Friends Provident unveil €12.8bn merger

Friends Provident wrote a new chapter in its 175-year history today after unveiling an £8.6bn (€12.8bn) merger deal to create a “significant” new force in the British insurance industry.

The life and pensions specialist will combine with Resolution – the UK’s biggest owner of closed life insurance funds – to form Friends Financial Group.

The tie-up will use cash generated from Resolution’s extensive book of life policies to fund an aggressive push for new business in areas such as protection and group pensions.

The two firms have also pledged to use their increased scale to participate in further consolidation in the life and pensions industry.

Rival bidders may yet disrupt the tie-up, with the French insurance giant Axa and Standard Life among potential candidates. The merger is due to complete in the fourth quarter of the year, but is conditional on shareholder, regulatory and other approvals.

The combination is expected to generate at least £100m (€149m) of annual cost savings, although the firms denied this would lead to major job losses.

Resolution employs around 3,500 people, although some 2,000 staff, mainly from customer services and IT departments, based in Glasgow and Birmingham, are already due to transfer to outsourcing group Capita from next month.

Friends Provident, which dates back to 1832, has around 2.5 million life and pensions policyholders, served by some 5,000 staff, at locations including Manchester, Exeter, Dorking and Salisbury.

The savings will be achieved through a single management structure, the integration of the group’s life and pensions operations and the combination of sales and marketing.

Resolution chief executive Mike Biggs, who will take the same post at the enlarged company, pointed out the £100m (€149m) need not be achieved until the end of 2010: “It would be wrong to think about job cuts at this point. As the integration is going to take some years to accomplish, in that period we would expect to see substantial growth.”

Friends demutualised and listed on the stock market in 2001, leaving it with one of the UK’s largest shareholder bases, with more than 800,000 individual investors.

They will retain their shares as the merger agreement will be structured to give Friends 49.1% of the company, with Resolution owning the rest.

Resolution founder Clive Cowdery, who will remain as chairman of the new company, said the merger marked a “turning point” for the UK life insurance industry, following a crisis of confidence caused by stock market weakness in 2003.

He said: “The next period will focus on sustainable earnings growth and cash returns to shareholders. Friends Financial is exceptionally well positioned to prosper in this new environment.”

The Friends Provident name will be retained as the main brand for the group’s life insurance and pensions business, but there should be opportunities for cross-selling between the two customer bases.

Asset management – through the F&C brand – will also remain part of the company’s strategy with a combined total of £165 billion funds under management at the end of last year.

In contrast with Friends, which started in 1832 to provide life assurance to members of the Society of Friends, Resolution launched only in 2003.

It has grown through acquisition to become the largest manager of in-force UK life funds, with an estimated seven million customers and invested assets of more than £61 billion.

Some of the life companies owned by Resolution include Phoenix Life Assurance, Scottish Mutual Assurance and Scottish Provident.

Mr Cowdery founded Resolution Life Group in 2003 and was appointed chairman of Resolution plc in September 2005, following a merger with Britannic Group. He was previously chairman and chief executive of GE’s primary insurance operations in Europe.

Today’s statement comes two days after the two companies confirmed they were in talks about a potential merger.

Barrie Cornes, an analyst at Panmure Gordon stockbrokers, said: “Overall we view this as a slightly strange combination but one which is logical in the sense that independently we believe that both companies are strategically challenged, with Friends needing cash to fund new business growth and Resolution finding new closed life businesses no longer for sale at prices below embedded values.”