TIDM35PG TIDMRSL
RNS Number : 5228D
Friends Provident Holdings (UK) PLC
24 March 2011
24 March 2011
Friends Provident Holdings (UK) Plc
Preliminary Results for the year ended
31 December 2010
Overview
Following the acquisition of Friends Provident in 2009 RSL
announced, in June 2010, the proposed acquisition of the AXA UK
Life Business and, in October 2010, the proposed acquisition of
Bupa Health Assurance Limited ("BHA").
The AXA UK Life Business acquisition was successfully completed,
with an effective date of 3 September 2010 (legal completion 15
September 2010), and post year end the acquisition of BHA
successfully completed on 31 January 2011.
The results of FPH in 2010 include the AXA UK Life Business from
its acquisition date and are characterised by the continued focus
on value over volume. The UK market continues to experience
challenging conditions but the business maintained its pricing
discipline and focus on cash generation. International and Lombard
saw improved sales and had a greater focus on shareholder cash
generation.
Further information on Resolution Limited's results and strategy
can be found in its preliminary announcement issued today,
(www.resolution.gg).
UK Life Project update
Following completion of the AXA transaction, a strategic review
of the combined Friends Provident and AXA UK Life Business was
undertaken and performance targets were announced on 23 February
2011. The highlights of this review included:
-- increased cost synergies from GBP75 million per annum before
tax to GBP112 million per annum before tax by end 2013, with
one-off implementation costs of GBP117 million;
-- a reduction in UK new business strain of approximately GBP200
million per annum by 2013 as a result of work on new product
strategies;
-- focused product strategies based on the Company's ongoing
commitment to prioritise value over volume, achieving a blended IRR
on new business of at least 15%; and
-- expected cash dividends from the non UK businesses
(International and Lombard) of at least GBP50 million per annum by
2014.
Financial highlights:
Restated
2010 2009
GBPm GBPm
--------------------------------------- ------ ---------
APE (i) 1,012 873
IFRS based operating profit (ii) 290 21
IFRS profit after tax (iii) 848 1,339
Estimated IGCA (iv) surplus capital
(GBPbn) 2.3 1.0
Asset quality for shareholder related
assets (v) 95% 95%
--------------------------------------- ------ ---------
(i) Annual Premium Equivalent ("APE"), 2009 comparative is for
12 months;
(ii) 2009 IFRS based operating profit has been restated to
exclude the impact of investment volatility in the long term funds.
GBP14 million of positive investment return has been reclassified
from operating profit to short term investment fluctuations. This
has no impact on profit after tax.
(iii) 2009 IFRS profit after tax has been restated to increase
the gain on acquisition of Friends Provident Group plc by GBP119
million in accordance with improvements to IFRS 3 (Revised).
(iv) Insurance Group Capital Adequacy ("IGCA").
(v) Percentage of shareholder and non-profit fund corporate debt
and asset-backed securities at investment grade.
-- IFRS based operating profit before tax of GBP290 million in
2010 compared to GBP21 million in 2009 reflects a full year of
Friends Provident results and the post acquisition four month
results of AXA UK Life Business. Operating profit for the life
businesses of GBP315 million, offset by GBP25 million of corporate
costs, represents a good result driven by expense savings, improved
persistency, and increased annual management charges driven by the
growth of funds under management as the financial markets
recover.
-- IFRS profit after tax of GBP848 million in 2010 compared to
GBP1,339 million in 2009 primarily reflects the inclusion of a full
year's amortisation of intangible assets in 2010 and reflects the
gains on acquisition recognised for the Friends Provident
businesses in 2009 and the acquired AXA UK Life Business in
2010.
-- IGCA surplus capital at FPH level is GBP2.3 billion as at 31
December 2010, up from GBP1.0 billion at the end of 2009 reflecting
the positive impact of the AXA UK Life Business, the transfer of
the reattributed inherited estate ("RIE") from the Friends Life
Company ("FLC") non-profit funds to the FLC shareholders' fund
combined with transfers from other long term funds and the positive
impact of management actions offset by financing costs.
Operating highlights
-- Total sales of GBP1,012 million (measured on an APE basis),
including a contribution of GBP82 million from the acquired AXA UK
Life Business, represents an increase of 16% on 2009.
-- UK sales for the year ended 31 December 2010 (excluding AXA
UK Life Business) of GBP391 million were down slightly (4%)
compared to 2009.
-- Fourth quarter UK sales were 40% greater after the inclusion
of AXA UK Life Business.
-- The International and Lombard businesses both delivered
record levels of annual sales in the year. International delivered
sales up 24% to GBP238 million, with Lombard up 10% to GBP302
million.
Outlook
2010 has seen our core UK markets of corporate pensions and
individual protection continue to be impacted by difficult
employment prospects and a sluggish housing market. Despite this we
made good progress controlling our cost base and expect this work
to be a good foundation for 2011. As we drive forward integration
of our businesses we are confident of achieving our cost savings
target announced on 23 February 2011.
In the overseas businesses, Lombard and International, consumer
confidence began to return in the second half of 2010 and they both
achieved record sales for the year.
We have made good progress integrating the acquired AXA UK Life
Business and completed the purchase of BHA. Our decision to develop
the protection platform acquired from BHA as our long term
strategic solution in this market means we will build market
leading propositions for our 5 million UK customers from the best
elements of our current ranges on a low cost efficient basis.
The introduction of our new Friends Life brand will enable us to
present a unified company with market leading propositions for
advisers and customers.
Journalists requiring further information should contact:
Peter Timberlake Friends Provident +44 (0) 845 641 7834
Lorna Wiltshire Friends Provident +44 (0) 845 641 7836
Emma Wylie Friends Provident +44 (0) 845 268 4909
Notes to the editors
1. We are the holders of a large number of industry awards,
showing continued recognition of the quality of our products and
service.
2. This announcement contains certain forward-looking statements
with respect to the Friends Life Group and its outlook. These
statements and forecasts involve risk and uncertainty because they
relate to events and depend on circumstances that may or may not
occur in the future. There are a number of factors that could cause
actual results or developments to differ materially from those
expressed or implied by these forward-looking statements and
forecasts. Nothing in this announcement should be construed as a
profit forecast.
3. For more information on the Friends Life Group including,
photos, awards, fast facts, presentations, and media contacts
please visit the media section at
www.friendsprovident.com/media
4. For more information on Resolution Limited, including,
photos, awards, fast facts, presentations, and media contacts
please visit the media section at www.resolution.gg
UK Life project update
Friends Provident Holdings (UK) plc is the holding company for
the Group and is used as the main acquisition vehicle for
Resolution Limited's UK Life Project.
The UK Life Project comprises three phases:
1. acquisition of businesses at a suitable valuation;
2. optimisation of the business models of the acquired
businesses, developing a sustainable business model, based on
profitable products, an efficient cost base and strong cash
generation; and
3. value delivery through financial synergies, restructuring,
and exit for Resolution Limited shareholders.
Acquisition phase
The aim of this phase is to acquire sufficient scale and
capability at suitable prices to allow the realisation of value
through the later two phases of the project. This phase started
with the acquisition of Friends Provident Group in late 2009. In
June 2010, the Group announced the agreement to acquire the
majority of the UK Life and Pensions businesses of AXA UK plc. On
completion of the transaction in September 2010, FPH acquired AXA
Sun Life ("ASL") (renamed Friends Life Company ("FLC") on 15 March
2011) and Sun Life Assurance Limited ("SLAS") (renamed Friends Life
Assurance Society ("FLAS") on 15 March 2011), agreed to transfers
of certain blocks of business from the acquired entities back to
the retained AXA UK business and agreed to the completion of the
acquisition of Winterthur Life UK ("WLUK") in late 2011. The
separation from AXA UK plc and the various transfers of blocks of
business require, as anticipated, considerable work to achieve.
This is progressing to plan with the WLUK acquisition on track for
completion in the fourth quarter of 2011. Exits from transitional
agreements set up as part of the transaction are also progressing
to plan.
The third acquisition, BHA, was announced in October 2010 and
completed successfully on 31 January 2011. As part of the refocus
and integration activities, the Group plans to rename all acquired
companies in line with its revised branding; Friends Life.
UK strategic review
In late 2010, a strategic review of the Friends Life UK
operations was carried out. The conclusions were set out in the
announcement issued by Resolution on 23 February 2011:
-- Individual Protection
- Friends Life will build on its market--leading positions in
Critical Illness Cover and Income Protection; introduce simplified
term assurance and 'over--50s' propositions; and further develop
profitable distribution segments and exclusive partnerships. This
improved product mix and focused distribution, along with sales and
marketing synergies, and consolidating the new businesses onto a
single platform will improve returns significantly. Since the
announcement in February, the Company has concluded that the
platform acquired with BHA will be the strategic platform for the
future. The Company is targeting gross value of new business
("VNB") of GBP80 million, new business strain of GBP30 million per
annum, a payback period of five years and an IRR of 20% by
2013.
-- Corporate Pensions
- The current financial returns from Friends Life's Corporate
Pensions business are unacceptably low. The market is evolving, and
its structure from 2013 onwards is uncertain due to the Retail
Distribution Review ("RDR") (to be effective 31 December 2012) and
the introduction of auto--enrolment (staging from July 2012),
whereby all employees above the age of 22 (and below Statutory
Pensionable Age) earning more than GBP7,475 will be automatically
enrolled into a qualifying scheme (of which NEST is one).
- Friends Life has the advantages of a comprehensive range of
defined contribution solutions, an integrated online workplace
savings platform and a full range of group risk products, as well
as the scale and relationships to be a major and profitable player,
but it is not prepared to write loss making new business in
anticipation of future reward. It will reshape the sales and
marketing teams into more focused distribution and selectively
migrate schemes to the more efficient Friends Provident NGP (New
Generation Pensions) platform to improve returns on new
business.
- Friends Life expects to develop the corporate Pensions and
Risk business favouring value over volume with a significant
improvement in VNB to GBP25 million, targeting a reduction in new
business strain to GBP75 million and achieving a double--digit IRR
by 2013.
-- Annuities
- The enlarged Friends Life will have vesting pension claims in
excess of GBP2 billion in 2011, growing steadily in subsequent
years. Both Friends Provident and AXA UK Life Business have
historically retained only a small proportion of their available
vesting pension funds as annuity new business. This is in part
because of under--investment in the expertise required to
underwrite and manage annuity business profitably. Following
completion of the strategic review of product propositions, Friends
Life continues to believe that the pension annuity market is
attractive and intends to build its own capability in annuity
underwriting, credit management and longevity risk management;
while not ruling out acquiring capability via a bolt--on
transaction should the opportunity arise.
- Friends Life's immediate objective in the annuity market is to
retain a larger proportion of vesting pension funds, and will aim
to raise its retention rates from 30% of vesting amounts (excluding
taxfree cash) to at least 50% by 2013, and reach gross VNB from
retained pensions of at least GBP50 million per annum.
- As it has low exposure to longevity risk (as a result of past
longevity risk hedging activity), and as the annuity market
currently has attractive IRRs and VNB, Friends Life has appetite to
write more annuity business than available from its vesting
pensions, and so in due course will examine options to enter the
open market option ("OMO") market.
-- This UK strategy is targeted to deliver:
- reduced new business strain on a like-for-like basis against
the 2010 annualised run-rate by around GBP200 million in 2013;
- increased cost synergies from GBP75 million per annum before
tax to GBP112 million per annum before tax by end 2013, with
one--off implementation costs of GBP117 million; and
- focused product strategies based on the Company's ongoing
commitment to prioritise value over volume, achieving a blended IRR
on new business of at least 15%:
-- Individual Protection targeting IRR of 20% by 2013;
-- Corporate Pensions targeting double digit IRRs by 2013;
and
-- Annuities targeting in excess of mid--teens IRRs by 2013.
