presentation does not constitute an offer or invitation for the sale or purchase of securities

• r business assets, and no reliance should be placed on it – this presentation has been prepared

by its authors to provide background information only; and (d) this presentation does not constitute a recommendation or investment advice of any nature whatsoever. By accepting this document the recipient agrees to be bound by the foregoing limitations.

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The Standard Life Offer: Uncertain and Value Destructive

Pearl’s 720p per share cash offer represents certain and compelling value for Resolution shareholders − Given Pearl’s intention to vote against the Scheme on the current terms and the implications for an offer with a 50% acceptance level, Pearl questions the feasibility of Standard Life’s current position Pearl is the largest shareholder in Resolution with an approx. 24.2% interest − Standard Life needs a 75% vote to implement a scheme − Standard Life needs 75% to de-list Resolution − Standard Life needs a 75% vote for life fund mergers Pearl believes that Standard Life’s shares and cash offer would be value destructive for Standard Life shares − Standard Life’s shares fell 6.1%

(1) to 266p after announcement of its offer, valuing its offer at

707p, rallying 8.4%

(2) only once Pearl’s increased offer and higher stake were announced

− An acquisition on Standard Life’s current terms would be materially dilutive for Standard Life’s embedded value per share

(3)

− Delivery of synergies likely to require 75% approval

Notes:

• 1. Between 12.46 on Thurs 25th Oct and 11:50 on Friday 26th Oct
• 2. Between 11:50 and 13:57 on Fri 26th Oct
• 3. Details on page 6

3

Value Destruction?

Source: Bloomberg 260 265 270 275 280 285 290 08:00 10:00 12:00 14:00 16:00 09:30 11:30 13:30 15:30

Share Price falls to 266p

• nce Standard

Life confirms its offer

Thurs 25th October 2007 Fri 26th October 2007

Standard Life share price falls 6.1% on announcement of terms Standard Life rallies 8.4%

• nce Pearl stake is

disclosed and increased

• ffer is announced

Standard Life Share Price

Market reaction to offer is clear!

(1) (2)

Notes:

• 1. Between 12.46 on Thurs 25th Oct and 11:50 on Friday 26th Oct
• 2. Between 11:50 and 13:57 on Fri 26th Oct

4

Ill-conceived acquisition, minimal strategic logic

A £2.9bn

(1) acquisition at 1.85x EV (2) of a largely closed business in run-off

EV per share dilutive A small protection business vulnerable to the mortgage market when Standard Life’s own protection business is losing money – more than £33m since 2005 An asset management business with sharply declining assets and low revenue margins when Standard Life’s stated strategy is to move into high margin, high growth areas Underwhelming cost synergies Risks to Standard Life’s own recovery − No large scale acquisition experience, cultural incompatibility and risk to existing cost saving plans − A departure from Standard Life’s organic growth strategy Pearl believes that this makes Standard Life shares look very unattractive

Notes:

• 1. Consideration of £2.6 billion (based on share price of 276.25p as at close of business of 25 Oct 2007) + net debt of £0.3 billion (£0.9 billion

debt less £0.6 billion Group cash) as per Standard Life presentation

• 2. See page 6

5

Standard Life is committing £2.9bn

(1) to w hat?

Highly competitive protection market Limited scope Abbey distribution channel Limited scope for synergies – those announced represent an illustrative 4.6%

(2) of pro forma combined EV

£250m of fund merger value to re-create Asset Management dependent on low revenue margin, run-off internal assets Standard Life is acquiring gross EV of c.£2 bn (net of £0.6 bn HoldCo cash) − Business is in run-off VIF discount rate of 7.6% Minimal cost saving opportunity – already outsourced to SwissRe / Capita Standard Life will assume £935 million of Resolution debt

£935m of Resolution debt assumed Tangible net EV, £1,056m Goodwill, £899m (0.85x TEV) Further goodwill?

What is SL buying?

Will Standard Life have to restructure / increase?

Notes:

• 1. Consideration of £2.6 billion (based on share price of 276.25p as at close of business of 25 Oct 2007) + net debt of £0.3 billion (£0.9 billion debt less £0.6 billion

Group cash) as per Standard Life presentation

• 2. Please see page 9
• 3. Please see appendix page 20

(3)

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Expensive & Dilutive Acquisition for Standard Life

Notes:

• 1. Based on SL’s share price as at COB on 25 October (day before offer) of 276.25p. Resolution’s TSO of 686.4m used (31 October)
• 2. Net of £935m of assumed Resolution debt
• 3. As at 30 June 2007. Refer to appendix page 20

Material EV per share dilution

• f 12.0%

(3)

Stock Consideration at c. 1.0x EV

Price 2,555

(1)

(600) 1,955 EV 1,953 (63) (134) (600) (100) 1,056

(2)

