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Resolution Raises Dividend After Rival Insurers Cut Payouts

Resolution Ltd., the insurance buyout firm founded by Clive Cowdery, raised its dividend 6 percent as cash flow increased, in contrast to payout cuts at U.K. peers including Aviva Plc.

Resolution will pay 21.14 pence a share for 2012, up from 19.89 pence in 2011, and will stop paying stock dividends, the Guernsey, Channel Islands-based firm said today in a statement. Operating profit excluding one-time items rose 12 percent to 309 million pounds ($470 million).

The shares rose in London trading. Results at U.K. insurers have diverged as some firms, including Aviva, were hurt by the sovereign-debt crisis, while Legal & General Group Plc boosted its dividend amid growing demand for pension plans. Resolution scrapped its initial acquisition strategy and is focusing on generating cash from its three units -- Friends Provident, Axa SA’s U.K. life insurance unit and Bupa Health Assurance Ltd. -- while attempting to build its pension business.

“Critically, and in contrast to Aviva, Resolution has kept its dividend,” Edward Houghton, a London-based analyst at Sanford C. Bernstein with a hold rating on the stock, wrote in a note to clients today. “This implies a current dividend yield of about 8 percent and will be attractive to income-hungry investors.”

Shares Rise

Resolution rose 1.8 percent to 273.1 pence at 9:40 a.m. in London, valuing the firm at about 3.9 billion pounds. The shares are up 10.3 percent this year, compared with a drop of more than 18 percent for Aviva.

Aviva, the U.K.’s second-biggest insurer by market value, cut its dividend 44 percent earlier this month as it sought to rebuild capital. RSA Insurance Group Plc also reduced its payout due to low investment returns.

Resolution seeks to pay its dividend using cash generated from its so-called back book unit, a pool of policies closed to new customers that expire over time. The stock is still down about a third since Resolution was founded in 2008. Its acquisition strategy was hampered as equity markets rallied in 2009, making deals more expensive.

Operating profit before one-time items missed the 336 million-pound estimate of 8 analysts surveyed by Bloomberg. Cash generation rose 3 percent to 300 million pounds in 2012. The dividend is covered 117 percent by cash moved up to the parent company, Resolution said.

‘Yield Stock’

“We have scale businesses with competitive advantage, well-placed for the key market trends which are driving delivery of financial priorities,” Chief Executive Officer-designate Andy Briggs said on a call with reporters. “Our dividend is clearly sustainable from cash generation.”

The firm’s growth plans in pensions will be held back given how much of its cash flow is paid out, according to Marcus Barnard, a London-based analyst at Oriel Securities Ltd.

“The dividend consumes a considerable amount of group resources,” Barnard wrote in a note to clients. “This is hardly impressive in terms of redirecting surplus cash into growth potential, and suggests the stock should continue to trade as a yield stock.”

Operating profit including the one-time items declined to 274 million pounds in 2012 from 681 million pounds a year earlier, when the firm benefited from about 400 million pounds of one-time gains including an outsourcing contract, Finance Director Tim Tookey said.

Integration Costs

The firm’s net loss widened to 41 million pounds in 2012 from 31 million pounds a year earlier. Resolution spent 124 million pounds on integrating its business units in 2012, compared with 133 million pounds the previous year. The firm also spent 76 million pounds relating to the European Union’s Solvency II regulations for insurers, as well as 41 million pounds on outsourcing.

Shareholders last week voted in favor of ending a governance arrangement that saw Resolution outsourcing the management of the firm to a privately-held company named Resolution Operations LLP, also owned by Cowdery. The U.K. Financial Services Authority last year warned that so-called externally managed companies may lose their right to a listing on the stock exchange if they fail to change their management structure.

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