Results profile
The profile of the FPH IFRS results for 2010 and 2009 is
dominated by the timing of the acquisitions of Friends Provident
and the AXA UK Life Businesses. These financial statements include
the results of the acquired businesses from the dates of their
acquisitions.
The results for 2010 therefore include:
-- Friends Provident for the full twelve months of 2010; and
-- The businesses acquired from AXA for the period from 3
September 2010, which included certain portfolios to be retained by
AXA (Guaranteed over fifties ("GOF") and Corporate Trustee
Investment ("TIP")) and excluded the WLUK portfolio which will be
acquired in the fourth quarter of 2011.
Included in the assets that were acquired as part of the AXA UK
Life Business are certain portfolios of insurance business (the GOF
and TIP portfolios) that are required to be transferred via Part
VII transfer to AXA's retained business as part of the separation.
This transfer is anticipated to take place in Q4 2011. The terms of
the transfer were agreed as part of the transaction and the
portfolios are treated as "held for sale" in the Group's
accounts.
In addition, the shares of WLUK are to be acquired by the Group
once business to be retained by AXA SA has been removed from the
entity. This acquisition is also anticipated to take place in Q4
2011, once the GOF/TIP insurance portfolios have been transferred
to AXA SA. These assets will be included in the Group's accounts
once the acquisition has taken place in 2011 and are not therefore
included within these financial results. The results of BHA are
also not included as BHA was not acquired until 31 January
2011.
IFRS profit
The FPH IFRS results are set out below, including a
reconciliation from operating profit to IFRS profit before tax. The
Group utilises the operating profit measure as management considers
that this better represents the underlying performance of the
business and the way in which it is managed. These results include
the results of the acquired Friends Provident business and the AXA
UK Life Business from the dates of their acquisitions, being 4
November 2009 and 3 September 2010 respectively.
2009 (ii)
restated
2010 (i) (iii)
GBPm GBPm
------------------------------------------------- --------- ----------
UK
Friends Provident 116 13
AXA UK Life Business 71 -
International 95 9
Lombard 33 4
Corporate (25) (5)
IFRS based operating profit before tax 290 21
Short-term fluctuations in investment
return 24 12
Returns on F&C Commercial Property Trust 23 23
Acquisition accounting adjustments:
Amortisation of acquired in-force business (364) (59)
Amortisation of other acquired intangible
assets (64) (10)
Non-recurring items:
Gain on acquisition of businesses 883 1,321
Costs associated with the business acquisitions (14) -
Other non-recurring items (68) 4
STICS interest adjustment to reflect
IFRS accounting
for STICS as equity 31 5
------------------------------------------------- --------- ----------
IFRS profit before shareholder tax 741 1,317
Shareholder tax 107 22
IFRS profit after tax 848 1,339
------------------------------------------------- --------- ----------
(i) 2010 results comprise 12 months for the Friends Provident
companies and four months for AXA UK Life Business.
(ii) 2009 results comprise two months for the Friends Provident
companies.
(iii) Restated to:
a. Reclassify GBP14 million of positive investment fluctuations
on non-profit fund investments as short term investment
fluctuations.
b. Increase gain on acquisition of Friends Provident by GBP119
million reflecting revaluation of STICS to fair value.
Operating profit
IFRS based operating profit is used internally to monitor the
Group's performance and is reported here to give shareholders a
better understanding of the Group's underlying performance.
Operating profit is based on a longer-term investment return with
the impact of short-term investment fluctuations shown separately
as a non-operating item.
UK UK FPH
FP AXA Int'l Lombard Corporate 2010
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ----- ----- ------ -------- ---------- ------
New business strain (65) (24) (28) (28) - (145)
In-force surplus 195 85 120 66 - 466
Long term investment
return 24 11 3 (4) (14) 20
Reserving changes
and
one-offs (15) - 2 - - (13)
Development costs (20) (1) (6) (1) - (28)
Other (3) - 4 - (11) (10)
---------------------- ----- ----- ------ -------- ---------- ------
IFRS based operating
profit before tax 116 71 95 33 (25) 290
---------------------- ----- ----- ------ -------- ---------- ------
IFRS based operating profit for 2010 was GBP290 million
comprising operating profit for the life business of GBP315 million
and GBP25 million of corporate costs.
Overall, new business strain was GBP145 million. In the UK,
Friends Provident new business strain improved due to reduced
acquisition expenses. The AXA UK Life Business results for the post
acquisition period benefited from no longer writing commission
paying pensions business; this was offset by strain in the
protection book.
Acquisition expense levels in the International business were
held to a 7% increase whilst new business volumes rose by 24%
thereby mitigating the increase in strain that would otherwise have
been experienced. In Lombard new business strain remained flat year
on year, which is a creditable performance in the light of the 10%
increase in volumes.
The main driver of in-force surplus improvement in the period
has been stock market advances which have helped to generate
increased annual management charges on greater funds under
management across all business segments. The shareholders' share of
the special bonus arising from the reattributed inherited estate
testing has also benefited the in-force surplus by GBP16
million.
Longer term investment returns on shareholder funds have been
depressed by the payment of GBP462 million of dividends to holding
companies and the continuing relatively low level of prevailing
interest rates.
Principal reserving changes were negative overall, largely
driven by the strengthening for future improvements in annuitant
mortality offset by the benefit of the re-negotiation of expense
recoveries from the with-profit fund in accordance with the FP
demutualisation scheme.
Development costs of GBP28 million complete the picture for
2010. The UK elements comprise corporate investment platform
development at GBP7 million, GBP3 million related to the Tesco
distribution relationship, GBP2 million for enhanced web security
and a range of projects which are individually small and whose
costs amounted to GBP9 million in the year. The remaining element
of the total is GBP7 million for the ongoing development of the
German proposition and other International and Lombard business
initiatives.
Non operating profit
Short-term fluctuations in investment return of GBP24 million
include the variance between expected and actual investment return
on assets backing shareholder and long-term funds, with the benefit
primarily driven by a slightly improved credit default allowance on
the corporate bond portfolio to reflect current market conditions.
As noted above, the 2009 short-term fluctuations in investment
return have been restated to include GBP14 million of fluctuations
relating to the non profit funds.
In April 2010 the Friends Provident UK business reduced its
holdings in F&C Commercial Property Trust ("F&C CPT") from
50.3% to 34.16% in order to manage the property exposure of the
life funds. As a result, the Group is no longer required to
consolidate the assets, liabilities and results of this investment
trust and the results for the year therefore only include F&C
CPT through to April. The GBP23 million return on F&C CPT in
2010 reflects the market return attributable to third parties for
the period up to April; this will not recur in future.
Acquisition accounting adjustments, totalling GBP428 million,
represent the amortisation of the intangible assets recognised on
the acquisition of Friends Provident and the AXA UK Life Business
in 2009 and 2010. These charges include the amortisation of
acquired in-force business, GBP364 million, and the amortisation of
intangible assets, GBP64 million.
Non-recurring items are a significant element of the Group IFRS
profit before tax. The main item in 2010 relates to the gain on the
acquisition of the AXA UK Life Business amounting to GBP883
million.
Other non-recurring items include separation and integration
costs of GBP34 million, capital optimisation costs of GBP3 million,
finance transformation costs (including the costs of preparing for
Solvency II) of GBP24 million and a charge of GBP7 million
reflecting the one-off impact of the increase in the VAT rate to
20%.
Interest payable on the Friends Provident Step-up Tier one
Insurance Capital Securities ("STICS") of GBP31 million is included
as a deduction to corporate long term investment return in the
foregoing operating profit analysis, and is added back here to
reflect the requirements of IFRS (where it is accounted for as
equity with interest being recorded as a reserve movement).
The total IFRS tax charge is GBP137 million and comprises a
policyholder tax charge of GBP244 million and a shareholder tax
credit of GBP107 million. Of the total tax charge, GBP8 million is
current and GBP129 million is deferred. The policyholder tax charge
is predominantly tax borne by the policyholder funds in the
operating life companies but accounted for by the company under the
UK's I minus E tax regime. The quantum of the policyholder tax is a
function of the investment return on the policyholder funds and is
not included in the summary of IFRS shareholder profit shown above.
The shareholder tax credit principally comprises tax relief for
expenses.
New business sales
Group life and pension new business sales, on an annualised
premium equivalent basis (APE), totalled GBP1,012 million in the
year to 31 December 2010. These results combine sales of GBP930
million generated over the 12 months by the Friends Provident
business and GBP81 million from the acquired AXA life businesses
for the final four months of the year. Excluding the acquired AXA
business, sales from the Friends Provident businesses have
increased by 7% from GBP873 million in 2009, with sales in the UK
business marginally down and the International and Lombard
businesses up 24% and 10% respectively.
12 mths(i) 12 mths Change
2010 2009 %
---------------------------- ----------- -------- -------
UK Corporate 336 318 6
UK Individual 107 66 62
Annuities 29 23 26
---------------------------- ----------- -------- -------
Total UK Life & Pensions 472 407 16
---------------------------- ----------- -------- -------
International 238 192 24
Lombard 302 274 10
---------------------------- ----------- -------- -------
Total International Life &
Pensions 540 466 16
---------------------------- ----------- -------- -------
Total Life & Pensions 1,012 873 16
---------------------------- ----------- -------- -------
(i) includes the post acquisition trading results of the
acquired AXA UK Life businesses for the period from 3 September
2010 to 31 December 2010.
Segment summary
UK
FP UK Ex-AXA UK FP UK
12 mths 4 mths 12 mths
2010 2010 2009
GBPm GBPm GBPm
---------------------------------- -------- ---------- --------
APE 391 81 407
IFRS operating profit 116 71 132*
IRR on cash and capital invested
in
new business 9.0% 3.9% 9.3%
---------------------------------- -------- ---------- --------
*restated
New business volumes in the Friends Provident business were
reduced in comparison to 2009 reflecting the competitive market
conditions. Friends Provident UK IFRS based operating profit before
tax of GBP116 million reflects the action taken to reduce expenses,
leading to reduced new business strain and the benefit of higher
annual management charges on fund values which have increased as a
result of improved market conditions.
International
2010 2009
12 mths 12 mths
GBPm GBPm
------------------------------------- -------- --------
APE 238 192
IFRS operating profit 95 57*
IRR on cash and capital invested in
new business 15.4% 14.4%
------------------------------------- -------- --------
*restated
International benefited from an improvement in customer
confidence across the majority of its markets, impacting both the
new business volumes and profits and cash from the back book of
business. International sales volumes were up 24% to GBP238 million
(2009: GBP192 million), and IFRS operating profit rose by 66% to
GBP95 million with the result reflecting the strong increase in fee
generation as improved global investment markets increase assets
under management.
Lombard
2010 2009
12 mths 12 mths
GBPm GBPm
------------------------------------- -------- --------
APE 302 274
IFRS operating profit 33 16*
IRR on cash and capital invested in
new business 26.7% 18.8%
------------------------------------- -------- --------
*restated
2010 was a particularly strong year for Lombard. The business
achieved record results, with an emphasis on significantly
improving underlying cash generation and distributable profits.
Lombard has continued the positive sales momentum generated at
the end of 2009 with volumes up 10% (15% in local currency) in the
year to 31 December 2010. In this period management has
successfully spread sales across the year which differs from the
predominantly fourth quarter weighted sales profile of previous
years.
Lombard generated operating profits of GBP33 million, up GBP17
million on 2009. The result highlights the focus on shareholder
cash resource generation and IFRS profitability, with the
enhancements made to products and distribution contributing to a
reduction in new business strain notwithstanding increased
sales.
Acquisition of the AXA UK Life Business on an IFRS basis
The acquisition of the AXA UK Life Business was completed in
September, with an effective acquisition date of 3 September 2010.
