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31 Jan, 2008

Published: 07:14 Thursday 31 January 2008
By: Charlie Parker, Investment Editor

Friends Provident has concluded in its strategic review that it must renew its focus on its core life and pensions business and sell its majority stake in F&C Asset Management.

The news has been poorly received by the market with shares declining 6.12% or 9.5p to 146p. This was probably driven by the fact that changes to the dividend strategy as the change will effectively halve the sum handed out.

It will also seek buyers for its European insurance business Lombard and Pantheon Financial. Internal changes are also likely with around 15% savings sought on the cost base and the cost of developing projects slashed by £20 million. This saving will be partly achieved by abandoning plans for a wrap platform.

The insurer conducted the review in order to plug a cashflow problem over the next four years. It has concluded that a cost cutting exercise is needed and a more tactical approach should be used to launching new products.

The management will come under questioning for the comment that it will write new business only 'selectively' under the new structure, a statement which will be taken in some quarters as an indication that the elements of the life book are approaching closure

The group indicated that it is to slash its dividend to bring it within a range more appropriate to the slimmed firm. It said it expects to have between £90 million and £100 million to distribute. In future it will target dividend growth based on operating cashflow, rather than past patterns. It has however committed to distribute in full any capital released by the sale of F&C, Lombard or Pantheon.

The firm is planning to streamline its operation under incoming chief executive Trevor Matthews who left Standard Life last week. However, announcing the radical changes Friends made no mention of the impending threat of a buy-out from private equity giant JC Flowers.

The group said in its announcement that it will work with the board of F&C, which has always retained an independent listing, to maximise shareholder value and avoid disruption to the business. This will be taken by some as an indication that it will hope to leave the asset manager intact and not see it broken up through an acquisition.

F&C has been quick to respond to the news by moving into an offer period and stating that it has not had any approaches from potential buyers, killing rumours that groups such as Aberdeen Asset Management had already targeted the firm.

Friends is announcing the changes alongside new business figures which will make difficult reading for investors. While profits were around £300 million a persistency charge of £160 million.

The new business figures were mixed overall and disclosed:
* UK new business up 7% to £4.4 billion
* Group pensions up 14% to £2.6 billion
* Investment down 27% to £501 million
* Lombard down 5% to £1.9 billion

The chief executive of Friends life and pensions business Ben Gunn conceded the results were mixed.

He said: 'The fourth quarter saw mixed results across our life and pensions operations.

'In the UK there were headwinds in the key protection market reflecting an
uncertain housing market, but our leading group pensions business continued to
drive an increase in sales for the year.

'Friends Provident International continued its excellent momentum with full year sales up by nearly half on last year, driven by success of savings products in Asia. Lombard sales were slower than expected in the key fourth quarter as fewer large cases from the pipeline were completed, so the overall result was lower year-on-year.'

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