Friends Provident

Last month Friends Provident (FP) kicked off the interim reporting season for the UK life insurers with an impressive 39 percent rise in sales to £3 billion. The company's solid product suite, effective distribution channels, and A-Day reforms drove these gains. Longer term we continue to expect Friends' solid domestic platform and exciting opportunities abroad will bolster earnings growth.

Group underlying profit fell 9 percent to £247 million on the back of write-downs at F&C Asset Management (F&C). However, the underlying life and pension result both at home and further a field was highly encouraging.

UK life and pensions new business profits grew 51 percent to £53 million as Friends' share of the market for the first quarter rose from 4.3 percent last year to 4.9 percent.

A stronger stock market helped the Life division's Investment group generate a 21 percent increase in new business to £354 million. The Protection division however underperformed, with new business declining 4 percent to £199 million. More encouragingly, new business growth is trending up following pricing changes and new distribution agreements.

Group and individual pensions turned in a stellar performance due to A-Day inspired volumes, and continued excellence in customer service. New business grew by 52 percent to £1.2 billion.

Overseas operations also performed admirably, and will in our view be the engine to long-term growth. The high margin International Life and Pensions business recorded a 57 percent increase in new business profits to £36 million.

Both Lombard, the financial planner to the rich, and Friends Provident International recorded strong gains in new business growth, 56 and 43 percent respectively. The groups target high net worth individuals throughout Asia, UK, Europe, and the Middle East. Ongoing expansion into new products and territories should ensure earnings growth remains robust.

Friends' 51 percent owned funds management business, F&C Asset Management, was the only blot in Friends' copy book. Funds under management declined from £131 billion to £107 billion in the first six months of this year.

To address the attrition rate the group is conducting a twofold response. First, is the strengthening of management expertise. Second, F&C are developing a 'multi-boutique' investment framework to stem the outflows due to a growing industry switch from balance to specialist mandates.

We believe that the foundations are in place for a much improved performance at F&C. A turnaround here combined with a well balanced domestic business, and a growing international operation should translate into sustained long term earnings growth at Friends.

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