Included in the assets that were acquired are certain portfolios of
insurance business that are required to be transferred via Part VII
transfer to AXA's retained business as part of the separation. This
transfer is anticipated to take place Q4 in 2011. The terms of the
transfer were agreed as part of the transaction and the portfolios
are treated as "held for sale" in the Group's accounts.
The acquisition of WLUK has not yet been completed and is
anticipated to take place in Q4 2011 once the GOF and TIP
portfolios have been transferred back to AXA. The terms of the
transfer were agreed as part of the transaction. These assets will
be included in the Group's accounts once the acquisition has taken
place in 2011 and are not included within the current acquisition
balance sheet.
The fair value of consideration and gain on acquisition were as
follows:
GBPm
-------------------------------------------------------- ------
Fair value of net assets acquired 3,607
-------------------------------------------------------- ------
Cash paid 2,224
Share Capital issued to parent at par value 500
-------------------------------------------------------- ------
Fair value of consideration 2,724
-------------------------------------------------------- ------
Gain on acquisition of AXA UK Life Business (excluding
transaction costs) 883
-------------------------------------------------------- ------
Distribution of the re-attributed inherited estate
-- As at 31 December 2010, the FLC RIE was GBP2,437 million,
increased from an estimated GBP2,200 million at 31 December
2009.
-- The High Court approved scheme ("the Scheme") rules require
that a test be undertaken every five years to determine whether it
is possible to transfer any of the RIE from the FLC non-profit
funds to the FLC shareholders' fund or to distribute any of the
inherited estate retained in the Old With-Profits Fund ("the Old
WPF") in the form of Special Bonuses (and associated transfer to
the shareholders' fund). The latest five yearly test was undertaken
as at 31 December 2010.
-- Following the results of the five year testing, the FLC Board
determined that as at 31 December 2010 it should make:
(a) a transfer of GBP1,010 million of RIE from the non-profit
funds to the shareholders' fund; and
(b) a distribution of GBP157 million of the inherited estate in
the Old WPF, which will be split 90% to with-profits policies
allocated to or reinsured to the Old WPF in the form of a Special
Bonus and 10% to the FLC Shareholders' Fund.
-- The transfer of RIE to the FLC Shareholders' Fund is an after
tax amount, and consists of GBP843 million of cash and GBP167
million of receivables which would otherwise have had to be repaid
by holding companies. Following completion of the 2010 year end
valuation, FLC has paid a dividend of GBP390 million to its parent
company, FPLP, consisting of GBP300 million of the cash transferred
from the RIE, the GBP16 million shareholders' share of the Special
Bonus declared in the Old WPF, and GBP74 million derived from
business as usual activities.
Group capital management
The Group manages its capital on both regulatory and economic
capital bases, focusing primarily on capital efficiency and the
ease with which cash and capital resources can be transferred
between entities. In managing capital, the Group considers the
following:
-- establishing targets for the main UK life companies at the
greater of 150% of the EU minimum required margin and 125% of the
Individual Capital Assessment ("ICA") and any Individual Capital
Guidance ("ICG") - the capital required to mitigate the risk of
insolvency to a 99.5% confidence level over a one year period;
-- at the FPH level, to hold sufficient capital to meet 160% of
the Insurance Groups Directive ("IGD") capital resource
requirements;
-- maintaining financial strength within companies sufficient to
support new business growth targets, including rating agency
requirements;
-- the need to have strong liquidity to cover expected and
unexpected events, which includes access to an undrawn facility
with a consortium of banks;
-- managing, in particular, the with-profits business of the
Group in accordance with agreed risk appetites and all statutory
requirements; and
-- transfers from long-term business funds and dividends from
entities that support the cash generation requirements of the
Group, balanced with the need to maintain appropriate capital
within the businesses for the reasons outlined above.
As part of the integration of the AXA UK Life Business, a number
of initiatives are being considered including fund mergers and the
optimisation of the corporate structure, designed to fit with the
drive for capital efficiency and fungibility.
Solvency II
The implementation of the EU Solvency II Directive continued to
be a key focus of attention for the Group during 2010. The Group
has been closely following the emerging regulations and monitoring
their potential impact on the Group balance sheet. FPH is closely
involved with the industry in lobbying on key areas where some
uncertainty remains. During 2010, FPH participated in the QIS5
exercise, which was an EU wide test of the calibration of the
standard formula and other technical items.
During the course of 2010, FPH has successfully integrated the
Solvency II programme for the acquired AXA UK Life Business and the
overall programme is progressing well against its plans.
FPH intends to apply for internal model approval pursuant to the
Solvency II Directive and has been notified by the Financial
Services Authority ("FSA") that it may start the internal model
pre-application process. The purpose of the internal model
pre-application process is to give firms and the FSA an opportunity
to consider whether a firm's proposed internal model is suitable to
be submitted for approval under the formal internal model
assessment requirements. The pre-application process ends when a
firm either submits a formal internal model application to the FSA
for approval or notifies the FSA that it no longer intends to use
an internal model.
Insurance Groups Capital Adequacy
In addition to individual company requirements FPH as the
ultimate European Economic Area ("EEA") parent insurance
undertaking, is required to meet the IGCA requirements of the
Insurance Groups Directive. The Group's capital policy is to
maintain sufficient group capital resources to cover 160% of group
capital resource requirements (excluding With Profits Insurance
Components ("WPICC")). This policy was temporarily increased from
150% following the acquisition of the AX UK Life Business. It is
anticipated that the FPH group capital management policy target
will reduce back to 150% in due course as the integration of the
AXA UK Life Business and BHA into the group proceeds.
The balance sheet remained strong with an IGCA surplus of GBP2.3
billion at 31 December 2010, with Group Capital Resources being
228% of Group Capital Resource Requirements (excluding WPICC).
Group Capital Resources were estimated to be GBP1.2 billion in
excess of the amount required to satisfy FPH's revised group
capital policy of holding 160% of Group Capital Resource
Requirements (excluding WPICC).
The increase in IGCA surplus over the year largely reflects the
GBP369 million impact of the AXA UK Life Business, the impact of
the transfer of RIE to the FLC shareholders' fund of GBP722 million
(GBP1,010 million transfer less shareholder funds required to cover
FLC non-profit fund capital resources requirements of GBP238
million) and other long-term fund transfers totalling GBP215
million (net of any shareholder funds now being utilised to cover
capital resource requirements).
Financing costs include the GBP65 million dividend paid to RSL
and interest costs at FPH. These include the coupon payments of the
external debt in addition to the interest due on the GBP700 million
lower tier debt issued to RSL in September 2010.
Management initiatives in the year to optimise the IGCA surplus
position delivered a benefit of GBP95 million. These largely
related to the more appropriate valuation treatment of
non-regulated entities within the Group's distribution
businesses.
Asset Quality
The vast majority of the Group's exposure to sovereign debt
holdings is to UK gilts. The Group's non-linked and shareholder
funds have immaterial exposure totalling GBP7 million to the higher
risk government debts of Spain, Portugal, Italy, Ireland and
Greece.
The Group has a direct exposure to various corporate securities
issued by companies domiciled in Spain, Portugal, Italy, Ireland
and Greece of GBP405 million. These corporate securities are mostly
issued by non-financial companies, which are in many cases less
exposed to their domicile economy than to other countries. Where
the Group holds securities issued by financial companies, the
company's financial strength and the ability of the domicile
government to provide financial support in the event of stress has
been considered.
Over 95% of the corporate bond and asset backed securities held
in the non-profit and shareholder funds are investment grade. The
Group controls its exposures to corporate issuers by rating, type
of instrument and type of issuer. The sub-investment grade bonds
held in investment portfolios are monitored closely in order to
maximise exit values. Where asset backed securities and other
complex securities are held, the Group monitors closely its
exposures to ensure that the relevant structure, liquidity and tail
credit risks are well understood and controlled.
Dividends
The directors are recommending an interim dividend of GBP250
million (2009: GBP65 million) payable by 31 March 2011.
Consolidated income statement
For the year ended 31 December 2010
As restated
Year 5 months
ended ended
31 Dec 31 Dec
2010 2009
Notes GBPm GBPm
-------------------------------------------- ------ ------- ------------
Revenue
Gross earned premiums 3 1,288 133
Premiums ceded to reinsurers 3 (241) (15)
-------------------------------------------- ------ ------- ------------
Net earned premiums 3 1,047 118
Fee and commission income and income
from service activities 751 126
Investment return 3 8,424 1,263
-------------------------------------------- ------ ------- ------------
Total revenue 10,222 1,507
-------------------------------------------- ------ ------- ------------
Other income (ii) 3 891 1,321
-------------------------------------------- ------ ------- ------------
Claims, benefits and expenses
Gross claims and benefits paid 2,004 211
Amounts receivable from reinsurers (322) (32)
-------------------------------------------- ------ ------- ------------
Net claims and benefits paid 1,682 179
-------------------------------------------- ------ ------- ------------
Change in insurance contracts liabilities 891 (129)
Change in investment contracts liabilities 5,863 1,189
Transfer to unallocated surplus 4 3
Movement in net assets attributable
to unit-holders 139 31
Movement in policyholder liabilities 6,897 1,094
-------------------------------------------- ------ ------- ------------
Acquisition expenses 392 74
Administrative and other expenses 1,028 148
Finance costs 129 20
-------------------------------------------- ------ ------- ------------
Total claims, benefits and expenses 10,128 1,515
-------------------------------------------- ------ ------- ------------
Share of profit of associate and joint
venture - 5
Profit before tax from continuing
operations 985 1,318
Policyholder tax 5 (244) (1)
-------------------------------------------- ------ ------- ------------
Profit before shareholder tax from
continuing operations 741 1,317
-------------------------------------------- ------ ------- ------------
Total tax (charge)/credit 5 (137) 21
Policyholder tax 5 244 1
-------------------------------------------- ------ ------- ------------
Shareholder tax 5 107 22
-------------------------------------------- ------ ------- ------------
Profit for the period 848 1,339
-------------------------------------------- ------ ------- ------------
Attributable to:
Ordinary shares (i) 794 1,311
STICS holders 1 -
-------------------------------------------- ------ ------- ------------
795 1,311
Non-controlling interests
Equity attributable to STICS holders 30 5
Other 23 23
-------------------------------------------- ------ ------- ------------
Profit for the period 848 1,339
-------------------------------------------- ------ ------- ------------
2010 2009
Earnings per share Notes pence pence
-------------------------------------------- ------ ------ --------
Basic earnings per share from continuing
operations 7 241.2 1,324.8
Diluted earnings per share from continuing
operations 7 241.2 1,324.8
-------------------------------------------- ------ ------ --------
(i) All profit attributable to ordinary shareholders is from
continuing operations.
(ii) The Group has chosen to early adopt amendments to IFRS 3
(revised) Business Combinations which requires that the STICS
should be recorded at their fair value at the date of acquisition
of Friends Provident. This has resulted in an increase in other
income and profit of GBP119 million net of tax.
The consolidated income statement includes the results of AXA UK
Life Business from the date of acquisition on 3 September 2010.
Consolidated statement of comprehensive income
For the year ended 31 December 2010
Non-controlling
Equity holders interests
Ordinary
share STICS STICS
holders holders holders Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------- --------- ------------ ---------- ------ ------
Profit for the period 794 1 30 23 848
----------------------- --------- ------------ ---------- ------ ------
Actuarial loss on
defined
benefit schemes (46) - - - (46)
Foreign exchange
adjustments (i) (6) - - - (6)
Shadow accounting
(ii) (3) - - - (3)
Aggregate tax effect
of
above items 25 - - - 25
----------------------- --------- ------------ ---------- ------ ------
Other comprehensive
income, net of tax (30) - - - (30)
----------------------- --------- ------------ ---------- ------ ------
Total comprehensive
income, net of tax 764 1 30 23 818
----------------------- --------- ------------ ---------- ------ ------
(i) Foreign exchange adjustments relate to the translation of
overseas subsidiaries.
