Preliminary results - 12 months ended 31 December 2006 01 March 2007
3. Acquisitions
(a) Ark Life Assurance Company Limited
On 27 January 2006, Hibernian Life Holdings Limited (HLH), the parent company of Hibernian Life & Pensions Limited, acquired all the shares of Ark Life Assurance Company Limited (Ark Life) from Allied Irish Banks plc (AIB) in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of €196 million (£134 million) which also reflects the transfer of the management of Ark Life funds to Hibernian Investment Managers Limited, part of the Group’s fund management business. The final consideration has not yet been agreed with AIB but is expected to be finalised in 2007. However, any adjustment to the above figures is not expected to be material. In addition, a further deferred cash payment of up to €10 million (£7 million) is payable, subject to the fulfilment of certain performance criteria. The results of Ark Life have been included in the consolidated financial statements of the Group with effect from 27 January 2006, and contributed £30 million to the consolidated EEV profit before tax and £40 million to the IFRS profit before tax.
The transaction has been accounted for as the acquisition of 75.01% of Ark Life and the disposal of 24.99% of HLH. The realised gain on disposal of the Group’s 24.99% interest in HLH was £25 million on an EEV basis and £86 million on an IFRS basis.
The Ark Life acquisition has given rise to goodwill on acquisition of £57 million, calculated as follows:
| Purchase cost: | £m |
|---|---|
| Fair value of shares in Hibernian Life Holdings Limited | 184 |
| Cash paid | 134 |
| Attributable costs | 4 |
| Total consideration | 322 |
The assets and liabilities at the date of acquisition were:
| Book value £m | Fair value and accounting policy adjustments £m | Fair value £m | |
|---|---|---|---|
| Assets | |||
| Acquired value of in-force business on insurance and investment contracts | - | 168 | 168 |
| Other intangible assets | 1 | 44 | 45 |
| Investments | 2,939 | (74) | 2,865 |
| Other assets | 1,225 | (15) | 1,210 |
| Total assets | 4,165 | 123 | 4,288 |
| Liabilities | |||
| Gross insurance liabilities | (1,767) | (22) | (1,789) |
| Gross liability for investment contracts | (2,066) | (25) | (2,091) |
| Other liabilities | (154) | 96 | (58) |
| Total liabilities | (3,987) | 49 | (3,938) |
| Total net assets | 178 | 172 | 350 |
| Net assets acquired (Group share) | 265 | ||
| Goodwill arising on acquisition | 57 | ||
The value of the agreement to distribute through AIB’s networks has been identified as a separate intangible asset and valued by an independent third party at £45 million, using estimated post-tax cash flows and discount rates. It has been assessed as having a life of 25 years and is being amortised over that period, with a corresponding release of the applicable deferred tax provision.
The residual goodwill of £57 million represents future synergies expected to arise in the combined life operations. The slight increase of £12 million in residual goodwill from the interim announcement reflects finalisation of values of the assets and liabilities which have been amended in accordance with paragraph 62 of IFR3, Business Combinations.
As disclosed in the EEV section, the embedded value of the long-term business acquired was £310 million, representing the net assets adjusted for other intangible assets net of tax.
(b) Eagle Insurance Company Limited
On 1 February 2006, the Group acquired a 51% interest in Eagle Insurance Limited (Eagle), the third largest insurer in Sri Lanka, by buying a majority shareholding in Eagle’s immediate holding company, NDB Finance Lanka (Pvt) Limited. At the same time, Eagle entered into a 10-year bancassurance agreement with National Development Bank Limited (NDB), Sri Lank ’s biggest development bank and Eagle’s other major shareholder. The cash consideration, including purchase costs, was £15 million. The fair value of the Group’s share of net assets acquired was £12 million including intangibles of £2 million, giving rise to £3 million of goodwill on acquisition.
As disclosed in the EEV section, the embedded value of the long-term business acquired was £17 million, representing the net assets adjusted for other intangible assets net of tax.
(c) Canadian Brokers
On 28 April 2006, the Group acquired a 20% holding in Dale-Parizeau L.M. Inc, a Canadian insurance broker, for a consideration of £16 million including purchase costs. The allocation of the risks and rewards of ownership between the Group and third party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. The fair value of the net assets acquired, including intangibles of £10 million, was £9 million, giving rise to £7 million of goodwill on acquisition.
On 4 December 2006, the Group acquired a 20% holding in a second Canadian insurance broker, Morris & Mackenzie Inc (M&M), for a consideration of £28 million including purchase costs. The allocation of the risks and rewards of ownership between the Group and third party investors in the broker has led the Group to consolidate its results for the period since acquisition to 31 December 2006. Due to the proximity of the acquisition date to the year end, provisional fair values have been used and will be adjusted within 12 months. The provisional fair value of the net assets acquired, including intangibles of £14 million, was £12 million, giving rise to £16 million of goodwill on acquisition. On 31 December 2006, the Group completed the disposal of M&M’s non-Quebec based operations for £9 million. The sale did not give rise to any gain or loss. Net assets at disposal represented goodwill, intangible assets and deferred tax liabilities.
(d) AmerUs Group Co.
On 15 November 2006, the Group acquired 100% of the common stock of AmerUs Group Co. (AmerUs) for US$69 in cash per common share of AmerUs. AmerUs is a leading provider of equity-indexed life and annuity products to the United States retirement and savings markets, and the acquisition establishes a leading presence for the Group in these selected high growth segments.
The total purchase price of US$3.1 billion (£1.7 billion) represents cash consideration for AmerUs shares and stock options, and stock-based compensation vesting on change of control. The purchase consideration was partly financed by a £903 million placing of the Company’s ordinary shares, with the balance of funding being provided by internal resources and external debt. The share placing was completed on 13 July 2006, with 129 million shares issued on 18 July, at £7 per share.
