News Release

4 February 2008

Friends Provident plc - strategy to deliver enhanced profitability and disclosure

Friends Provident announced in November 2007 that it was conducting a detailed review of the Group's strategic options in order to maximise value for shareholders. Today, Friends Provident announces the results of this strategic review which, when implemented, will transform the company into a more streamlined, more focused and more profitable business.

The strategy review has concluded that Friends Provident should focus on its core strengths of manufacturing and administering life & pensions products in the UK and in related International markets.  This will encompass Protection, Group Pensions and Friends Provident International, a business closely connected to the UK business by common systems and expertise. The Group will seek to improve profitability and reduce capital intensity. A substantial reduction in the cost base will also be implemented. The result will be a Group with improved returns and strong capital adequacy. It will also be able to finance its growth without recourse to debt or equity markets.  The dividend cost will be rebased to a level consistent with the operating cashflow being generated by the business. The dividend per share will be determined in due course. In making this decision, the Board will have regard not only to the dividend paying capacity of the ongoing business but also to any capital returned to shareholders from releases from businesses which do not fit the strategy. In future, the Group intends to grow dividends in line with cash flow which offers the prospect of dividend growth in real terms.

The key points of the revised strategy are:

• A renewed focus on core segments of the UK and International life and pensions market, based on Friends Provident's existing strengths in:
  • UK protection market - continuing at least to maintain market share and to continue to enter new segments.
  • UK group pensions and vesting annuity market - enhancing profitability by ceasing to pay initial commission on new schemes and focusing on acquiring larger schemes.
  • International savings & investment, pensions and protection markets through Friends Provident International - pursuing growth in markets with attractive margins.
    
• The aim of the strategy is:
  • to improve cashflow and to reduce the capital intensity of the UK business.
  • to grow the related international business, which has superior returns, faster than the UK.
  • to provide improved returns for shareholders. The Board expects that, in total, the strategy of reshaping the business once implemented will enhance the overall IRR of new business by approximately 2 per cent and that this can be improved further over time.
    
• Reduction of the Group's cost base reflecting the new scale and focus of its operations. It is expected that the cost base will be reduced by at least £40 million, 15 per cent of the 2007 operating cost base, by the end of 2009.  In addition, development costs will be reduced by around £20m from the 2007 level.
  
• Commitment to manage the business for profit and shareholder value through adopting a more selective approach to writing new business. In particular, it will adopt a tactical approach to Savings & Investment products in the UK offering them only when adequate returns are available.
  
• The Group will not compete in the wealth management market other than by manufacture and administration of Life & Pensions products. This will entail ceasing the development of the Wrap Platform.
  
• The Group owns three businesses which do not fit the revised strategy. They are: F&C Asset Management, Lombard and Pantheon Financial. These businesses are profitable and attractive. The Board intends to explore opportunities for these businesses with a view to maximising value for shareholders. The Board will work with the respective management teams to establish strategies for achieving this while minimising disruption to the businesses. Any capital that is released as a result of these strategies will be returned to shareholders.
  
• In delivering its strategy, Friends Provident confirms that:
  • The reshaped Group will be adequately capitalised and self-financing. 
  • The strategy will improve cash flow and reduce the capital intensity of new business. The previous strategy required the Group to raise finance to support its growth ambitions. The revised strategy requires no new financing and releases capital which provides flexibility to invest in growth, for example in Friends Provident International.
  • The 2008 dividend cost will be rebased to a level related to the cash flows arising from the ongoing business. The Board expects the dividend paying capacity of the ongoing life and pensions business to be around £90m to £100m annually. F&C, Lombard and Pantheon Financial do not have a material impact as they produce little cash in the short term. The Board will determine the appropriate dividend per share in due course. In reaching this decision, the Board will have regard not only to the dividend paying capacity of the Group but also to any capital returned to shareholders as a result of releases from businesses which do not fit the strategy.
  • In future, policy will be to grow dividend in line with operating cash flow. This offers the prospects of dividend growth in real terms.
  • The Group will maintain strong capital adequacy and will aim to maintain an investment grade credit rating.
    
• In managing its operations, the Board will measure performance utilising a wider range of metrics, including shareholder cashflow, cash payback, IFRS earnings, IRR and Embedded Value. The Board intends to disclose this information at the product category level and details of operating and economic assumptions will be included.

