Friends Provident, the life, pensions and asset management company, has not
been making the great strides it had hoped since its demutualisation and
flotation on the London Stock Exchange in July 2001. Part of the problem, says
Friends’ group FD Philip Moore, is that the City hasn’t yet come to terms with
the new-look company. “The market’s not quite sure yet whether we’re a winner in
the new regime,” he says.
Friends’ flotation was designed to give the organisation scale, and to
provide extra capital so the company could invest in more equities, grow
operations and increase market share. But shareholders have suffered as markets
collapsed and worries about the financial viability of assurance companies have
persisted since Equitable Life closed to new business in 2001.
Friends has also been forced to switch its investment strategy from equities
to bonds, and falling interest rates have hit the sector hard, with many more
companies closing their books. When Friends CEO Keith Satchell told a press
conference in May 2001 that the “big assurers are getting bigger and we need
5%-5.5% market share to place ourselves in the top five,” he could hardly have
envisaged the problems that would lie ahead. Not only has Friends failed to
increase its market share from 4%, making it a lowly number nine in the top 10
life assurers, but its share price slid from debut at 230p to below 75p at the
beginning of 2003.
But recently, City commentators have been impressed by Friends’ ability to
meet or outperform analyst expectations. And while the company also promises to
announce significant growth figures when it publishes its 2003 year-end accounts
in March 2004, its share price has recovered to 145p at the beginning of 2004,
having outperformed the FTSE-100 in 2003.
“I think the strategy has panned out,” says Moore. “When you actually see the
year-end results our market share will have grown, it will have grown in an
organic sense quite significantly. If you look at the third-quarter financials
you can see that already. Compound interest is a dangerous thing as is just
projecting growth lines forever, but we can achieve Keith’s aspirational market
share targets in a not immeasurable number of years just by organic growth.”
And it is up to Moore to keep the good news coming and ensure that Friends keeps
its finances under control, whatever happens to the markets.
Recruited in July 2003 from financial services group AMP, Moore replaced
Martin Jackson, who retired early after four years in the role so he could spend
more time with his pension. And while Jackson, a trained accountant, was focused
on getting the numbers in shape for demutualisation, Moore, who holds an
actuarial qualification, says that his time will be spent keeping the business
as financially sound as possible going forward.
And who better than an actuary to understand the challenges of fluctuating
markets and interest rates that have left the sector perilously positioned in
the past few years – claiming the notorious scalp of Equitable in the process?
“If you can match your assets and your liabilities exactly then you need no
capital. But the nature of insurance liabilities is that we do take risks and
that’s what we’re in business for, and there’s nothing wrong with that. But some
of the market risks that were being written recently were much larger than when
they were originally priced in the 1970s and 1980s,” Moore says. “Arguably,
actuarial training is marginally more relevant than the accounting training to
this sort of organisation. It has made me focused on the balance sheet and we do
need capital to fund growth.”
As an actuary, Moore grew up in the realm of statistics and complicated
financial models, even though he jokes that his time as a consultant for Coopers
& Lybrand helped beat most of the actuary out of him. But his experience as
a life assurance industry consultant has given him an edge over other FDs in the
sector. Within a few days of becoming FD of NPI in 1998, for instance, Moore was
applying cutting-edge actuarial thinking, stochastic modelling and
scenario-planning to work out whether NPI could meet its liabilities in the form
of guaranteed annuities. At the same time, Equitable Life was heading into
“Equitable must have believed there was less of an issue than the future has
shown, Moore says. “If interest rates had gone back up again to 10% – and it
wasn’t that long ago when they were at that level – and if the bull market had
continued, then Equitable would never have happened.”
The problem, says Moore, is that the fall in interest rates and the market
collapse was so sudden that many life assurers were caught unawares. “It is
difficult, when interest rates have been as high as they had been in the past,
to predict a regime of interest rates below 5% across the length of yield curve.
I would challenge any financial commentator five or 10 years ago to have said,
‘That’s where they’re going to be’,” Moore says.
“When the FTSE was 6,900, if you had said to any analyst that in
two-and-a-half years it’s going to be 3,287, you can guess their response.”
But Moore was prepared. And his actuarial background mixed with his days in
the Territorial Army means that everything in his professional life is
calculated and assessed with a hint of military precision. His favourite phrase
is, “No plan survives contact with the enemy” and he devised a comprehensive
100-day plan when he first joined Friends.
“‘The first 100 days in office’ is a kind of buzz phrase, and people did ask
if I had the hundredth day circled on my calendar. Actually, I did note it down
and spent some time on that day assessing what I did and didn’t achieve,” he
says. “When you join a new organisation and don’t plan for the first three
months, it will be very difficult. You end up doing three jobs – the job itself,
all the stuff the chief executive has been sitting on to give the new guy, and
you have to learn the job. You’re not going to be sitting on your arse.”
