A stained glass image of William Penn, the 18th century ?philanthropist, adorns the lobby of Friends Provident’s London office, a ?testament to mutuality and the tolerant ideologies that gave birth to the ?life assurer.
This year, however, Penn, founder of Pennsylvania and the Society of ?Friends, has lost relevance to the company as it prepares to demutualise ?after 170 years of self-governance.
Friends Provident began life in 1832 as the Friends’ Provident ?Institution, founded to provide life assurance for Quakers. By 1870 funds ?under management topped #1m, by 1902 #3m, and currently the company is ?managing assets closer to #38bn. But even with its venerable history as a ?mutual and impressive growth record, the Friends Provident directors feel ?that the company’s relatively small market share and limited access to ?capital demand that it gets a market listing. Cash is king, and Friends ?Provident needs much more of it.
Martin Jackson, the assurer’s group finance director, doesn’t see ?nostalgia as any reason to resist going to market. “With Friends ?Provident’s heritage and the Quaker background we have probably got a ?proportion of policy-holders who are tied to the history of the company ?and the mutual status,” he says. “But I would be kidding myself if I said ?these people accounted for anything other than a small percentage. The ?vast majority of policy-holders are not looking much further than the ?immediate benefits of demutualisation.
They may well be interested in retaining their shares and participating in ?the company going forward and I think that is absolutely right.”
Jackson has experience of being on the board of a plc, joining FP from ?London & Manchester, where he was FD in the late 90s when the mutual ?launched a hostile bid for its smaller quoted rival. And he is keen to ?introduce a public company mentality to FP before listing. “We have always ?wanted to bring plc disciplines to corporate governance,” he says. “We are ?now tightening some of the reporting requirements. We will have to report ?faster and more regularly, and be more responsive than we have been.” FP ?signed off its 1999 accounts on 4 May 2000, 125 days after financial year-end. In terms of reporting times this would have placed FP 99th out ?of the FTSE-100.
FDs of plcs have to be strategically minded, but from 1970 to the early ?90s, Jackson held a number of senior positions in internal audit ?departments, including the Kuwait office of Ernst & Young and the Union ?Bank of the Middle East. The question is, how can an FD with such an ?extensive background in the minutiae keep the bigger picture in mind?
“Well, the internal audit function could be described as inward looking, ?but it is the only area of the company that gets right into the heart of ?company business,” argues Jackson. “You have to maintain control and a ?spell in audit gave me discipline that reinforced my accountancy ?qualification.
Companies need to have good systems and controls, and internal audit has ?now broadened out to include such things as business risk. We review risks ?on a quarterly basis and my background has helped make our risk assessment ?system successful.”
Jackson moved from internal audit into the finance department of London & ?Manchester in 1991, becoming FD of L&M in 1992. But he is blase about his ?rise to the top of the finance ladder. “I am not one of those people who ?plan their career year to year. I like to do the best job I can, wherever ?I can,” he says. This is a surprisingly relaxed approach from a man who is ?likely to be admitted to the illustrious Hundred Group of Finance ?Directors.
He must have impressed though, because he became group FD of Friends ?Provident in November 1999, shortly after L&M was bought by Friends.
Only six months after Jackson’s appointment, the FP board formally ?announced the intention to demutualise. Despite the convenient timing, ?Jackson denies that was the reason he was hired. “When I was appointed we ?genuinely hadn’t had the demutualisation debate. We started the process ?fully in January and announced in May 2000,” he says.
The speed of Jackson’s integration into the heart of FP has been ?accompanied by the company’s headlong charge into demutualisation. As we ?went to press, two million copies of the circular were landing on policy-holder’s doormats.
Once 75% of policy-holders have ticked the box on the voting forms ?entitled “Show me the money!” the proposal goes to the courts on 11 June ?to be rubber stamped and the prospectus will then be dispatched on 12 ?June.
Share dealing is due to commence on 9 July.
“We have recently been working through the night to get the circular out,” ?says Jackson. “We are in a slight lull at the moment while we wait for the ?court hearing but it will all start up again. It hasn’t been too bad. I ?knew we had a big project on our hands so we sat down and worked out how ?many people we needed to see the demutualisation through. Even then I’d ?say that the task is 50% bigger than a year ago with the addition of ?unforeseen membership and financial issues. The year has flown by.”
He has also had to prepare the company for Turnbull and make sure that the ?accounts are up to scrutiny. “We have had to produce embedded value ?results for three years now,” he says. Embedded value is the valuation ?basis for life assurance companies, which discounts back the future ?profits on contracts in force and then adds the net assets.
