Friends Provident's strategic review wasn't just the tale of cutbacks reported in the mainstream media. As Rocco Sepe and Paul Tunnicliffe explain to Sarah Godfrey, the new focus on the international side of the business is somethi ng to celebrate
When Friends Provident announced the results of its strategic review at the end of January, most of the public attention focused on the 600 job cuts at the life and pensions giant. It even made the top story on Yahoo! News, better known for its in-depth coverage of Mesdames Winehouse and Spears. Even the investment press tended to focus on the proposed sale of F&C Asset Management and the abandonment of Friends Provident's nascent wrap.
At the same time, many international life offices have been nervously waiting to see whether Chancellor Alistair Darling will cut them any slack in his proposed new capital gains tax regime, which could see offshore bonds become less attractive to UK residents.
But how big an impact this will have depends on how one defines international - and Friends Provident International is not feeling at all concerned.
The strategic review concluded that FPI, under managing director Rocco Sepe, should be placed at the heart of the business. With more than twice the internal rate of return of the UK business in 2006, it seems the child has a fair bit to teach the parent.
Sepe is delighted with the outcome of the review for FPI, as is Paul Tunnicliffe, recently named managing director of FPIL, the UK and Isle of Man-facing part of FPI.
"I'm really pleased the group has chosen to focus attention on the international side," says Sepe. "It flows naturally from the strategic review: it is clear to us and to the group that we are able to earn good rates of return and our growth prospects are excellent - we have a proven track record. Very naturally we are ready to go with it."
Tunnicliffe adds that while those on the international side are pleased to be able to play a larger role in the business, they are mindful of the difficult situation in the UK market.
The cost-cutting measures announced in the UK to address Friends Provident's problems (the board concluded in its strategic review that "the Group's recent results are unacceptable and must be improved") will not extend to the international side. "We will continue to provide all the products and services to all the territories that we currently do," says Sepe, adding that the review is about refocusing the UK business into a more focused, profitable entity.
The reason the international business has done better, says Sepe, is down to the markets it focuses on, as well as synergies with Friends Provident's UK operations.
"The fact is the UK is a very mature market, and very competitive," he says. "Internationally, we find markets that are less well developed, so there is more room for growth, and we find we are able to enjoy better margins through exploiting the scale benefits of sharing systems with the UK business. That gives us a very strong advantage over other players internationally. It is a well documented fact that margins are higher outside the UK than inside."
But simply looking overseas is not enough, says Tunnicliffe. "We target the segments of those markets with more attractive margins where we can market our operation effectively. We are not looking for international waterfront coverage; we are careful about where we go and what we do - where there are returns available and we can capture them. So being international is one thing but strategy is a key part too."
The international business offers regular savings and investments, pensions, single-premium investments, term assurance and protection, but it does not offer the same products in all markets. "We have a core in each market," explains Tunnicliffe. "The UK is pretty much portfolio bonds. In Germany we currently only offer pensions, but we are working on other products. In Asia and the Middle East we have a broader range."
While some of the products are relatively generic in terms of the chassis they operate on, the proposition is tailored to suit individual markets. "Our regular savings plan in Sweden is a similar shape to the one we offer in Hong Kong or the Middle East but we tailor the fund offering, for example offering Swedish equity funds," says Tunnicliffe. "We offer it in the local currency and have the product literature in the local language. If you really want to succeed, you have got to make your products appeal to international markets, and each market is different. The days of having one product and one proposition and expecting every market to bite your hand off are gone."
The vexed question of the new CGT rules means Sepe is glad FPI has cast its net further afield than the UK. "It has introduced uncertainty and some slowdown in interest for products," he says. "We are continuing to write business and much will depend on the outcome of the review. The ABI is leading the charge for the industry on that front. But we don't lose a lot of sleep over it as we are really focused on markets elsewhere."
The markets in question are continental Europe, Asia and the Middle East, which respectively accounted for £214m, £593m and £116m of new business premiums in 2007, compared with £184m for the UK.
The European business is a mix of local national markets and expatriate business. "In terms of Germany, which we entered at the end of 2006, it's a totally local national market, and we have a very tailored proposition for that market serving a particular niche via specialist intermediaries," says Sepe. "I would choose Germany as the model we are seeking to go forward with and replicate elsewhere, benefiting from the single licence provisions enabling us to do business around Europe from a UK base."
The Asian business centres on an established presence in Hong Kong as well as a newer focus on Singapore.
"It is our 20th anniversary in Asia," Tunnicliffe points out. "In all the international markets we operate in, I am always asked are we committed to it. Some companies dip in and out but we have a demonstrable track record. We have a full branch in Asia. We have a good reputation; the distributors know us; we have developed our products and enhanced our fund range.
"That's very important as this part of the world is very interested in funds, so we have to keep our range fresh and current."
He adds that using Friends Provident's offshored back office in India helps keep up service standards even in the face of rising demand. "We have had feedback from our IFA forums in Hong Kong that they are able to give us more business and we are still able to turn it round effectively."
While still fairly new in the Middle East, Sepe is confident it will feature prominently in FPI's future success. "We set off there in 2004," he says. "We are very pleased with the way business is growing out of Dubai. It's a very vibrant market - the whole United Arab Emirates is - and we expect it to be very important going forward. Today it is 10-15% of our business, and we expect that to grow strongly."
Friends Provident's decision not to continue to develop its wrap has few implications for the international business. Indeed, wrap as a whole is not a factor in FPI's strategy at present, says Tunnicliffe.
"In the markets we operate in, wrap is not really available. Wraps are a feature of highly developed markets. I wouldn't be surprised if wrap featured in years to come but at the moment, there are no wraps to speak of in Europe or Asia, so they are simply not there for us to place our products on."
A potential cloud on the horizon for FPI is what might happen to its parent in the wake of its strategic review. Following its failed bid for Resolution last year - a prize eventually won by Pearl - there is speculation that Friends Provident might itself become the target of a takeover approach.
But Sepe is optimistic about the future, even given the difficult times forecast for the world economy. "I see us continuing to grow in markets we are new in," he says. "Singapore, Dubai, Germany are a big focus for us; we have only just started there and there is lots to go at.
"We will be in new territories, seeking opportunities where we can make a difference, offering products that are currently absent from those markets where we can really add value through our core capabilities, excellent systems, very good products and something of a reputation for innovation," he concludes.
Reasons to be cheerful
Total investment reaches £9m
Medium to long-term capital growth