Your IndustryNov 24 2014

Advisers fear Friends Life and Aviva ‘directionless mix’

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Concern has been raised as to what direction a Friends Life and Aviva merger would go, with some advisers fearing that consumers will be the losers due to a potential lack of innovation and competition in the market.

Last Friday (21 November) Aviva confirmed it has reached an agreement on a Friends Life buyout that could be worth £5.6bn.

Some have suggested the deal is inspired by the pension changes due to come into force in April.

At the time of writing (11.30am), Friends Life’s share price has increased by 4.63 per cent today to 363.5p, whereas Aviva’s has fallen by 5.29 per cent to 510.5p.

Speaking to FTAdviser, Colin Rodger, managing director at Alexander Sloan Financial Planning, said: “Friends Life were never one of our ‘go to’ providers. Good brands like Sun Life and Friends Provident were absorbed into a directionless mix. The business lacked focus and always seemed less than the sum of its parts.

“I think Aviva will have to work hard to get value from the acquisition. The market’s immediate reaction indicates as much with Friends Life shares up and Aviva shares down.”

Daren O’Brien, director at Aurora Financial Solutions, said the move was typical of life insurers having to cut costs and that the industry would definitely see more mergers and acquisitions of a similar nature.

Mr O’Brien said: “It’s not great for consumers in terms of keeping costs down and also competition - having two insurers competing with each other generates more reasons to keep costs down and innovate but as a monopoly there is no incentive to keep costs low.”

He added there were not many of the old life insurers left to merge but that he understood why these companies were doing this, perceivably to keep costs low.

Robin Sainty, Chartered financial planner at Nurture Financial Planning, agreed, adding: “It is going to create another conglomerate, which I’m not sure is a good thing - I think we are going to see a lot more of this.

“When Aviva have gone through these kinds of mergers in the past it has always been terribly messy - particularly in terms of technology.”

Mr Sainty said that a merger of this nature would take another element of choice out of the market.

“The other side of the coin is it does produce a much bigger company which can hopefully make economies of scale and translate into cheaper products.”

Tom McPhail, head of pensions research at Hargreaves Lansdown, told FTAdviser that while it was neutral on the potential deal, if completed it would turn the merged company into a “substantial market player” moving well up the pecking order in terms of UK life and pensions insurers.

He said: “The industry as a whole has had to deal with a series of serious disruptions in a small amount of time. Both of these companies will be carrying back books full of legacy business from previous mergers, so technology integration and achieving economies of scale will be challenging.”

Jason Hollands, managing director for business development and communications at Bestinvest, argued that there is a strategic logic to this consolidation.

“There should be very significant operational and cost synergies to be had from this deal – though in the past merging life platforms has often proved complex in practice given legacy systems.

“But a lot of the logic is also about speeding up Aviva’s turnaround as the deal should improve free cash flow, enabling Aviva to improve its balance sheet and that in turn should support dividend growth potential or indeed the ability to execute expansion outside of the UK.”

Tim Rodgers, Chartered financial planner at TM Asset Management, said: “The experience of insurance companies merging into one does cause an initial amount of pain but in the longer term will be beneficial for consumers.

“From our perspective the Friends Life book of clients we look at are spread across different platforms, so sometimes they have functionality and sometimes they don’t.

“If Aviva gets hold of Friends Life they will hopefully all go on one platform. If all goes to plan the pain early on will be small compared to long term benefits.”

ruth.gillbe@ft.com, peter.walker@ft.com