Jackson hopes to take a breather after the publication of the interim ?accounts in the summer, but he is keen to get back to driving the business ?as FD and not just a project manager. “My role will revert back to one ?akin to my job at London & Manchester in terms of investor relations.
There I spent ten years building rapport with institutional fund managers, ?analysts and going round the City. The rest will be getting back to ?business,” he says.
Jackson will hopefully have lots of lovely lucre to play with in Q3.
Merrill Lynch has estimated the price of shares in Friends Provident plc ?to be in the range of 225p to 270p per share. This would give it a market ?capitalisation between #3.7bn and #4.2bn – enough to book its place in the ?FTSE-100.
Most importantly for Jackson, the key figure is the #1.4bn expected in new ?capital from flotation, which will be used partly to buy the assets of the ?mutual company and partly to invest in equities. “As a mutual, our owners ?are the policy-holders, and subsidiaries such as Friends Ivory & Sime are ?assets of the life fund. For regulatory purposes these are not valued at ?very much – they are valued at net asset value and not market value. So ?when we transfer the ownership to the plc we have to pay the full market ?value and inject that money into the life fund. It is essential that we ?raise at least #500m to do that. The remaining #900m will be invested on ?behalf of new business. It will be injected as capital into the main life ?company, FPLP, Friends Provident Life & Pensions. We will leave about ?#200m at the plc level just to give us corporate flexibility,” he ?says.
For months before the May 2000 announcement the FP board denied they would ?demutualise. So why the rush to market? The answer came from Keith ?Satchell, Jackson’s CEO, during a press conference in May. “There is a gap ?opening up in the life assurance market. The big companies are getting ?bigger. We need a 5% to 5.5% market share to place ourselves in the top ?five,” he said. The inference was that FP could not survive with its 4% ?market share.
Jackson supports this view, reiterating the grim realities of remaining a ?mutual. “As a mutual we are getting to a restricted position as regards ?writing new business,” he says. “Demutualisation will improve our ?financial strength, our free asset ratio as it is called. We will then be ?able to move more of our policyholder money into equities and property ?than fixed interest. It is essential that we get bigger and stronger so we ?can compete in today’s market. We would find it quite hard over time to ?carry on as a mutual. We would have been able to do so for a while, but ?eventually it would have been much more difficult.”
The converse argument has been put by Standard Life, the last big mutual ?in the life assurance arena. SL’s board steadfastly refuses to ?demutualise, claiming that they can provide better long-term results for ?policy-holders if they manage their own affairs. Look after the financial ?health of your grandchildren and not your current account is their ?philosophy.
Jackson sees Standard Life’s point but says demutualisation was ?inevitable.
“Standard Life are in a different situation because they are much ?bigger.
So long as they run themselves on proper business lines I can fully ?understand why they stayed mutual. They have a business model that works. ?They don’t have the same issues as us as regards strength and financial ?flexibility.
So why change?” he says.
Perhaps with another mutual in mind Jackson points out another argument ?for demutualisation. “If you look at Turnbull issues, the risks of running ?the business should not be borne by the policy-holders, this is the ?current situation for a mutual. The investors carry the risks in a listed ?business,” he says.
Equitable Life infamously left itself exposed to guaranteed annuity rates ?- termed “guaranteed annuity options” (GAO) by FP – to the tune of ?#1.5bn.
When interest rates dropped, EL’s investments could not cover the ?guaranteed payouts to policy-holders. Jackson doesn’t want to expose his ?policy-holders to the same risk, and is confident that GAO is not a ?serious issue for Friends Provident. “The difficulty that Equitable had ?was the fact that its policies were open-ended. How do you deal with a ?problem that could be growing?” he says. “They also had a policy of paying ?out the full amount of investment earnings and not filling up their ?reserves. I don’t think those two issues would have been very easy to ?manage given Equitable’s business model. Of course, this can be seen as ?another indication of policy-holders bearing the risk in a mutual.”
Despite claiming to be “a million miles away from this situation,” Jackson ?does not deny that FP is substantially exposed to GAO. Where the circular ?claims that exposure to GAO is “within acceptable levels”, he is more ?specific. “The guaranteed annuities that we are going to have to pay are ?not in the circular itself, but the actuaries’ report contains a figure of ?#500m for the current economic exposure. That is essentially based on the ?level of current interest rates and the expected level of mortality,” he ?says.