(ii) Shadow accounting includes GBPnil (2009: GBP1 million) in
respect of the revaluation of owner occupied properties and GBP3
million (2009: GBP3 million) in respect of foreign exchange
adjustments on translation of overseas subsidiaries held by the
with-profits fund of FPLP.
For the period ended 31 December 2009 (Restated)
Non-controlling
Equity holders interests
Ordinary
share STICS STICS
holders holders holders Other Total
GBPm GBPm GBPm GBPm GBPm
----------------------- --------- ------------ ---------- ------ ------
Profit for the period 1,311 - 5 23 1,339
----------------------- --------- ------------ ---------- ------ ------
Actuarial gains on
defined
benefit schemes 25 - - - 25
Foreign exchange
adjustments (i) (2) - - - (2)
Revaluation of owner
occupied properties 1 - - - 1
Shadow accounting
(ii) (4) - - - (4)
Aggregate tax effect
of
above items 5 - - - 5
----------------------- --------- ------------ ---------- ------ ------
Other comprehensive
income, net of tax 25 - - - 25
----------------------- --------- ------------ ---------- ------ ------
Total comprehensive
income, net of tax 1,336 - 5 23 1,364
----------------------- --------- ------------ ---------- ------ ------
Consolidated statement of IFRS based operating profit
For the year ended 31 December 2010
As restated
Year 5 months
ended ended
31 Dec 31 Dec
2010 2009
Notes GBPm GBPm
---------------------------------------- ------ ------- ------------
Profit before tax from continuing
operations 985 1,318
Policyholder tax 5 (244) (1)
Returns on Group-controlled funds
attributable to
third parties (23) (23)
---------------------------------------- ------ ------- ------------
Profit before tax excluding returns
generated
within policyholder funds 718 1,294
Non-recurring items (801) (1,325)
Amortisation of acquired present value
of in-force
business 364 59
Amortisation of intangible assets 64 10
Interest payable on Step-up Tier one
Insurance
Capital Securities (STICS) (31) (5)
Short-term fluctuations in investment
return (24) (12)
---------------------------------------- ------ ------- ------------
IFRS based operating profit before
tax 290 21
Tax on operating profit 16 14
---------------------------------------- ------ ------- ------------
IFRS based operating profit after
tax
attributable to ordinary shareholders
from
continuing operations (i) 306 35
---------------------------------------- ------ ------- ------------
2010 2009
Earnings per share Notes pence pence
---------------------------------------- ------ ------- ------------
IFRS based operating profit per share 7 92.9 35.4
---------------------------------------- ------ ------- ------------
(i) The Group has revised the definition of IFRS based operating
profit in order to reduce the impact of investment volatility on
operating profit. Operating profit excludes: (a) all investment
variances from expected investment return which is calculated on a
long term rate of return; (b) policyholder tax; (c) returns
attributable to non-controlling interests in policyholder funds;
(d) significant non-recurring items; and (e) amortisation and
impairment of present value of acquired in-force business and other
intangible assets and is stated after deducting interest payable on
STICS. Operating profit is considered to be a better measure of
performance of the Group and this measure of profit is used
internally to monitor the Group's IFRS results.
Further details are included in Note 2.
Consolidated statement of financial position
At 31 December 2010
Restated
2010 2009
Notes GBPm GBPm
---------------------------------------------- ------ -------- ---------
Assets
Pensions scheme surplus 4 22 38
Intangible assets 8 5,140 3,251
Property and equipment 46 47
Investment properties 3,189 1,546
Investments in associate and joint
venture 32 30
Deferred tax assets 4 12
Financial assets 9 99,465 48,315
Deferred acquisition costs 358 46
Reinsurance assets 2,637 1,972
Current tax assets 22 4
Insurance and other receivables 976 443
Cash and cash equivalents 9,057 5,073
Assets of operations classified as
held for sale 14 1,206 -
---------------------------------------------- ------ -------- ---------
Total assets 122,154 60,777
Liabilities
Insurance contracts 35,081 12,107
Unallocated surplus 1,098 273
Financial liabilities
Investment contract 72,411 40,495
Loans and borrowings 10 1,012 590
Amounts due to reinsurers 1,666 1,610
Net asset value attributable to unit-holders 1,173 668
Provisions 221 72
Deferred tax liabilities 1,115 535
Current tax liabilities 11 15
Insurance payables, others payables
and deferred
income 893 448
Liabilities of operations classified
as held for sale 14 925 -
---------------------------------------------- ------ -------- ---------
Total liabilities 115,606 56,813
---------------------------------------------- ------ -------- ---------
Equity attributable to equity holders
of the
parent
Attributable to ordinary shareholders:
Share capital 515 250
Other reserves 11 5,711 3,099
---------------------------------------------- ------ -------- ---------
6,226 3,349
STICS holders (i) 318 -
---------------------------------------------- ------ -------- ---------
6,544 3,349
Attributable to non-controlling interests
STICS holders (i) - 318
Other 4 297
---------------------------------------------- ------ -------- ---------
Total equity 6,548 3,964
---------------------------------------------- ------ -------- ---------
Total equity and liabilities 122,154 60,777
---------------------------------------------- ------ -------- ---------
(i) The Group has chosen to early adopt amendments to IFRS 3
(revised) Business Combinations which requires that the STICS
should be recorded at their fair value at the date of acquisition
of Friends Provident.
The financial statements were approved by the Board of directors
on 23 March 2011.
Consolidated statement of changes in equity
For the year ended 31 December 2010
Attributable to Other Non-
ordinary equity controlling
shareholders holders interests
Share Other STICS STICS
capital reserves Total holders holders Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------- --------- ------ -------- -------- ------ ------
At 31 December
2009
as previously
reported 250 2,980 3,230 - 483 297 4,010
Prior year
adjustment
(i) - 119 119 - (165) - (46)
--------------- -------- --------- ------ -------- -------- ------ ------
At 1 January
2010 restated 250 3,099 3,349 - 318 297 3,964
--------------- -------- --------- ------ -------- -------- ------ ------
Profit for the
year - 794 794 1 30 23 848
Other
comprehensive
income - (30) (30) - - - (30)
--------------- -------- --------- ------ -------- -------- ------ ------
Total
comprehensive
income - 764 764 1 30 23 818
--------------- -------- --------- ------ -------- -------- ------ ------
Dividends on
equity
shares - (65) (65) - - (7) (72)
Interest paid
on STICS - - - (1) (30) - (31)
--------------- -------- --------- ------ -------- -------- ------ ------
Appropriations
of
profit - (65) (65) (1) (30) (7) (103)
Tax relief on
STICS
interest - 9 9 - - - 9
Disposals of
business - - - - - (309) (309)
Issue of share
capital 2,165 - 2,165 - - - 2,165
Capital
reduction (1,900) 1,900 - - - - -
Share based
payments - 4 4 - - - 4
Transfer of
STICS to FPH - - - 318 (318) - -
--------------- -------- --------- ------ -------- -------- ------ ------
At 31 December
2010 515 5,711 6,226 318 - 4 6,548
--------------- -------- --------- ------ -------- -------- ------ ------
(i) Adjustment to measure the STICS at fair value at the date of
acquisition (4 November 2009) of Friends Provident.
For the period ended 31 December 2009 (Restated)
Attributable to Other Non-
ordinary equity controlling
shareholders holders interests
Share Other STICS STICS
capital reserves Total holders holders Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------- ------ -------- -------- ------ ------
On
incorporation:
10 August 2009 - - - - - - -
Profit for the
period - 1,311 1,311 - 5 23 1,339
Other
comprehensive
income - 25 25 - - - 25
---------------- -------- --------- ------ -------- -------- ------ ------
Total
comprehensive
income - 1,336 1,336 - 5 23 1,364
---------------- -------- --------- ------ -------- -------- ------ ------
Dividends on
equity
shares - - - - - (4) (4)
Interest paid
on STICS - - - - (7) - (7)
---------------- -------- --------- ------ -------- -------- ------ ------
Appropriations
of profit - - - - (7) (4) (11)
Tax relief on
STICS
interest - 1 1 - - - 1
Acquired
through
business
combinations - - - - 320 278 598
Issue of share
capital 1,598 102 1,700 - - - 1,700
Capital
contribution - 312 312 - - - 312
Capital
reduction (1,348) 1,348 - - - - -
---------------- -------- --------- ------ -------- -------- ------ ------
At 31 December
2009 250 3,099 3,349 - 318 297 3,964
---------------- -------- --------- ------ -------- -------- ------ ------
Consolidated cash flow statement
For the year ended 31 December 2010
As restated
Year 5 months
ended ended
31 Dec 31 Dec
2010 2009
GBPm GBPm
----------------------------------------------- --------- ------------
Operating activities
Profit for the period 848 1,339
Adjusted for:
Other income (gain on acquisition) (883) (1,321)
Net realised and unrealised gains on assets
at fair value (6,379) (810)
Finance costs 129 20
Amortisation and impairment of intangible
assets 428 69
Depreciation of property and equipment 4 1
Movement in deferred acquisition costs (312) (46)
Total tax charge/(credit) 137 (21)
Purchase of shares and other variable yield
securities (21,985) (8,828)
Sale of shares and other variable yield
securities 19,029 7,717
Purchase of loans, debt securities and
other fixed income
securities (33,869) (4,082)
Sale of loans, debt securities and other
fixed income
securities 34,880 3,751
Purchase of investment properties (67) -
Sale of investment properties 81 46
Increase/(decrease) in insurance contract
liabilities 925 (158)
Increase in investment contract liabilities 7,372 2,936
Increase in unallocated surplus 2 2
Decrease in provisions (5) (17)
Net movement in receivables and payables 668 (47)
----------------------------------------------- --------- ------------
Pre-tax cash inflow from operating activities 1,003 551
Tax received 15 11
----------------------------------------------- --------- ------------
Net cash inflow from operating activities 1,018 562
----------------------------------------------- --------- ------------
Investing activities
Acquisition of subsidiaries, net of cash
acquired 969 4,282
Additions to internally generated intangible
assets (4) (1)
Purchase of property and equipment (net) (1) 3
----------------------------------------------- --------- ------------
Net cash inflow from investing activities 964 4,284
----------------------------------------------- --------- ------------
Financing activities
Proceeds from issue of ordinary share capital 1,665 -
Proceeds from issue of long term debt 729 -
Repayment of long term debt (123) -
Finance costs (126) (17)
STICS interest (31) (7)
Net movement in other borrowings, net of
expenses 15 (45)
Capital contribution - 312
Dividends paid to equity holders of the
parent (65) -
Dividends paid to minority interest (7) (4)
----------------------------------------------- --------- ------------
Net cash inflow from financing activities 2,057 239
----------------------------------------------- --------- ------------
Increase in cash and cash equivalents 4,039 5,085
----------------------------------------------- --------- ------------
Balance at beginning of period 5,073 -
Exchange adjustments on the translation
of foreign
operations (55) (12)
----------------------------------------------- --------- ------------
Balance at end of period 9,057 5,073
----------------------------------------------- --------- ------------
Notes to the consolidated financial statements
1. Accounting policies
1.1 Basis of preparation
The Company, formerly known as Friends Provident Holdings (UK)
Limited was re-registered under the Companies Act 2006 as a public
company on 30 September 2010 under the name Friends Provident
Holdings (UK) plc ("the Company") and is domiciled in England and
Wales. The financial statements of the Company as at and for the
year ended 31 December 2010 comprise the consolidated financial
statements of the Company and its subsidiaries (together referred
to as 'the Group') and the Group's interests in associates and
jointly controlled entities.
