Final Resolution for Abbey's life book

Resolution Life is in negotiations to acquire the closed funds of UK-based financial services provider Abbey, in a £4 billion deal that would be the largest yet in the sector and, if successful, will bring a total of £67 billion of assets under the control of the closed fund specialist.

Goldman Sachs is advising Resolution Life over its bid for Abbey National Life, with the deal giving the investment bank the right to unwind a complex series of hedges that were set-up by the insurer before the whole of Abbey was acquired by Banco Santander in 2004.

If the deal goes through it may prove lucrative for Goldman Sachs, but it could also be extremely complex, given that the hedge is a hybrid structure combining interest rate and equity exposure. Speaking to Risk Magazine in 2005, the then derivatives structurer for Abbey Financial Markets, Brendan O'Flynn, outlined the intricate thinking required to set the structure in the first place.

"We went around the puzzle and found it very difficult to solve because the boundaries were so tight. In the end, the solution that we settled on included a comprehensive derivatives hedge that gave the funds protected exposure to asset appreciation."

Given the existence of a large hedging portfolio, which will require a large investment of time and money to unwind, questions are likely to be raised over whether Resolution's plans will meet with policyholders' expectations. Resolution declined to comment.

News of the negotiations has been met with a mixed response by rating agency Standard & Poor's (S&P) which downgraded the rating on Abbey National Life to A, from A+, and placed it on CreditWatch, while Resolution was kept on its BBB+ stable rating.

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