A month of fraught negotiation ended in a £1.86bn takeover of Friends Provident, the FTSE 100 life insurer, by the acquisition vehicle Resolution yesterday, in a move that could kickstart plans for Clive Cowdery's Guernsey-based cash shell to launch bids for a string of other insurers including Clerical Medical and Scottish Widows.
But the takeover has prompted fears that the needs of policyholders will take a back seat at a company focused on an ambitious merger and acquisition strategy.
News of the deal came as Friends Provident announced pre-tax losses from continuing operations of £102m for the first half of 2009. Although this is a distinct improvement on the £221m interim losses it posted last year, the insurer also admitted it is struggling to find new business in the current climate.
Resolution's bid offers 0.9 of its shares – worth 74p last night – for each Friends Provident share. There is also a 79.4p per share cash alternative, worth around £500m, available for the insurer's 700,000 smaller shareholders – a legacy of Friends Provident's demutualisation in 2001. Trevor Matthews, the chief executive of Friends Provident, will remain with Resolution following the merger, although chairman Sir Adrian Montague will stand down.
Friends Provident was adamant that there would be no negative impact for its customers. "The deal enables Friends Provident to move forward with greater certainty," said Peter Timberlake, the head of public relations. "Customer service is at the heart of what we do and the checks and balances we have in place, like treating customers fairly and our with-profits committee, remain in place, so the interests of customers are fully protected. F&C will also continue to manage our funds on behalf of our customers under agreements which run to 2014."
But personal finance experts have raised concerns that a company with such epic plans to consolidate the UK's insurance industry will neglect to look after its policyholders during unstable periods of integration.
Laith Khalaf, a pensions analyst for the financial adviser Hargreaves Lansdown said: "The problem with Resolution aggressively pursuing further mergers and acquisitions is that Friends Provident and those other firms will need to be integrated. This can lead to a significant decline in service standards as systems and staff are merged. Resolution is trying to make a buck by combining similar companies and producing economies of scale. Those savings are unlikely to filter down to policyholders, but it is this group that will have to suffer the administrative headaches.
"It's also worth noting that in its former rejection of the deal, FP highlighted that Resolution's corporate structure was inappropriate. In particular, Resolution's management had little accountability and took big chunks in fees, which could have a negative impact on both policyholders and shareholders.
"Resolution intends to sell off the business in two to four years, so there is likely to be a further change of hands in a short space of time anyway. This uncertainty could also mean customers move out. Policyholders will probably find themselves shifted on again in the not too distant future, into the hands of who knows, with the potential for further integration problems.
"The key thing for customers to watch out for going forward from this merger is the level of communication, administration and service standards," agreed Justine Fearns, investment research manager for financial adviser AWD Chase de Vere. "When the insurance company NPI was merged with Pearl, redundancies meant that staff with in-depth knowledge disappeared overnight. Enquiries and requests took far longer post-merger and their communication with customers fell apart, leaving them with a real sense of instability."
But advisers have warned against knee-jerk reactions from policyholders looking for certainty for their long-term investments and pension pots. The fees and charges involved in both the withdrawal and new investment of long-term plans can significantly affect the capital value of the sum being transferred, Ms Fearns said.
She added: "Old policies often have guaranteed rates of return. Those are invaluable and customers should be very certain before throwing that away.
"This merger is big news, but a policy that was the right investment two weeks ago will still be right for you for the immediate future. Transferring out of Friends Provident should be something to consider for the short to medium term, once the dust settles a little and we can clearly see what the effect has been. This is not a decision to make based on a knee-jerk reaction."
However, yesterday's announcement leaves little doubt that the insurance industry is on the brink of merger upheaval. Indeed, this was not the first time Friends Provident had been the focus of insurance tycoon Clive Cowdery's attentions. Resolution Plc, his first insurance company, had agreed to merge with Friends Provident in 2007, but the deal fell away when Pearl took over Resolution. Mr Cowdery then set up Resolution in its current incarnation to buy underperforming financial services firms, and further deals will follow.
David Middleton, the head of strategic marketing for wealth adviser Towry Law, said further consolidation in the industry had been a long time coming and offered the chance of a better deal for customers. "The life assurance industry faces a number of key challenges," he said. "They include the unattractiveness of long-standing products such as with-profits and insurance bonds, and the increasing awareness consumers have of a multi-manager, open-architecture approach to investment management which will channel funds away from profitable in-house insurance company investment products.
"Consolidation could give companies more opportunity to meet these challenges and be better placed to provide an improved service to policyholders."
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