Friends Provident

Last week, Friends Provident (FP) rounded out the new business reporting season for the UK life assurance sector. The group, one of the country's leading life assurance providers and asset managers, delivered another record rise in new business. We were particularly heartened by the strong results posted by the recently acquired Lombard International.

For the year, total group annual premium equivalent (APE) rose 1 percent to a record £434 million. Volumes were boosted by an impressive performance in the Life business where annual APE increased 12 percent, offsetting a lacklustre 7 percent decline in the Pensions group.

Robust performance in the Life division was underpinned by strength in both the 'protection' and 'investment' businesses. Protection APE rose 11 percent for the year, despite a 12 percent decline in the fourth quarter (in line with market movements). Impressively, Friends' market share of protection products doubled in the first three quarters of the year. New Investment APE performed even better, increasing 13 percent in 2004.

The underperformance in the Pensions business was driven by a number of external factors, as well as a decision to focus on margins rather than volumes. We expect this strategic direction taken by Friends to drive margins in the individual and annuity businesses will enhance profitability going forward. We are also encouraged that the group pensions division appears set for improved growth in 2005 as sales from large national Independent Financial Advisors (IFAs) rise.

Friends' new business results excluded the performance of Lombard, as the acquisition was only completed last month. The outlook is highly encouraging though - the private wealth management and estate planning group generated a 38 percent rise in new business APE last year. We are heartened by these results as we believe continued strength in Lombard's high growth, high margin business will drive Friends' long-term earnings profile.

Much has been made of the upcoming depolarisation of the industry. The change will allow IFAs to offer a broader range of products than they have in the past. We expect that this change will benefit the larger, better branded companies like Friends. In addition, Friends superior technology makes its products a natural choice for inclusion on wider product panels when the distribution regime changes.

Friends completed the merger of its asset management subsidiary ISIS with competitor Foreign & Colonial (F&C) in October. Following the deal, Friends now holds 51 percent of the enlarged group, F&C Asset Management. The company is one of the UK's top five asset managers with £125 billion in funds under management at the end of December 2004. We applaud this deal which increases Friends' exposure to the more profitable and cash generative funds management business.

FP is proving to be a fast mover in the life assurance market, growing market share here and significantly expanding distribution abroad. In particular we are highly excited by the growth prospects presented by Lombard. In addition we believe the asset management business now has superior scale following the purchase of F&C. On this basis we believe that the company's current valuation is undemanding, with a prospective price earnings multiple of around 11 times and a yield exceeding 3.5 percent.

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