Fund Arm F&C Weighs on Friends Provident Profit

British insurer Friends Provident's headline profits slipped 3% in 2006 as lower earnings from its asset management arm offset strong volumes and a jump in new business profits.

Fund manager F&C, 51%-owned by Friends, posted a drop in underlying earnings last week, though it set ambitious growth targets as part of a turnaround plan. The insurer said on Tuesday it had "every confidence" the asset manager would return to strong growth in the medium term.

Friends Provident reported a full-year underlying pretax profit of 509 million pounds ($990 million). That compares to a median forecast of 516 million pounds, according to Reuters Estimates, in a range of 489 million to 602 million pounds.

The life insurer earlier this year reported record 2006 sales at home, boosted by new pension rules, and it said on Tuesday that new business profit there grew nearly 70%.

But it warned that the challenging domestic market for protection insurance and recent market jitters, if prolonged, could dampen business in 2007 and hit its ability to meet a demanding 2008 U.K. new business profit target of 180 million-200 million pounds, compared to 108 million pounds this year.

"It is early days, and we are making progress towards our goal, but the prospects for a more challenging protection market, and the impact on our 2008 target, will not be fully understood until later in 2007," Chief Executive Philip Moore said, adding he remained committed to the target.

Friends said contribution to profits from life and pensions sales at a group level rose 42% to 204 million pounds.

Friends Provident recommend a dividend of 7.85 pence, in line with forecasts and up from 7.7 pence per share in 2005.

Friends Provident shares trade at a slight premium to the sector and analysts said ahead of the results that they did not expect much share price reaction, but talk of consolidation in the financial sector lifted the stock over 4% on Monday.

Since the beginning of 2007, the stock has dropped 7%, slightly underperforming the U.K. life insurance sector.