The consolidated financial statements of the Group have been
prepared under International Financial Reporting Standards (IFRS)
issued by the International Accounting Standards Board (IASB) and
as adopted by the European Union (EU). The results in this
preliminary announcement have been prepared in accordance with IFRS
applicable at 31 December 2010 and have been taken from the Group's
Annual Report and Accounts which will be available on the Company's
website shortly.
The annual report and accounts complies with the Disclosure and
Transparency Rules (DTR) of the United Kingdom's Financial Services
Authority in respect of the requirement to produce an annual
financial report. The preliminary announcement is the
responsibility of, and has been approved by, the directors.
Responsibility Statement
We confirm that to the best of our knowledge:
-- the consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS);
-- the financial statements give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation taken as
a whole; and
-- the preliminary announcement includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
On behalf of the Board
Andy Parsons
Executive Director - Finance
23 March 2011
This preliminary announcement does not constitute the Company's
statutory financial statements for 2010 but is derived from those
financial statements. Statutory accounts for 2009 have been filed
with the Registrar of Companies. The auditors have reported on the
2010 and 2009 financial statements and their reports were
unqualified and did not contain a statement under section 498 (2)
or 498(3) of the Companies Act 2006. The auditor for 2010 is Ernst
& Young LLP (also acted as auditor for 2009).
The principal activity of the Company is that of a holding
company for acquisitions in the life assurance and pensions sector.
On 3 September 2010, the Company acquired its second acquisition
when it acquired all of the share capital of AXA Sun Life Holdings
Limited, a UK life insurance business which at that date was owned
by AXA UK plc. The consolidated income statement therefore includes
the results of this business from that date subject to the
following exceptions. Under the terms of the AXA UK Life
acquisition certain portfolios of business have been purchased that
are currently still legally owned by AXA UK plc and similarly
certain portfolios of business legally owned by the Group as a
result of the acquisition are to be transferred back to AXA UK
plc.
The 2009 comparatives include the consolidated income statement
of the Company for the period from incorporation and those of
Friends Provident Group plc from the date of acquisition (4
November 2009).
The consolidated financial statements of the Group are prepared
in accordance with EU adopted IFRS and those parts of the Companies
Act 2006 applicable to companies reporting under IFRS. The
consolidated financial statements have been prepared under the
historical cost convention, as modified by the revaluation of
property, investment properties, share based payment schemes and
financial instruments at fair value through the income statement in
accordance with the respective accounting policies contained
herein.
The presentation currency of the Group is GBPmillion sterling.
Unless otherwise stated the amounts shown in these financial
statements are in millions of pounds sterling (GBP million).
These financial statements have been prepared on a going concern
basis. The directors have undertaken a going concern assessment in
accordance with "Going Concern and Liquidity Risk: Guidance for UK
Directors of UK Companies 2009", published by the Financial
Reporting Council in October 2009. As a result of this assessment,
the directors are satisfied that the Group and the Company have
adequate resources to continue to operate as a going concern for
the foreseeable future and have prepared the financial statements
on that basis.
The Group has applied all IFRS standards and interpretations
adopted by the EU and effective for accounting periods beginning on
or after 1 January 2010. Those new standards, changes to existing
standards and interpretations adopted by the Group during the year
are:
IFRS 2: Share-based payment: Group cash-settled share-based
payment transactions. The amendment clarifies the scope and the
accounting for group cash-settled share-based payment
transactions.
IAS 39: Financial instruments: recognition and measurement -
amendments to eligible hedged items. The Group has not entered into
the type of hedges addressed by this amendment.
Annual improvements to IFRSs (April 2009). The Group has
evaluated the impact of these annual improvements and incorporated
them where appropriate. The Group has assessed that they do not
have a material impact.
IFRIC 17: Distribution of non-cash assets to owners. The Group
has determined that this interpretation does not have a material
impact on the Group.
IFRIC 18: Transfers of assets from customers. The Group has
determined that this interpretation does not have a material impact
on the Group.
The International Accounting Standards Board (IASB) has issued
the following new standards, changes to standards and
interpretations with effective dates for reporting periods
beginning after 1 January 2010, but where earlier adoption is
permitted.
The Group has elected to early adopt the following in the
financial statements for the year ended 31 December 2010:
The annual improvement to IFRS 3 (revised) on Business
combinations which requires that non-controlling interests in an
acquired that do not entitle their holders to a proportionate share
of the entity's net assets in the event of liquidation be measured
at their acquisition date fair values. The impact of early adopting
this annual improvement is detailed in section 2(b).
Amendment to IFRIC 14: Prepayments of a minimum funding
requirement. This amendment provides guidance on assessing the
recoverable amount on a net pension asset and permits an entity to
treat the prepayment of a minimum funding requirement as an
asset.
The Group has elected to adopt the following when they become
effective:
IAS 32: Financial instruments: presentation - amendments
relating to classification of rights issues. The amendment
addresses the accounting for rights issues that are denominated in
a currency other than the functional currency of the issuer. This
amendment will not have a material impact on the group.
IFRS 7: Financial instruments: disclosures. This amends IFRS 7
to improve the disclosure requirements in relation to transferred
financial assets.
IFRS 9: Financial instruments: classification and measurement.
This standard reflects the first phase of the Board's work on the
replacement of IAS 39 and applies to classification and measurement
of financial assets as defined in IAS 39. This IFRS has not yet
been endorsed by the EU. The adoption of IFRS 9 may have a material
effect on the classification and measurement of the Group's
financial assets and the Group will require adequate time to assess
its impact.
IAS 24 (revised): Related party disclosures. The revised
standard clarifies and simplifies the definition of a related party
and provides a partial exemption for government-controlled
entities. This exemption is not applicable to the Group.
Annual improvements to IFRSs (May 2010). The Group intends to
adopt these improvements, apart from the amendment to IFRS 3
(revised): Business combinations when they become effective. The
Group does not expect a material impact on its financial position
or performance from the annual improvements that have not been
adopted.
IFRIC 19: Extinguishing financial liabilities with equity
instruments. This interpretation clarifies that equity instruments
issued to a creditor to extinguish a financial liability qualify as
consideration paid. The equity instruments issued are measured at
their fair value. The adoption of this interpretation will have no
material effect on the financial statements of the Group.
The financial statements comply with the Statement of
Recommended Practice issued by the Association of British Insurers
in December 2005 (as amended in December 2006) in so far as these
requirements do not contradict IFRS requirements.
The Group presents its balance sheet in order of liquidity.
Where applicable, for each asset and liability line item that
combines amounts expected to be recovered or settled both within
and beyond 12 months after the balance sheet date, disclosure of
the amount due beyond 12 months is made in the respective note.
Financial assets and financial liabilities are not offset unless
there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or to
realise the assets and settle the liability simultaneously. Income
and expenses are not offset in the income statement unless required
or permitted by an accounting standard or interpretation, as
specifically disclosed in the accounting policies of the Group.
1.2 Use of estimates, assumptions and judgements
The Group makes judgements in the application of critical
accounting policies that affect the reported amounts of assets and
liabilities, as well as affecting the reported income and expenses
for the year. The Group also makes key assumptions about the future
and other sources of uncertainty. These are continually evaluated
and based on historical experience and other factors, including
expectations of future events that are considered to be reasonable
under the circumstances. Actual results may differ from these
estimates.
1.3 Changes in accounting policy
1.3.1 Treatment of deficit reduction contributions
Early adoption of IFRIC 14 which applies to IAS 19 on Employee
benefits results in the following changes to the accounting
treatment for deficit reduction contributions:
-- a pension deficit to be recognised to the extent that
reduction contributions will not be available after they are paid
into the scheme;
-- a deferred tax asset to be recognised through other
comprehensive income (OCI) for tax relief on deficit reduction
contributions; and
-- a tax credit to be recognised on contributions paid through
other comprehensive income (OCI).
1.3.2 Accounting for loans at fair value through P&L
As part of the process to align accounting policy between
heritage AXA business and the Group, accounting policies have been
amended to permit loans to be valued at fair value where certain
conditions in IAS 39 on Financial Instruments are met, including
the elimination or significant reduction in accounting
mismatches.
1.3.3 Economic life of capitalised software
As part of the process to align accounting policy between
heritage AXA business and the Group, an amendment has been made to
the duration of amortisation of software intangible assets to 3-4
years.
2. Restatement of prior period figures
(a) Restatement of definition of IFRS operating profit
IFRS based operating profit is used internally to monitor the
Group's performance and is included within these financial
statements to give shareholders a better understanding of the
Group's underlying performance.
Operating profit is based on a longer term investment return
with the impact of short term investment fluctuations shown
separately as a non-operating item. The Group has amended its
definition of operating profit to exclude the impact of investment
volatility in the non-profit fund. This has been recorded as a
restatement of prior year figures.
The table below bridges the previous basis of IFRS operating
profit for the period ended 31 December 2009 to the amended
basis.
As reported Effect of Restated
2009 restatement 2009
GBPm GBPm GBPm
---------------------------------- ------------ ------------ ---------
Operating profit/loss before tax
from
continuing operations 35 (14) 21
Policyholder tax on operating
profit 10 4 14
---------------------------------- ------------ ------------ ---------
(b) Restatement due to adoption of amendments to IFRS 3
(revised)
The Group's early adoption and application of annual improvement
to IFRS 3 (revised): Business Combinations results in certain
non-controlling interests arising from the acquisition of the
Friends Provident Group of Companies on 4 November 2009 being
restated at fair value whereas they were previously shown at their
nominal value less issue costs and interest adjustments. This
results in the equity attributable to STICS holders decreasing by
GBP165 million at 31 December 2009. The impact of this change in
accounting policy is to increase the gain on acquisition of Friends
Provident Group plc recognised in the previous period by GBP119
million (GBP165 million net of deferred tax of GBP46 million).
The effect of the restatement on the financial statements is
summarised below.
Year ended 31 December 2009
As reported Effect of Restated
2009 restatement 2009
GBPm GBPm GBPm
----------------------------------- ------------ ------------ ---------
Other income 1,202 119 1,321
----------------------------------- ------------ ------------ ---------
Profit before tax from continuing
operations 1,199 119 1,318
----------------------------------- ------------ ------------ ---------
Non-controlling interests - STICS
holders 483 (165) 318
Equity attributable to equity
holders of
the parent 3,230 119 3,349
----------------------------------- ------------ ------------ ---------
The STICS were deemed non-controlling interests in the previous
year. During the current year, the STICS ceased to be
non-controlling interests following an intra-group transfer of
these equity instruments from FPG to the Company.
3. Segmental information
(a) Summary
Segmental information is presented on the same basis as internal
financial information used by the Group to evaluate operating
performance. Segmental information relating to revenue, net income,
products and services for the period ended 31 December 2009 and
year ended 31 December 2010 includes acquired Friends Provident
from 4 November 2009 and AXA UK Life Business balances from 3
September 2010. No segmental information is presented in respect of
the period ended 31 December 2009 for the acquired AXA UK Life
Business as the acquisition had not occurred at this point.
The Group's management and internal reporting structure is based
on the following operating segments which all meet the definition
of a reportable segment under IFRS 8:
-- UK - comprising Friends Provident UK life and pensions
business, the acquired AXA UK Life Business, Sesame Bankhall and,
for the period prior to its disposal, Pantheon Financial
Limited;
-- International comprising Friends Provident International
Limited, the overseas life assurance business within the UK life
and pensions subsidiaries and the Group's share of AmLife
Berhad;
-- Lombard International Assurance SA ("Lombard"); and
-- Corporate.
Corporate functions are not an operating segment, but are
reported to management, and are provided in the analysis below to
reconcile the Group's reportable segments to total profit.
In presenting geographical segment information, segment revenue
is based on the geographical location of customers. The Group has
defined two geographical areas: UK and the rest of the world. AXA
UK Life Business is reported as UK as its business is entirely
written and sold to customers based in the UK.