Interim dividend

• f 9.17p

As at 30 June 2007 As per SL presentation As per SL presentation 1.85x 1.85x 1.69x 1.45x 1.35x 1.31x Standard Life multiple calculation Interim dividend RAM goodwill Excess cash Transaction costs Actual multiple paid

Source: Company Reports

7

Questionable New Business Opportunity

Protection new business was a mere £13 million post-tax in 1H07 Protection is highly competitive and strongly correlated to the mortgage market − What skills does Standard Life have in protection given its track record? Abbey distribution channel is limited in product breadth − No opportunity for SIPPs – Abbey owns James Hay − Investment new business 1H07 was 45% below 2H06

(1) – Abbey is

focused on its own products − Contract terminates in 2016 with reset to market pricing in 2011 Risk of revenue dis-synergies − Integrating the Scottish Provident and Standard Life IFA sales forces could result in significant attrition and loss of sales momentum What is the real value of new business? Where are the synergies?

Source: Company Reports Note:

• 1. PVNBP basis

8

91% 9% Internal Assets External Assets

57 61 2H 06 1H 07

Low Revenue Margin Asset Management in Run-Off

Standard Life asset management strategy: higher margin, higher growth RAM: Rapidly declining AUM with 91% from internal clients (average revenue margin of 7bps) − c.£20 bn

(2) outsourced to State Street for passive management

How quickly will declining revenues impact the value of the synergies? Low revenue margin assets Fees controlled by life boards

RAM AUM Development (£ bn) Dominated by Low Revenue Margin Internal Assets

7% decline in 1H 07

Notes:

• 1. As at 30 June 2007 (Resolution Interim Report)
• 2. Based on Resolution prospectus for acquisition of Abbey businesses, and Resolution annual report 2006

Source: Company Reports

9

299 358 59 51 50 100 150 200 250 300 350 400 Net Savings Costs to achieve Capitalised x7 Annual Cost Savings

Limited scope for synergies

Total stated synergies of £71m pre-tax (£51m post-tax) − Limited expense synergies of £13m (post-tax) − Asset management cost savings of £25m (post-tax) required to maintain margins in face of run-off − Administration of Resolution’s life business is outsourced, savings primarily head office − These synergies, even if achieved, will mostly not accrue to EV

Synergies worth illustrative 4.6%

(1) of total

pro forma EV

Notes:

• 1. Using pro forma EEV of £6,564m as per SL presentation and a tax rate of 28%
• 2. 7x is used for illustrative purposes

Illustrative value of post-tax cost savings (£m)

Source: Company reports, presentations and announcements

(2)

10

A Defensive Acquisition?

11

Where is Standard Life today?

Standard Life IPO – Story of “Recovery”

Source: Company Reports

Wretched period 1999 – 2005 − IFRS losses of £0.5 billion in 2004 − £9 bn capital erosion in with-profits fund between 1999 and 2002 On IPO, target RoEV of 9-10% in 2007, higher thereafter But significant shareholder risks e.g. longevity Insignificant equity stake for management 1H07 RoEV of 9.1% Restructuring announced but not completed Stated focus on “capital-lite” asset accumulation UK Life & Pensions increasingly dependent on declining SIPPs business − 42% of sales in 9M07, 38% fall in 3Q07 sales vs. 2Q07, 11% fall vs. 3Q06 Recovery story over – must focus on core strategy; however − Core business still pensions dominated – facing lapse and margin issues − Several sub-scale peripheral businesses: bank, healthcare, Ireland, Canada, Germany − Is acquisition of Resolution seeking to mask a lack of organic ideas or inability to complete transformation?

Recovered? What next?

12

80% 16%

4%

Pensions Life Other

UK New Business Exposed to Low Margin Pensions

Source: Company Reports & FSA Returns

Standard Life business remains highly concentrated on pensions Low new business margins vs. UK peers Underlying new business margin before acquisition costs was flat between 2005 and 1H07 Continued exposure to lapses / surrenders 2007 1H PVNBP

1.9% 2.7% 3.7% 3.7% 3.4% 3.1% Prudential Legal & General Scottish Widows Aviva Friends Provident Standard Life

UK Life & Pensions Margins (PVNBP, 1H07)(1)

Notes:

• 1. Pre-tax, post cost of capital, as per company interim reports / interim results press releases
• 2. Based on individual insured SIPPs and Group SIPPs only, data from Standard Life new business reports

70 315 79 718 812 624 3Q 06 2Q 07 3Q 07

Individual SIPP's Group SIPP's

UK SIPPs Sales Development (PVNBP, £m)

(2)

38% Decline

13

Note:

• 1. Based on UK pension surrenders as per FSA returns, divided by sum of new UK pensions business, single and regular

premiums, adjusted for intra group reinsurance – SLIF in 2006

• 151
• 124

43 176

• 8
• 67
• 278
• 307

2004 2005 2006 1H 07 Value Added £ millions

New business (cumulative pre-tax) Experience variances, assumption changes (cumulative pre-tax)

