Friends is inspiring confidence

Friends Provident; Jardine Lloyd Thompson; Geneti

Friends Provident, the latest life insurer to demutualise and turn more than one million customers into windfall shareholders, has been quick to learn the first rule of the stock market: the City hates surprises.

So Friends had already warned ahead of its flotation last month that business was severely down this year – and that there is no reason to panic.

Yesterday it produced the unsavoury evidence. Total sales fell by 12 per cent to £182m in the half-year to June, with a 40 per cent slump in life product sales. Savers have preferred to steer clear of the company during the demutualisation process, while the end of the internet bubble has diminished enthusiasm for stock market investing. To make matters worse, Friends suffered from being seen as less financially secure than its competitors, just as the implosion of Equitable Life has made insurance brokers more careful about whose life products they sell.

But there are grounds now for cautious optimism. Shares rose a penny to 242.5p, producing an 8 per cent premium on the float price of 225p.

By demutualising, it has significantly improved its financial strength, bolstered by £1.4bn of capital raised as part of its flotation. This should enable the company to write business at a faster rate, as well as inspiring confidence among brokers.

Friends must now concentrate on its biggest challenge – making a success of stakeholder pensions. A recent research note by Credit Suisse First Boston suggested that might be tough. Bigger and better-known rivals like Legal & General might capture the lion's share of stakeholder investments while being able to stand the margin pressure of ever-lower costs. So far business has been slow across the pensions industry.

Friends has invested heavily to produce some of the best technology for managing stakeholder investments and was one of the first to get the new low-cost pensions off the ground. It will also concentrate its stakeholder marketing to capture more lucrative company pension business.

It certainly has to get stakeholders right if it wants to stay independent, because it has chosen not to diversify into other areas of growth such as the overseas life and pensions markets. Shareholders should be protected, though, since any slip-ups could mean the company attracts a bid from a bigger continental insurer.

While the jury is out on Friends' long-term success, the shares should be buoyed for now because of buying by the tracker funds which replicate the make-up of FTSE indices. The stock is also a cheap way to get exposure to its successful investment management arm Friends Ivory & Sime, of which it owns two-thirds. Hold.

Jardine Lloyd Thompson

Investors are always wise to be wary of "forward looking statements" – as the legal jargon has it – from companies, but insurance broker Jardine Lloyd Thompson does appear to be right in its prediction of boom times for the industry.

The company said yesterday that premium increases, which are suddenly racing ahead after seven long years of price competition, are set to continue. Insurers need to shore up their cash positions after some big airline disasters in the past year and as the collapse of Independent Insurance turns the spotlight on their ability to pay claims. Additionally, the giant CGNU has pulled out of the general insurance market in the US, reducing competition.

The shares jumped 19.5p to 491p on hopes that the growth in evidence from interims yesterday might be a taste of things to come. Turnover for the six months to June was up 26 per cent to £173.3m and profits rose 18 per cent to £42.3m.

That Ken Carter, the chief executive, is moving up to chairman and being replaced by his deputy, Steve McGill, should ensure management continuity. The shares, which doubled last year, have only gone sideways in the last six months and, on 17 times the house broker's forecast earnings for 2001, are not on a demanding rating. Buy.

Genetix

With the mapping of the human genome complete, universities, biotech companies and pharmaceuticals giants are throwing themselves into the search for drugs based on what has been discovered about the genes and proteins that are the building blocks of human life. That's a lot of work.

So Genetix is developing and selling robots to do the mundane lab chores of sorting and monitoring samples. Interims yesterday showed profits up 39 per cent to £2.4m on sales up two-thirds to £7.3m. Investment in two big new product launches later in the year and a bigger marketing effort will mean a weaker second half but the forward price-earnings multiple of 41 reflects Genetix's growth potential. Down a ha'penny to 159.5p, the shares are worth a look.