(b) Operating segment information
(i) IFRS based operating profit
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- ------ -------- ---------- ------
Life result 176 94 38 - 308
Longer-term return on
shareholders funds 30 1 (4) (14) 13
Other income/(expense) 2 6 - (11) (3)
Development costs (21) (6) (1) - (28)
------------------------------- ----- ------ -------- ---------- ------
IFRS based operating
profit/(loss) before tax 187 95 33 (25) 290
Tax on operating profit 16
------------------------------- ----- ------ -------- ---------- ------
IFRS based operating
profit after tax attributable
to ordinary shareholders
from continuing operations 306
------------------------------- ----- ------ -------- ---------- ------
Earnings per share
IFRS based operating
profit per share (pence) 92.9
------------------------------- ----- ------ -------- ---------- ------
10 August 2009 to 31 December 2009 (Restated)
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- ------ -------- ---------- ------
Life result 12 11 4 - 27
Longer-term return on
shareholders funds 4 - - - 4
Other income/(expense) - - - (5) (5)
Development costs (3) (2) - - (5)
------------------------------- ----- ------ -------- ---------- ------
IFRS based operating
profit/(loss) before tax 13 9 4 (5) 21
Tax on operating profit 14
------------------------------- ----- ------ -------- ---------- ------
IFRS based operating
profit after tax attributable
to ordinary share holders
of the parent 35
------------------------------- ----- ------ -------- ---------- ------
Earnings per share
IFRS based operating earnings
per share (pence) 35.4
------------------------------- ----- ------ -------- ---------- ------
(ii) Reconciliation of operating profit before tax to profit
before tax from continuing operations
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------ -------- ---------- ------
IFRS based operating profit
before tax 187 95 33 (25) 290
Non-recurring items (i) (121) (6) - 928 801
Amortisation of acquired
present
value of in-force business (169) (123) (72) - (364)
Amortisation of acquired
intangible assets (27) (8) (28) (1) (64)
Interest payable on STICS 31 - - - 31
Short-term fluctuations
in
investment return 28 2 1 (7) 24
----------------------------- ------ ------ -------- ---------- ------
Profit/(loss) before tax
excluding profit generated
within policyholder funds (71) (40) (66) 895 718
Policyholder tax 244 - - - 244
Returns on Group-controlled
funds attributable to
third
parties 23 - - - 23
----------------------------- ------ ------ -------- ---------- ------
Profit/(loss) before tax
from continuing operations 196 (40) (66) 895 985
----------------------------- ------ ------ -------- ---------- ------
(i) Non-recurring items
Corporate items include GBP883 million (GBP869 million net of
stamp duty expenses) in respect of the gain on acquisition of the
AXA UK Life Business. Further details are set out in Note 13.
A further GBP68 million of non-recurring costs comprises GBP34
million of separation and integration costs in respect of the
acquired AXA UK Life Business, GBP23 million in respect of Solvency
II and finance system developments and GBP11 million of other
costs. The segment results also include GBP76 million of
non-recurring items which comprises a management recharge to the
life companies for pension scheme contributions. The net impact of
the recharge for the Group is nil.
For the period from 10 August 2009 to 31 December 2009
(Restated) from continuing operations
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- ------ -------- ---------- ------
IFRS based operating profit
before tax 13 9 4 (5) 21
Non-recurring items (i) 5 - - 1,320 1,325
Amortisation of acquired
present
value of in-force business (27) (9) (23) - (59)
Amortisation of acquired
intangible assets (5) (1) (4) - (10)
Interest payable on STICS 5 - - - 5
Short-term fluctuations
in
investment return 5 (1) - 8 12
----------------------------- ----- ------ -------- ---------- ------
Profit/(loss) before tax
excluding profit generated
within policyholder funds (4) (2) (23) 1,323 1,294
Policyholder tax 1 - - - 1
Returns on Group-controlled
funds attributable to
third
parties 23 - - - 23
----------------------------- ----- ------ -------- ---------- ------
Profit/(loss) before tax
from continuing operations 20 (2) (23) 1,323 1,318
----------------------------- ----- ------ -------- ---------- ------
(i) Non-recurring items
UK Life & Pensions items mainly relate to pension service
credits.
Corporate items include GBP1,321 million in respect of the gain
on acquisition of Friends Provident.
(iii) Revenue and expenses
For the year ended 31 December 2010
Elimination
of inter
segment
amounts
UK Int'l Lombard Corporate (ii) Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- -------- -------- ---------- ------------ --------
Gross earned
premiums
on insurance and
investment
contracts 3,457 1,063 3,021 - - 7,541
Investment
contract
premiums (i) (2,181) (1,051) (3,021) - - (6,253)
----------------- -------- -------- -------- ---------- ------------ --------
Gross earned
premiums 1,276 12 - - - 1,288
Premiums ceded
to
reinsurers (240) (1) - - - (241)
----------------- -------- -------- -------- ---------- ------------ --------
Net earned
premiums 1,036 11 - - - 1,047
Fee and
commission
income 373 266 111 1 - 751
Investment
return 6,477 569 1,374 22 (18) 8,424
Total revenue 7,886 846 1,485 23 (18) 10,222
----------------- -------- -------- -------- ---------- ------------ --------
Intersegment
revenue 3 1 - 14 (18) -
Total external
revenue 7,883 845 1,485 9 - 10,222
----------------- -------- -------- -------- ---------- ------------ --------
Other income
(iii) 8 - - 883 - 891
Net claims and
benefits
paid 1,678 4 - - - 1,682
Movement in
insurance
and investment
contracts
liabilities 4,768 694 1,292 - - 6,754
Transfer to
unallocated
surplus 2 2 - - - 4
Movement in net
assets
attributable to
unit-holders 139 - - - - 139
Acquisition
expenses 329 15 48 - - 392
Administrative
and other
expenses 669 169 208 (18) - 1,028
Finance costs 109 6 3 29 (18) 129
----------------- -------- -------- -------- ---------- ------------ --------
Total claims,
benefits
and expenses 7,694 890 1,551 11 (18) 10,128
----------------- -------- -------- -------- ---------- ------------ --------
Intersegment
expenses 3 1 - 14 (18) -
Total external
claims,
benefits and
expenses 7,691 889 1,551 (3) - 10,128
----------------- -------- -------- -------- ---------- ------------ --------
Share of
profit/(losses)
of associates
and joint
venture (4) 4 - - - -
----------------- -------- -------- -------- ---------- ------------ --------
Profit/(loss)
before tax
from continuing
operations 196 (40) (66) 895 - 985
----------------- -------- -------- -------- ---------- ------------ --------
Policyholder tax (244) - - - - (244)
Shareholder tax 98 7 21 (19) - 107
----------------- -------- -------- -------- ---------- ------------ --------
Segmental result
after
tax 50 (33) (45) 876 - 848
----------------- -------- -------- -------- ---------- ------------ --------
(i) Accounted for as deposit under IFRS.
(ii) Eliminations include intersegment fee income and loan
interest. Intersegment transactions are undertaken on an
arms-length basis.
(iii) Includes gain on acquisition of the AXA UK Life Business
of GBP883 million.
For the period from 10 August 2009 to 31 December 2009
(Restated)
Elimination
of inter
segment
amounts
UK Int'l Lombard Corporate (ii) Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------ ------ -------- ---------- ------------ --------
Gross earned
premiums
on insurance
and
investment
contracts 746 150 1,935 - - 2,831
Investment
contract
premiums (i) (615) (148) (1,935) - - (2,698)
---------------- ------ ------ -------- ---------- ------------ --------
Gross earned
premiums 131 2 - - - 133
Premiums ceded
to
reinsurers (15) - - - - (15)
---------------- ------ ------ -------- ---------- ------------ --------
Net earned
premiums 116 2 - - - 118
Fee and
commission
income 63 46 18 - (1) 126
Investment
return 713 174 380 5 (9) 1,263
---------------- ------ ------ -------- ---------- ------------ --------
Total revenue 892 222 398 5 (10) 1,507
---------------- ------ ------ -------- ---------- ------------ --------
Intersegment
revenue 2 - 5 3 (10) -
Total external
revenue 890 222 393 2 - 1,507
---------------- ------ ------ -------- ---------- ------------ --------
Other income
(iii) - - - 1,321 - 1,321
Net claims and
benefits
paid 178 1 - - - 179
Movement in
insurance
and investment
contracts
liabilities 512 197 351 - - 1,060
Transfer to
unallocated
surplus 3 - - - - 3
Movement in net
assets
attributable to
unit-holders 31 - - - - 31
Acquisition
expenses 55 14 5 - - 74
Administrative
and other
expenses 73 17 65 - (7) 148
Finance costs 20 - - 3 (3) 20
---------------- ------ ------ -------- ---------- ------------ --------
Total claims,
benefits
and expenses 872 229 421 3 (10) 1,515
---------------- ------ ------ -------- ---------- ------------ --------
Intersegment
expenses 3 - - 7 (10) -
Total external
claims,
benefits and
expenses 869 229 421 (4) - 1,515
---------------- ------ ------ -------- ---------- ------------ --------
Share of
profits of
associates and
joint
venture - 5 - - - 5
---------------- ------ ------ -------- ---------- ------------ --------
Profit/(loss)
before tax
from continuing
operations 20 (2) (23) 1,323 - 1,318
---------------- ------ ------ -------- ---------- ------------ --------
Policyholder
tax (1) - - - - (1)
Shareholder tax 8 3 8 3 - 22
---------------- ------ ------ -------- ---------- ------------ --------
Segmental
result after
tax 27 1 (15) 1,326 - 1,339
---------------- ------ ------ -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include intersegment fee income and loan
interest. Intersegment transactions are undertaken on an
arms-length basis.
(iii) Gain on acquisition of Friends Provident. This amount has
been restated to reflect the adoption of amendments to IFRS 3
(revised).
(iv) Products and Services
Year ended 31 December 2010
Individual Group Other Total
Protection Investment Annuities Pensions Pensions (i)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Gross
earned
premiums 598 312 327 42 9 - 1,288
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Net earned
premiums 480 310 207 41 9 - 1,047
Fee and
commission
income (3) 423 - 145 6 180 751
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Total
external
revenue 477 733 207 186 15 180 1,798
------------ ----------- ----------- ---------- ----------- --------- ------ ------
(i) Other includes revenue streams from Sesame Bankhall and
Pantheon (for the period prior to its disposal).
Period ended 31 December 2009
Individual Group Other Total
Protection Investment Annuities Pensions Pensions (ii)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Gross
earned
premiums 51 37 42 2 1 - 133
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Net earned
premiums 37 36 42 2 1 - 118
Fee and
commission
income - 54 - 19 - 53 126
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Total
external
revenue 37 90 42 21 1 53 244
------------ ----------- ----------- ---------- ----------- --------- ------ ------
(ii) Other includes revenue streams from Sesame Bankhall and
Pantheon.
(v) Assets and Liabilities
Year ended 31 December 2010
Elimination
of inter
segment
amounts
UK Int'l Lombard Corporate (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------- ------ -------- ---------- ------------ --------
Segment assets 96,551 7,184 17,930 1,325 (868) 122,122
Investment in
associate
and joint
venture 5 27 - - - 32
--------------- ------- ------ -------- ---------- ------------ --------
Total assets 96,556 7,211 17,930 1,325 (868) 122,154
--------------- ------- ------ -------- ---------- ------------ --------
Total
liabilities 91,237 6,814 17,487 936 (868) 115,606
--------------- ------- ------ -------- ---------- ------------ --------
Other segment
information:
Capital
expenditure 1 - 4 1 - 6
Depreciation 1 - 1 2 - 4
Amortisation 196 131 100 1 - 428
--------------- ------- ------ -------- ---------- ------------ --------
Period ended 31 December 2009 (Restated)
Elimination
of inter
segment
amounts
UK Int'l Lombard Corporate (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------- ------ -------- ---------- ------------ -------
Segment assets 39,491 5,858 15,367 575 (544) 60,747
Investment in
associate
and joint
venture 7 23 - - - 30
---------------- ------- ------ -------- ---------- ------------ -------
Total assets 39,498 5,881 15,367 575 (544) 60,777
---------------- ------- ------ -------- ---------- ------------ -------
Total
liabilities 36,718 5,386 14,865 388 (544) 56,813
---------------- ------- ------ -------- ---------- ------------ -------
Other segment
information:
Capital
expenditure - - 2 - - 2
Depreciation - - 1 - - 1
Amortisation 32 10 27 - - 69
---------------- ------- ------ -------- ---------- ------------ -------
(i) Eliminations mainly comprise intercompany loans.