Lapses Continue to Erode Value

£307 million of experience variances and assumption changes since 2004 – 174% of new business

Source: Company Reports & FSA Returns

Lapses – Value Erosion

• 37%
• 56%
• 50%
• 61%

2003 2004 2005 2006

Pension Surrenders as a % of New Pension Business Pension surrenders are a large (and rising) percentage of new business

14

Longevity Risk on £12.7bn of Annuities

Longevity risk on Standard Life’s in-force block of £12.7bn

(1) of annuities

is borne by shareholders As investment risks and returns on assets backing existing annuity liabilities accrue to the Heritage mutual fund, there is no scope for Standard Life shareholders to earn their way out of potential increases in longevity A move from Standard Life’s current actuarial assumptions to a “long cohort” basis would be borne entirely by shareholders

A potential significant reserve issue

506 380 253 126 1% 2% 3% 4%

Illustrative Pre-tax Cost of Annuity Strengthening £’m

(2) Notes:

• 1. Based on FSA returns analysis, Forms 51 and 54
• 2. Pre-tax impact to shareholders for each 1% of reserves strengthening required

Source: Company Reports

15

Acquiring Resolution: A Step in the Wrong Direction?

Resolution acquisition is contrary to stated strategy of asset accumulation − Standard Life has no experience of a large-scale acquisition − How successful has previous diversification into banking and healthcare been? The risks of integrating Standard Life and Resolution include: ? Complex separation – sale of LDS and RMS ? Complex integration of RAM and SLI, and two competing IFA sales-forces ? Complex fund merger integration – to replicate £250m of benefits ? Delivery of merger cost savings alongside existing restructuring Off strategy Limited acquisition expertise Significant integration risks

16

Conclusions

17

Pearl’s new paradigm vs. Resolution’s traditional approach

Improved risk management of funds: Pearl has invested significant capital in setting up Axial specifically to seek ways of enhancing returns

• f life funds

Allows reallocation of capital into a broader spread of assets to derive a higher return Management of assets achieved in such a way to ensure no increase in risk across the funds as a whole Although relatively small increase in margin – when achieved across significant number of funds and over a numbers of years has the potential to deliver a meaningful return Policyholders share in the improvement in returns – (majority of WP funds are 90:10) Not revolutionary but evolutionary – can only be achieved through management over a number of years. Wouldn’t make sense to pay for all that value up front Adopting this paradigm means that Pearl can support the investment case at 720p per share Axial is the proven analysis and risk management engine of Pearl

18

Pearl’s Firm All-Cash Offer of 720 pence Only offer capable of implementation

Pearl offer provides very attractive value to Resolution shareholders: − 720p per Resolution share in cash − Multiple of 1.20x Resolution’s tangible EV − Premium of 16.9% to Resolution’s closing share price on 25 July Pearl’s offer is deliverable with fewer uncertainties − Significantly more certain than Standard Life offer − Scheme cannot be executed − Offer acceptances of less than 75% will give rise to significant separation issues − Pearl has 24.2% interest in Resolution − All cash – not subject to shareholder approval Pearl believes its offer is compelling for Resolution shareholders and will vote against the Standard Life proposal on its current terms Pearl’s Offer: Certainty & Value

19

Q&A

20

Appendix

21

EV Dilution

The offer £m per share, p Offer per share Cash 517

• No. of Standard Life shares

0.715 Resolution total number of shares (m) 686 Cash component 3,549 517 Share component 1,356 198 Offer value 4,905 715 Standard Life Plc (SL) £m per share, p Number of shares (m) 2,174 Embedded value Half-year embedded value 5,911 272 Dividend (83) (4) SL embedded value 5,828 268 Consideration £m per share, p Offer price for RSL 4,905 715 Market value of SL 6,005 276 Pro-forma £m per share, p Embedded value EEV acquired by SL 1,953 Less declared dividend (63) (9) Less goodwill of RAM (134) Less excess cash acquired (600) Less transaction costs (100) EEV acquired by SL 1,056 Pro-forma embedded value 6,884 Consideration Bid price 4,905 Less excess cash acquired (600) Of which Swiss Re pays cash (2,350) Net consideration paid by SL 1,955 Of which paid with shares 1,356 Number of SL shares New shares to be issued (m) 491 Pro-forma number of shares (m) 2,665 Pro-forma embedded value 6,884 Less net new SL debt (599) Post transaction embedded value 6,286 236 Pre-transaction embedded value 5,828 268 Accretion / dilution

• 12.0%

Source: Company Interim Reports; Rule 2.10 Announcements; Merger Announcement and Presentation and; share price of 276.25p as at close of business of 25 Oct 2007