The mystery of insurance

As this blog is called "Mistaken Phil" I feel at liberty to admit that a recent report I studied left me with more questions than answers.

The company in questions is Friends Provident (FP), a FTSE 100 life insurance provider.

Here are the basics: the market cap. is £4 Billion, the PE is about 15 and the yield is about 4%. The analysts expect earnings growth of 10% in 2007 but as the income jumps all over the place depending on external factors that is at best a rough guess.

The confusion arises from the 2006 report. Group profit before tax is stated twice, once on an EEV basis and once on an IFRS basis. EEV profit decreased 34% while IFRS profit increased 34%!

I am used to seeing results stated on a GAAP and pro forma basis where the pro forma results normally look better but are in the same order of magnitude as the GAAP results. But I have never seen anything like this, where two different measures give totally conflicting information.

What is EEV? Wikipedia comes to the rescue. European Embedded Value is an attempt to standardise how embedded value is calculated between life insurance companies. The embedded value of a company is calculated by added together its net assets and the present value of future profits from its insurance contracts. Obviously the present value of future profits will vary considerably depending on what assumptions are made during the calculation. EEV attempts to standardise these assumptions.

Still awake? So as the EEV profit is designed to be appropriate for life insurance companies I guess I should use that rather than IFRS? So doesn't that mean 2006 was a very bad year? So what does chief executive Philip Moore say about 2006?

"We are announcing a strong set of results built around solid operational performances in both UK and international life and pensions." Right.

There is another EEV metric that presumably Philip was looking at when making that statement. PVNBP or Present Value of New Business Premiums increased by 31% in 2006; an impressive result which makes me wonder why the EEV group profit decreased by so much.

Turning away from confusing numbers, FP has three businesses: UK life insurance and pensions, international life insurance and pensions and asset management through the struggling Foreign and Colonial arm.

Philip Moore is confident about the future: "We are confident that we have three businesses well positioned to deliver excellent long-term future growth."

Is FP a buy? Maybe. It has a nice yield and if I can get my head around the figures it could indeed be worth accumulating.