Friends Provident has a lot of convincing to do

Friends Provident (FP) is facing a
credibility gap following the unveiling of its much-awaited
transformation strategy on 31 January. Hyped by FP as the solution
that will transform it into a more focused and profitable business,
the UK life insurer’s strategy received a cold welcome, reflected
in an immediate 10 percent slump in its share price to its lowest
level in over three years.

Adding to negative sentiment was a warning that charges would
slice pre-tax profit to about £20 million ($39 million) in 2007,
down from £509 million in 2006. Charges include £160 million
related to poor persistency experience and £280 million related to
a corporate cost accounting change. FP’s dividend is also set to be
cut by about one-half.

FP will no doubt want to put 2007 behind it and focus on a strategy
that its CFO, Jim Smart, said was aimed at repositioning it
“towards those areas where it has true competitive advantage, such
as protection, pensions, and international life and pensions
markets”. There will also be a “more selective approach to writing
new business in the UK”, he added.

As part of its repositioning, FP intends to sell three units: 52
percent-owned F&C Asset Management, which has about $220
billion under management; Lombard International, a Luxembourg-based
estate planning specialist; and Pantheon Financial, a financial
advisory firm. FP’s stake in F&C is worth about £500
million.

Lowering costs and improving cash flow are other objectives. To
this end, staff numbers are to be cut by about 600 and development
costs reduced. By the end of 2009 these actions are expected to cut
costs by about £60 million, or about 22 percent of FP’s 2007 cost
base.

Unimpressed, rating agency Moody’s Investor Services announced a
negative outlook and a credit rating downgrade of FP following the
insurer’s presentation. In a statement, Moody’s said its action
primarily reflects a likely shrinking of FP’s UK business,
profitability pressure and reduced financial flexibility. FP’s
strategy has significant execution risk, added Moody’s.

No doubt FP will be hoping that its newly appointed CEO, Trevor
Matthews, will be able to prove the sceptics wrong. Matthews was
recruited from rival UK insurer Standard Life where he has headed
the UK life and pensions operations since 2004. Matthews will take
up his FP position in six months.

Meanwhile, talk of a private equity buyout of FP continue to
circulate in the UK’s financial media.