Moore’s 100-day plan seems to have consisted entirely of things beginning
with the letter ‘c’. The first was ‘capital’ in the shape of issuing a £300m
bond that under new regulations counts as Tier-1 capital and takes on the
characteristics of a preference share, feeling like equity at debt rates. Second
on his list was controlling costs through using technology to provide a better
service for independent financial advisers and policyholders. Third, and most
important for Moore, is cash flow.
“Cash flow is one of my pet subjects, but it has not been an issue for life
and pension companies because buckets of it come in every day – it’s called
premiums. But that is not our money; we effectively hold it in trust,” Moore
says. “But shareholder cash flow is a completely different issue. If you look at
a widget manufacturer, the FD and treasurer will manage cash on a daily basis,
so we need to make sure we manage cash more actively than the industry has done
in the past. Recently, Prudential cut its dividends because it wasn’t generating
enough cash to pay them.”
The problem for assurance companies and Friends Provident, in particular, is
that the City has become jittery about the financial viability of the sector.
Standard Life, the last big mutual, has come under pressure to float because
under the FSA’s emerging ‘realistic value’ reporting rules it is thought that
Standard Life’s free-assets ratio (in effect, capital reserves) at 4.5% was low
compared with its peers. Friends Provident, with a free-assets ratio of 5%, is
not far behind.
“Some commentators have suggested that Friends Provident is capitally weak.
It isn’t, and I wouldn’t have joined if it were,” says Moore. “The restructuring
of a lot of balance sheets is going to be necessary under the new rules. But
there are opportunities to do it in a positive way.” Friend’s bond issue was an
example of this. But Moore says he has to spend a lot more time communicating
how rules and regulations affect the company’s financial position.
“My fourth ‘c’ is communication with external stakeholders. I’m passionate
about full disclosure and we have a duty to our investors to disclose financial
information about the state of the company. But we are straitjacketed by
accounting standards and could spend forever talking about those,” he says.
International accounting standards, in particular, are troublesome because,
as Moore says, you start with “the absolutely laudable desire to get insurance
companies accounting on a consistent basis” but “you start with a pure standard
and then fudge it”. The problem is that under IAS, Friends will have to alter
the way that it recognises profits from long-term contracts.
“Profits will have to be deferred over the life of the contract. That’s fine
if that profit emerges over a year, but if it emerges over 30 you can get into
difficult situations, where a company that writes a lot of intrinsically
profitable new business shows greater losses than one that writes less of that
same business. Now stand right back from it. That’s not right.”
In the end, Moore thinks IAS will fail, “which is a huge shame”. In the
meantime, he has to keep investors aware of its implications. Other bad news he
has had to tell the market includes the FSA’s recent decision to fine Friends
£675,000 for mishandling complaints about endowment mortgages, which was another
distraction Moore could have done without. “We weren’t mis-selling or anything
like that, but the FSA came to their conclusion. We absolutely disagree, but
against the rules and the standards they have set they’ve found us guilty and we
paid the fine.”
Friends faces a challenging future, and some might say that Moore’s
background in mergers and acquisitions from when he was at Coopers suggests that
change is on the horizon. After all, Moore was hired at NPI as an M&A
specialist “in full knowledge of its demutualisation”. So is Friends’
independence under threat, too?
“There’s a distinction between concentration and consolidation in the sector,
” he says. “The market is concentrating on the top 10 – they are writing about
70% of all new business. But I think there will be some consolidation.”
And what will Friends’ role be going forward? “I don’t know if we will
acquirer or go through a pure merger. I see both possibilities. Our pensions
strategy is to grow organically, so we’re not looking for mergers and
acquisitions. But if the opportunity presents itself we would look at it
seriously,” Moore says. “Friends is strong enough, big enough, with a good
enough business model that I do see it as a winner, but with the opportunity to
continue to grow – to be in the top five. That is well within our long-term
Name: Philip Moore
Qualifications: FIA, MA, TD
2003: Group finance director, Friends Provident
1998-2003: Finance director and head of M&A, AMP (UK)
1998: Finance director and actuary, NPI prior to acquisition by AMP
1989-1998: Various positions, including partner responsible for East Asia
insurance consultancy, PwC, Hong Kong
Biggest challenge?: Ensuring I properly support the organisation’s business
Biggest hassle?: Driving round to Dorking on the M25. But compared with Mumbai
airport, which I had to use at PwC, the M25 is wonderful.
Which company would you like to be FD of?: A university with a bias towards
Cambridge. I believe passionately in education and so to be able to contribute
in some way towards it would be good.