The issue of new shares in the company to fund the acquisition of AmerUs was effected by a share placing and attracted merger relief under section 131 of the Companies Act 1985. The placing structure utilised attracted merger relief under section 131 of the Companies Act 1985, resulting in a credit to the merger reserve of £871 million. Subsequent internal transactions required to complete the placing structure have resulted in this part of the merger reserve being realised. Consequently, a transfer of £871 million has been made from the merger reserve to retained earnings. Expenses of £11 million have been charged to the share premium account.
The AmerUs acquisition has given rise to goodwill on acquisition of £669 million, calculated as follows:
| Purchase cost: | £m |
|---|---|
| Cash paid | 1,669 |
| Attributable costs | 11 |
| Total consideration | 1,680 |
The assets and liabilities at the date of acquisition were:
| Book Value £m | Fair value and Accounting Policy Adjustments £m | Fair value £m | |
|---|---|---|---|
| Assets | |||
| Acquired value of in-force business on insurance and investment contracts | 179 | 1,387 | 1,566 |
| Other intangible assets | 126 | 165 | 291 |
| Investments | 11,539 | 5 | 11,544 |
| Other assets | 2,717 | (1,270) | 1,447 |
| Total assets | 14,561 | 287 | 14,848 |
| Liabilities | |||
| Gross insurance liabilities | 11,055 | (50) | 11,005 |
| Gross liability for investment contracts | 1,137 | 5 | 1,142 |
| Other liabilities | 1,503 | 187 | 1,690 |
| Total liabilities | 13,695 | 142 | 13,837 |
| Total net assets acquired | 866 | 145 | 1,011 |
| Goodwill arising on acquisition | 669 | ||
The largest fair value adjustments above relate to the recognition of a value for the in-force business on insurance and investment contracts acquired by the Group (the AVIF) and to a reduction in other assets. The AVIF adjustment of £1,387 million represents the excess of the value of the acquired in-force life insurance contracts over their IFRS net asset value, and is calculated as the difference between the acquired net tangible assets on an EEV value basis and the same net assets on an IFRS basis. Deferred acquisition costs (DAC) totalling £1,297 million included in other assets in the book value column above, are not recognised in the IFRS fair value balance sheet as they have no fair value at acquisition. As DAC is reflected in the calculation of AVIF, its write-off in the fair value adjustments is offset by the recognition of a fair value for the AVIF.
Other intangible assets of £291 million are represented by AmerUs’ distribution channels and have been valued by an independent third party, using estimated post-tax cash flows and discount rates. The distribution channels have been assessed as having a life of between six and nine years and their value is being amortised over that period, with a corresponding release of the applicable deferred tax provision.
The residual goodwill of £669 million represents future synergies expected to arise in the combined life operations, the value of new business from new distribution channels and customers going forward, and the value of the workforce and management, related know-how and other future business value not included in the intangibles and the AVIF.
As disclosed in the EEV section, the embedded value of the long-term business acquired was £1,107 million, representing the net assets acquired, adjusted for other intangible assets net of tax and corporate debt.
(e) Total goodwill arising on the above acquisitions
| £m | |
|---|---|
| Total net assets | 1,405 |
| Less: Minority interests | (96) |
| Net assets acquired | 1,309 |
| Goodwill arising on acquisition | 752 |
| Total consideration | 2,061 |
| The total consideration comprised: | |
| Fair value of shares | 184 |
| Cash paid | 1,862 |
| Attributable costs | 15 |
| Total consideration | 2,061 |
(f) Other
In addition to the goodwill arising on the above acquisitions, the Group also made a number of smaller acquisitions giving rise to additional goodwill of £9 million. Total goodwill arising in the year was £761 million.
On 1 January 2006, following the introduction of a new Health Insurance Act, a Netherlands subsidiary acquired 100% of the share capital of O.W.M. Delta Lloyd and OHRA Zorgverzekeringen U.A. for nil consideration. Assets and liabilities acquired amounted to £272 million and £258 million, respectively, giving rise to £14 million of negative goodwill which has been recognised in the income statement.
Unaudited pro forma combined revenues and profit
Shown below are unaudited pro forma figures for the Group’s combined revenues and profit as though the acquisition date for all business combinations effected during the year had been 1 January 2006, after giving effect to purchase accounting adjustments and the elimination of intercompany transactions. The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2006, nor is it necessarily indicative of future results.
| 2006 £m | |
|---|---|
| Revenues (net earned premiums and fee income) | 30,670 |
| Profit before tax attributable to shareholders | 3,076 |
Of the above pre-tax profit, £83 million has arisen since acquisition. No adjustments have been made to the profit figure above for any additional borrowing costs, integration costs or other synergies that might arise had the acquisitions been completed at 1 January 2006.
(g) Non-adjusting post-balance sheet events
On 1 January 2007, the Group acquired 100% of the shares of the Eurolloyd companies (Eurolloyd Nederland BV and Eurolloyd Belgie NV) for cash of £11 million. In view of the very recent timing of this transaction, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair value of assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition.
In addition to the above transaction, subsequent to year end, the Group has announced it will acquire two of the units of the Malaysian business Bumiputra-Commerce Holdings Berhad (BCHB) – 49% of each of a Life and a Takaful business – for approximately £75 million. The transaction is subject to signature and regulatory approval but completion is expected to occur by the second quarter of 2007.
On 8 February 2007, the Group announced that it planned to acquire 100% of the shares in Erasmus Groep BV in the Netherlands. Erasmus writes both general insurance and long-term business and, at 31 December 2005, had gross assets of £648 million and net assets of £29 million. The acquisition, when completed, will be effective from 1 January 2007, subject to the approval of the Dutch regulator, the relevant works council and notification to the relevant competition authorities.