(c) Geographical segmental information
Year ended 31 December 2010
Rest of
UK (i) the World Total
GBPm GBPm GBPm
--------------------------------- ------- ---------- -------
Gross earned premiums 1,276 12 1,288
Fee and commission income 398 353 751
--------------------------------- ------- ---------- -------
Revenue from external customers 1,674 365 2,039
Investment return 8,424
Premiums ceded to reinsurers (241)
--------------------------------- ------- ---------- -------
Total revenue 10,222
--------------------------------- ------- ---------- -------
(i) AXA UK Life Business is reported as UK, as its business is
entirely written and sold to customers based in the UK.
Period ended 31 December 2009
Rest of
UK the World Total
GBPm GBPm GBPm
--------------------------------- ----- ---------- ------
Gross earned premiums 131 2 133
Fee and commission income 85 41 126
--------------------------------- ----- ---------- ------
Revenue from external customers 216 43 259
Investment return 1,263
Premiums ceded to reinsurers (15)
--------------------------------- ----- ---------- ------
Total revenue 1,507
--------------------------------- ----- ---------- ------
4. Staff pension schemes
(a) Introduction
The Group operates a defined benefit scheme: the Friends
Provident Pension Scheme ("FPPS"), to which a significant
proportion of the Group's UK Life & Pensions employees belong.
In addition, defined contribution schemes are operated by FP UK
Life & Pensions, Friends Provident International Limited and
Sesame Bankhall Group. Lombard does not operate a pension
scheme.
On an IAS 19 basis, a gross surplus of GBP66 million has been
recognised in respect of the FPPS at 31 December 2010 (GBP59
million at 31 December 2009). The last triennial actuarial
valuation as at 30 September 2008 showed a deficit on a funding
basis of GBP65 million. To meet the deficit, a revised funding
agreement was entered into in June 2010 whereby deficit reduction
contributions of GBP20 million per annum will be made over the next
four years, commencing in July 2010.
Under IFRIC 14, deficit reduction contributions are considered
to be a minimum funding requirement and, to the extent that the
contributions payable will not be available after they are paid
into the scheme, a liability is recognised when the obligation
arises. An additional liability of GBP44 million has been
recognised (GBP21 million at 31 December 2009), reflecting the 35%
tax that would arise on any notional refund in respect of the
resultant IAS 19 surplus of GBP126 million (GBP60 million
contributions plus the current surplus of GBP66 million). A
deferred tax asset of GBP16 million has also been recognised to
reflect tax relief at a rate of 27% that is expected to be
available on the contributions, once paid into the scheme.
Employees of the acquired AXA UK Life Business have been placed
into new defined contribution arrangements with FPPS for service
accruing after the acquisition date. The pension obligation for
service accruing up to the date of the acquisition is not borne by
the Group. AXA UK Plc will continue to manage the defined benefit
pension scheme in respect of deferred and existing pensioners and
will be responsible for future funding of this scheme. Therefore,
for the purposes of these consolidated financial statements the
impact of the AXA defined benefit scheme IAS 19 deficit in so far
as it relates to employees acquired by the Group has been
excluded.
(b) Total schemes
The pension surplus is recognised in the statement of financial
position net of 35% (2009: 35%) penal tax payable on refund.
2010 2009
GBPm GBPm
--------------------------------------------------------- ----- -----
Pension surplus recognised in the consolidated
statement of
financial position
Surplus in the FPPS 22 38
--------------------------------------------------------- ----- -----
Net pension asset 22 38
--------------------------------------------------------- ----- -----
Amounts recognised in the consolidated income statement
FPPS: net (expense)/income (11) 7
--------------------------------------------------------- ----- -----
(11) 7
--------------------------------------------------------- ----- -----
Amounts recognised in the consolidated statement
of
comprehensive income
FPPS: actuarial (loss)/gain (21) 30
--------------------------------------------------------- ----- -----
Actuarial (losses)/gains on defined benefit schemes
after tax (21) 30
--------------------------------------------------------- ----- -----
2010 2009
GBPm GBPm
-------------------------------------------------------- ----- -----
IAS 19 pension surplus (excluding deficit reduction
contribution) 66 59
Authorised payments surplus charge at 35% of available
surplus
following deficit reduction contributions (44) (21)
-------------------------------------------------------- ----- -----
Net pension surplus (excluding deficit reduction
contribution) 22 38
-------------------------------------------------------- ----- -----
Movement in IAS 19 pension surplus
2010 2009
GBPm GBPm
------------------------------------------------------ ----- -----
Pension surplus at 1 January 59 -
Acquired through business combinations - (4)
Service costs (i) (13) (2)
Interest cost (i) (55) (9)
Expected return on pension assets 60 11
Augmentations and termination benefits (i) (3) (2)
Prior service credit - 10
Contributions 41 9
Actuarial (losses)/gains (23) 46
------------------------------------------------------ ----- -----
Pension surplus at 31 December (excluding authorised
payments surplus charge) 66 59
------------------------------------------------------ ----- -----
Deficit reduction contributions 60 -
------------------------------------------------------ ----- -----
Available surplus subject to authorised payments
surplus
charge 126 59
------------------------------------------------------ ----- -----
(i) Recognised in the consolidated income statement.
Analysis of pension surplus and related deferred tax asset
As at 31 December 2010
Pension Deferred
surplus tax
GBPm GBPm
--------------------------------------------------------- -------- ---------
Gross IAS 19 pension surplus and related deferred
tax asset 66 (18)
Irrecoverable element of deficit reduction contributions
(authorised payments surplus charge on available
surplus) (44) -
Reversal of deferred tax asset due to pension surplus
arising - 18
Tax relief available on deficit reduction contributions - 16
--------------------------------------------------------- -------- ---------
Pension surplus and related deferred tax asset 22 16
--------------------------------------------------------- -------- ---------
As at 31 December 2009
Pension Deferred
surplus tax
GBPm GBPm
--------------------------------------------------- -------- ---------
Gross IAS 19 pension surplus and related deferred
tax asset 59 (16)
Irrecoverable element of deficit reduction
contributions
(authorised payments surplus charge on available
surplus) (21) -
Reversal of deferred tax asset due to pension
surplus arising - 16
Pension surplus and related deferred tax asset 38 -
--------------------------------------------------- -------- ---------
Amounts recognised in the consolidated statement of
comprehensive income
2010 2009
GBPm GBPm
-------------------------------------------------- ----- -----
Actuarial (losses)/gains (23) 46
Reverse authorised payments surplus charge
on opening
surplus 21 -
Irrecoverable element of deficit reduction
contributions
(authorised payments surplus charge on available
surplus) (44) (21)
-------------------------------------------------- ----- -----
Actuarial (losses)/gains on defined benefit
schemes (46) 25
Taxation 25 5
-------------------------------------------------- ----- -----
Actuarial (losses)/gains on defined benefit
schemes
after tax (21) 30
-------------------------------------------------- ----- -----
Tax relief of GBP16 million available on deficit reduction
contributions and GBP9 million in respect of other movements in the
pension scheme are included in the aggregate tax line of the
consolidated statement of comprehensive income.
5. Taxation
(a) Tax charged to the income statement
2010 2009
GBPm GBPm
--------------------------------------------------- ------ -----
Current tax
UK corporation tax at 28% 16 (8)
Adjustments in respect of prior periods (15) -
Overseas taxation 7 -
--------------------------------------------------- ------ -----
Total current tax charge/(credit) 8 (8)
--------------------------------------------------- ------ -----
Deferred tax
Origination and reversal of temporary differences 121 (13)
Adjustments in respect of prior periods 8 -
--------------------------------------------------- ------ -----
Total deferred tax charge/(credit) 129 (13)
--------------------------------------------------- ------ -----
Total tax charge/(credit) 137 (21)
--------------------------------------------------- ------ -----
Analysis:
Policyholder tax 244 1
Shareholder tax (107) (22)
--------------------------------------------------- ------ -----
Total tax charge/(credit) 137 (21)
--------------------------------------------------- ------ -----
Policyholders' tax is tax on the income and investment returns
charged to policyholders of linked and with-profits funds.
Shareholders' tax is tax charged to shareholders on the profits of
the Group. During the year legislation has been introduced to bring
in a phased decrease in the rate of corporation tax commencing with
a reduction to 27% on 1 April 2011 and further reductions of 1% per
annum until it reaches 24% on 1 April 2014. Under IFRS deferred tax
is calculated using substantively enacted rates and as such only
the reduction to a 27% rate has been taken into account in deferred
tax balance.
(b) Factors affecting tax charge for the period
2010 2009
Profit Profit
before
before tax tax
(Restated)
GBPm GBPm
---------------------------------------------- ----------- -----------
Profit before tax from continuing operations
(i) 985 1,318
---------------------------------------------- ----------- -----------
Profit before tax from continuing operations
determined
with reference to the standard rate of
corporation tax
in the UK of 28% 275 369
Effects of:
Non-taxable income (115) (9)
Deductions not allowable for tax purposes 46 1
Tax on reserving adjustments 7 -
Overseas tax - (1)
Tax relief for share based payments - 3
Utilisation of excess expenses brought
forward (8) 5
Valuation of tax losses (42) (14)
With-profits minority interest (ii) (8) (6)
Adjustments in respect of prior periods (7) -
Non taxable gain on acquisition (247) (370)
Reduction in corporation tax rate from
28% to 27% (8) -
Policyholder tax 244 1
---------------------------------------------- ----------- -----------
Total tax (credit)/charge 137 (21)
---------------------------------------------- ----------- -----------
(i) The 2009 profit is restated as detailed in Note 2.
(ii) This relates to tax on F&C CPT prior to
deconsolidation.
6. Appropriations of profit
(a) Dividends paid on ordinary shares
Dividends paid during the year and recognised in reserves:
2010 2009
GBPm GBPm
----------------------------------------- ----- -----
Final dividend in respect of the period
ended
31 December 2009 paid in 2010 65 -
----------------------------------------- ----- -----
The distributable reserves of Friends Provident Holdings (UK)
plc at 31 December 2010 are GBP3,478 million (2009: GBP1,348
million).
As required by IAS10: Events after the balance sheet date,
dividends declared after the balance sheet date are not accrued in
these accounts. The directors are recommending a interim dividend
of GBP250 million (2009: GBP65 million) payable by 31 March
2011.
(b) STICS interest
Interest on the 2003 STICS is paid in equal instalments in May
and November each year at a rate of 6.875%. During the year ended
31 December 2010, interest of GBP14 million (period ended 31
December 2009: GBP7 million) was paid to the 2003 STICS
holders.
Interest on the 2005 STICS is paid annually in June at a rate of
6.292%. During the year ended 31 December 2010, interest of GBP17
million (period ended 31 December 2009: GBPnil) was paid to the
2005 STICS holders.
7. Earnings per share
(a) Basic and operating earnings per share from continuing
operations
Earnings per share ("EPS") have been calculated based on the
profit after tax and on the operating profit after tax,
attributable to ordinary shareholders of the parent. The directors
consider that the operating earnings per share figure gives a
better indication of operating performance.