Separately, Friends Provident has today announced its new business sales results for the fourth quarter of 2007. In light of recent trading and the strategic review announced today, the Group will be taking a number of charges to reflect the impact of future actions to be taken and operating assumption changes reflecting recent experience, most notably adverse persistency experience. The persistency charge is estimated at £160m. As a result of the trading results and the persistency charges, Friends Provident would expect to report underlying profit before tax for the year ending 31 December 2007 of approximately £300m on an EEV basis (2006: £509m). 
 
However, an operating assumption change will be made to include around £20m of costs previously shown as development costs as maintenance costs capitalised in the EEV. In addition, all corporate costs will now be capitalised in the calculation of embedded value.  As a result, we would expect to charge around £280m against underlying EEV profit. In total, therefore, management estimates that the reported underlying profit before tax for the year ending 31 December 2007 will be approximately £20m on an EEV basis. 

Achieving this estimate remains subject to the normal year-end reporting processes.

Embedded Value for the International businesses will be changed to allow for a tax charge at UK rates.  At the same time the UK tax charge allowed for in the Embedded Value will be reduced from 30% to 28%. This will result in a net charge of around £70m. This will be disclosed as a current period tax charge.

In summary, the expected impact of these changes are as follows:

No credit will be taken in the 2007 Embedded Value for the planned operating expense savings.

As a result of adverse persistency and the expense assumption changes, certain Deferred Acquisition Costs will become impaired.  This will be shown as a charge against Underlying Profit on an IFRS basis. Management estimates this charge could be up to £400m.

Sir Adrian Montague, executive chairman, said:

"In conducting this strategic review, the Board's main objectives were to enhance shareholder value and to address the challenges the Group has encountered in the light of changing market conditions. The decisions we are announcing today, which will take time to implement, consolidate the Group around its core life and pensions businesses. Once fully implemented, these changes will allow the Group to offer shareholders steady returns from improved profitability and cash generation in its UK business, with opportunities for higher margin growth in selected overseas markets."

Jim Smart, chief financial officer, said:

"The new strategy will reposition the Group towards those areas where it has true competitive advantage, such as protection, pensions and international life and pensions markets. A focus on financial rigour will result in a more selective approach to writing new business in the UK. Crucially, these measures, together with rebasing the dividend to an affordable level, will ensure that the Group will be self financing and will remain well capitalised. The strategy allows us to aspire to provide dividend growth in real terms from the new level and any future capital releases will be returned in full to shareholders."

Friends Provident is being advised by JPMorgan Cazenove and Goldman Sachs in relation to the strategic review.

- Ends -

Full release (pdf, 216k)

Notes to editors:

1. The management team will be conducting meetings with shareholders after today's announcement.

2. An analyst presentation will take place at 9.30am today at J P Morgan Cazenove, 20 Moorgate, London, EC2R 6DA.

3. The analyst presentation will be webcast live and can be viewed on the Friends Provident website: www.friendsprovident.com/presentations

4. The presentation slides will be available from 9.30am today on www.friendsprovident.com/presentations

5. For more information on Friends Provident including, photos, awards, fast facts, presentations, and media contacts please visit the media section at www.friendsprovident.com/media
 

6. Financial reporting dates 

Friends Provident full year 2007 Life & Pensions new business 31 January 2008

F&C Asset Management plc Quarter 4 Funds Under Management 31 January 2008

F&C Asset Management plc Preliminary Results  6 March 2008

Friends Provident plc Group Preliminary Results 11 March 2008

F&C Asset Management plc Quarter 1 Funds Under Management 25 April 2008

Friends Provident plc Interim Management Statement and Quarter 1 New Business Announcement 29 April 2008

F&C Asset Management plc Annual General Meeting 13 May 2008

Friends Provident plc Annual General Meeting 22 May 2008

F&C Asset Management plc Interim Results (provisional) 6 August 2008

Friends Provident plc Group Interim Results 7 August 2008

Friends Provident plc Interim Management Statement and Quarter 3 New Business Announcement 31 October 2008

F&C Asset Management plc Quarter 3 Funds Under Management 31 October 2008

7. Certain statements contained in this announcement constitute 'forward-looking statements'. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements, from time to time, of Friends Provident plc, its subsidiaries and subsidiary undertakings or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, adverse changes to laws or regulations; risks in respect of taxation; unforeseen liabilities from product reviews; asset shortfalls against product liabilities; changes in the general economic environment; levels and trends in mortality, morbidity and persistency; restrictions on access to product distribution channels; increased competition; and the ability to attract and retain personnel.  These forward-looking statements are made only as at the date of this announcement and, save where required in order to comply with the Listing Rules, there is no obligation on Friends Provident plc to update such forward-looking statements.

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