Half a billion pounds is a lot of money – a third of the amount that ?brought EL to its knees. Could it be that the extra capital from listing ?is needed to fill this hole in the balance sheet? Not at all, says ?Jackson.
“Our reserves as a mutual cover the guaranteed annuity liability in full, ?and they have covered them over the last three years. Absolutely none of ?the new capital will be used in this area.”
Jackson admits that if interest rates continue to fall then FP will be ?further exposed, so it has purchased swaptions. FP has hedged by paying a ?premium in the marketplace, so that if interest rates fall it makes a ?profit, and if rates go up it just loses the premium.
In the past, Jackson has been cagey about the amount FP has hedged and the ?numbers of policy-holders that account for the GAO exposure. But he opened ?up a little in our interview. “We have not hedged every last penny because ?it’s difficult to judge the final amount and we do not want to be accused ?of over-hedging,” he says. “It’s also difficult to say exactly what the ?exposure is because we are going back 20 years, but it is only 150,000 ?policy-holders who account for this risk. Our embedded value is #2.3bn and ?I have hinted that our exposure will only be a small percentage of ?this.”
FP’s advisors Merrill Lynch and Bacon & Woodrow certainly seem happy ?enough with the financial health of the company, and gave demutualisation ?the all clear. The ratings agencies have also given their seal of ?approval, with Moody’s considering an upgrade from A2 to A1 or Aa3, and ?S&P looking at AA-.
To a certain extent, of course, asking advisors like Merrill Lynch if you ?should cease to be mutual is like asking a butcher if you should stop ?being vegetarian. This is especially true if the butcher and the ?vegetarian have a common interest – and David Newbigging, FP’s chairman, ?is also a director of Merrill Lynch. Is this a conflict of interest? ?Jackson doesn’t think so. “There is a satisfactory degree of independence. ?The fact that we use Merrill Lynch is incidental. Had we used another ?investment bank they would have been putting the same arguments forward. ?The chairman is also an independent director, he is not on the executive ?board,” he says.
After flotation, Jackson is sure that FP will have enough clout to ?compete.
“Friends will be big enough in the FTSE-100. We have a good background in ?technology, key skills in the group and we have got good cost ratios in ?terms of policies on the books,” he says.
Yet there is a feeling that the FP directors are not fattening the pig for ?market, but for slaughter. For some time, the company has been dogged by ?rumours, which have been vehemently denied, of a sale to a third ?party.
With a healthy share price, extra capital and investment flexibility it ?would make an attractive target. And one of the reasons in the circular ?for not selling out before listing is that “it would be difficult to ?demonstrate that any proposal would maximise value for policy-holders”. ?Friends Provident plc will not have this problem because any bid premium ?above market price is more transparent.
Satchell found it easy to claim that FP was “not wedded to mutuality” in ?May 2000. Does the same now go for its independence? Jackson admits the ?possibility of a takeover. “It would be difficult to say that I am wedded ?to independence because I came from a company that was taken over,” he ?says. “The Friends board has an open mind. But the focus is on growing the ?business organically. If we do that we will be well positioned as an ?independent, but also if someone came along to buy us. We don’t go into ?work every day wondering who will approach us – just as it would be wrong ?to say we will remain independent forever or we will be taken over ?tomorrow.”
Name: David Martin Jackson
1999-: Group finance director, Friends Provident
1998-99: Director of financial operations, Friends Provident
1992-98: Group finance director, London & Manchester
1991-92: General manager, finance, London & Manchester
1988-91: Assistant general manager, audit and compliance, London & Manchester
1988: Senior manager, financial institutions, Deloitte & Touche, London
1986-87: Senior manager, internal audit, The Union Bank of Middle East, Dubai
1982-86: Internal audit, Ministry of Defence, Government of Oman
1979-81: Audit function, Ernst & Young, Kuwait
1970-79: KPMG, audit and consultancy
Biggest challenge: Initially the biggest challenge in my job is that we ?meet all the reporting timetables in the new plc world. We must also ?compete and have a focus on cost. Margins in the industry are under ?pressure – we have a 1% annual management charge and a cap on stakeholder ?pensions.
Biggest hassle: I do not look in terms of hassle. It is a job I enjoy and ?I always look at issues rather than hassles. But, it is important to be ?able to present our results to the analysts in the City in a way that they ?understand it.
You can be FD or any company except Friends Provident. Which?: It would be ?interesting to be the FD of a large bank. The attributes of banking are ?the management of the finances: capital management, management of assets ?and liabilities. That is what I find interesting.
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