2010 2009 (Restated)
EPS EPS
------ -------- -------- ----------
GBPm pence GBPm pence
------------------------------- ------ -------- -------- ----------
Profit after tax attributable
to
ordinary shareholders of
the
parent 794 241.2 1,311 1,324.8
Short-term fluctuations in
investment return (24) (7.3) (12) (12.1)
Non-recurring items (801) (243.4) (1,325) (1,338.9)
Amortisation and impairment
of
acquired intangible assets 428 130.0 69 69.7
Tax credit on items excluded
from
operating profit (91) (27.6) (8) (8.1)
------------------------------- ------ -------- -------- ----------
Operating profit after tax
attributable to ordinary
shareholders of the parent 306 92.9 35 35.4
------------------------------- ------ -------- -------- ----------
(b) Diluted basic earnings per share from continuing
operations
2010 2009 (Restated)
Weighted Weighted
average average
number number
of of
ordinary Per ordinary Per
Earnings shares share Earnings shares share
GBPm millions pence GBPm millions pence
---------------- --------- --------- ------ --------- --------- --------
Profit after
tax
attributable
to ordinary
shareholders
of the parent 794 329 241.2 1,311 99 1,324.8
Dilution (c) - - - - - -
---------------- --------- --------- ------ --------- --------- --------
Diluted profit
after tax
attributable to
ordinary
shareholders of
the
parent 794 329 241.2 1,311 99 1,324.8
---------------- --------- --------- ------ --------- --------- --------
(c) Dilution
There are no dilution factors at 31 December 2010 (2009:
none).
8. Intangible assets
Movements in intangible assets are as follows:
For the year ended 31 December 2010
Goodwill AVIF Other Total
GBPm GBPm GBPm GBPm
------------------------------ --------- ------ ------ ------
Cost
------------------------------ --------- ------ ------ ------
At 1 January 2010 13 2,938 369 3,320
Acquisition of AXA UK Life
Business - 2,192 150 2,342
Other additions - - 4 4
Foreign exchange adjustments - (23) (8) (31)
------------------------------ --------- ------ ------ ------
At 31 December 2010 13 5,107 515 5,635
------------------------------ --------- ------ ------ ------
Amortisation and impairment
------------------------------ --------- ------ ------ ------
At 1 January 2010 - 59 10 69
Amortisation charge for the
period - 364 64 428
Foreign exchange adjustments - (1) (1) (2)
------------------------------ --------- ------ ------ ------
At 31 December 2010 - 422 73 495
------------------------------ --------- ------ ------ ------
Carrying amounts
------------------------------ --------- ------ ------ ------
At 31 December 2010 13 4,685 442 5,140
------------------------------ --------- ------ ------ ------
For the period ended 31 December 2009
Goodwill AVIF Other Total
GBPm GBPm GBPm GBPm
---------------------------------- --------- ------ ------ ------
Cost
---------------------------------- --------- ------ ------ ------
On incorporation: 10 August
2009 - - - -
Acquisition of Friends Provident - 2,943 363 3,306
Acquisition of FpB 13 - 5 18
Other additions - - 1 1
Foreign exchange adjustments - (5) - (5)
---------------------------------- --------- ------ ------ ------
At 31 December 2009 13 2,938 369 3,320
---------------------------------- --------- ------ ------ ------
Amortisation and impairment
---------------------------------- --------- ------ ------ ------
On incorporation: 10 August
2009 - - - -
Amortisation charge for the
period - 59 10 69
At 31 December 2009 - 59 10 69
---------------------------------- --------- ------ ------ ------
Carrying amounts
---------------------------------- --------- ------ ------ ------
At 31 December 2009 13 2,879 359 3,251
---------------------------------- --------- ------ ------ ------
An analysis of intangible assets by significant cash generating
unit ("CGU") is set out below:
Net book
Cost Amortisation value
31 December 2010 GBPm GBPm GBPm
---------------------------------- ------ ------------- ---------
UK - Friends Provident (life and
pensions
including Sesame Bankhall) 1,457 (142) 1,315
UK - AXA UK Life Business 2,342 (86) 2,256
International (including FPI and
AmLife
Berhad) 1,057 (141) 916
Lombard 779 (126) 653
---------------------------------- ------ ------------- ---------
Total 5,635 (495) 5,140
---------------------------------- ------ ------------- ---------
Net book
Cost Amortisation value
31 December 2009 GBPm GBPm GBPm
---------------------------------- ------ ------------- ---------
UK - Friends Provident (life and
pensions
including Sesame Bankhall) 1,457 (32) 1,425
International (including FPI and
AmLife
Berhad) 1,057 (10) 1,047
Lombard 806 (27) 779
---------------------------------- ------ ------------- ---------
Total 3,320 (69) 3,251
---------------------------------- ------ ------------- ---------
A detailed exercise was undertaken to identify intangible
assets, categorised by CGU as part of the acquisition of AXA UK
Life Business on 3 September 2010. As a result of this review it
was decided that the acquired business represented an additional
CGU in its own right. All intangible assets identified were in
respect of the individual product lines.
In determining the fair value of identified intangible assets,
appropriate approaches to valuation were applied, given the nature
of the intangible assets acquired.
Intangible assets relating to customer relationships and
distribution channels have been valued using an income approach
method, specifically the Multi-period Excess Earnings Method
("MEEM"). The principle behind the MEEM is that the value of an
intangible asset is equal to the present value of the after-tax
cash flows attributable only to that intangible asset. Other
intangibles include in-house developed IT systems and databases
which have been valued using a replacement cost approach which
assesses the cost of reproducing the equivalent technology in its
current form.
For each type of asset, the useful economic life was determined,
being the period over which the asset is expected to contribute
directly or indirectly to future cash flows. The value of the
assets will be amortised over the respective useful economic
lives.
The "AXA" brand and associated brands that existed within the
acquired business have been retained by AXA UK plc and as such no
value has been attributed to them.
The exercise excluded the Winterthur Life UK ("WLUK") business
that will be consolidated when control passes to the FPH group
which is expected to take place towards the end of 2011. Similarly
the exercise excluded the two portfolios of businesses that are
classified as held for sale.
On acquisition of a portfolio of insurance contracts and/or
investment contracts, either directly or through the acquisition of
a subsidiary undertaking, the net present value of the Group's
interest in the expected pre-tax cash flows of the in-force
business is capitalised in the balance sheet as the acquired value
of in-force business ("AVIF"). AVIF is shown gross of policyholder
and shareholder tax of GBP1,076 million (2009: GBP594 million),
with the offsetting balance included in deferred taxation.
(i) UK
An analysis of the intangible assets in respect of UK - Friends
Provident is as follows:
Net book
Cost Amortisation value
31 December 2010 GBPm GBPm GBPm
----------------------------------------- ------ ------------- ---------
AVIF 1,304 (116) 1,188
Distribution and customer relationships 122 (18) 104
Brand 28 (6) 22
Other 3 (2) 1
Total 1,457 (142) 1,315
----------------------------------------- ------ ------------- ---------
Net book
Cost Amortisation value
31 December 2009 GBPm GBPm GBPm
----------------------------------------- ------ ------------- ---------
AVIF 1,304 (27) 1,277
Distribution and customer relationships 122 (4) 118
Brand 28 (1) 27
Other 3 - 3
Total 1,457 (32) 1,425
----------------------------------------- ------ ------------- ---------
An analysis of the intangible assets in respect of the acquired
AXA UK Life Business is as follows:
Net book
Cost Amortisation value
31 December 2010 GBPm GBPm GBPm
----------------------------------------- ------ ------------- ---------
AVIF 2,192 (80) 2,112
Distribution and customer relationships 122 (4) 118
Other 28 (2) 26
Total 2,342 (86) 2,256
----------------------------------------- ------ ------------- ---------
(ii) International
An analysis of the intangible assets in respect of International
is as follows:
Net book
Cost Amortisation value
31 December 2010 GBPm GBPm GBPm
----------------------------------------- ------ ------------- ---------
AVIF 995 (132) 863
Distribution and customer relationships 40 (7) 33
Brand 9 (2) 7
Other 13 - 13
Total 1,057 (141) 916
----------------------------------------- ------ ------------- ---------
Net book
Cost Amortisation value
31 December 2009 GBPm GBPm GBPm
----------------------------------------- ------ ------------- ---------
AVIF 995 (9) 986
Distribution and customer relationships 40 (1) 39
Brand 9 - 9
Other 13 - 13
Total 1,057 (10) 1,047
----------------------------------------- ------ ------------- ---------
(iii) Lombard
An analysis of the intangible assets in respect of Lombard is as
follows:
Net book
Cost Amortisation value
31 December 2010 GBPm GBPm GBPm
----------------------------------------- ----- ------------- ---------
AVIF 616 (94) 522
Distribution and customer relationships 135 (25) 110
Brand 12 (2) 10
Other 16 (5) 11
Total 779 (126) 653
----------------------------------------- ----- ------------- ---------
Net book
Cost Amortisation Value
31 December 2009 GBPm GBPm GBPm
----------------------------------------- ----- ------------- ---------
AVIF 639 (23) 616
Distribution and customer relationships 141 (3) 138
Brand 13 - 13
Other 13 (1) 12
Total 806 (27) 779
----------------------------------------- ----- ------------- ---------
Impairment
All identifiable intangible assets are reviewed at each
reporting date to assess whether there are any circumstances that
might indicate that they are impaired. If such circumstances exist,
impairment testing is performed and any resulting impairment losses
are charged to the income statement. As at 31 December 2010, based
on an impairment review of each of the CGUs, the Directors are
satisfied that none of the Group's intangible assets are
impaired.
9. Financial assets
The Group's financial assets are summarised by measurement
categories as follows:
2010 2009
GBPm GBPm
----------------------------------------- ------- -------
Fair value through the income statement
(Note 9 (a)) 98,788 48,235
Loans at amortised cost (Note 9 (f)) 677 80
----------------------------------------- ------- -------
Total financial assets 99,465 48,315
----------------------------------------- ------- -------
(a) Analysis of financial assets at fair value through the
income statement
As at 31 December 2010
Non
-
With- Unit- linked Share-
profits linked Annuities Other holder Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------- ------- ---------- ------- ------- -------
Shares and other
variable
yield securities 8,114 52,017 - 241 8 60,380
Debt securities and
other
fixed-income
securities:
Government
securities 6,937 7,644 659 716 189 16,145
Corporate bonds 8,885 5,445 5,634 922 569 21,455
Derivate financial
instruments 393 24 39 5 (5) 456
Deposits with
credit
institutions 3 349 - - - 352
-------------------- -------- ------- ---------- ------- ------- -------
Total financial
assets 24,332 65,479 6,332 1,884 761 98,788
-------------------- -------- ------- ---------- ------- ------- -------
As at 31 December 2009
Non
-
With- Unit- linked Share-
Profits linked Annuities Other holder Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------- ------- ---------- ------- ------- -------
Shares and other
variable
yield securities 2,568 27,693 - 103 8 30,372
Debt securities and
other
fixed-income
securities:
Government
securities 3,654 1,803 424 256 173 6,310
Corporate bonds 4,442 3,471 2,200 501 357 10,971
Derivate financial
instruments 176 8 - 3 (6) 181
Deposits with
credit
institutions - 375 - 24 2 401
-------------------- -------- ------- ---------- ------- ------- -------
Total financial
assets 10,840 33,350 2,624 887 534 48,235
-------------------- -------- ------- ---------- ------- ------- -------
The above unit-linked column and with-profits column include
GBP964 million (2009: GBP584 million) of financial assets (GBP316
million of shares and GBP648 million of corporate bonds) relating
to the minority interests in the OEICs that have been consolidated
as the Group holding is 50% or more.
For unit-linked funds, the policyholders bear the investment
risk and any change in asset values is matched by a broadly
equivalent change in the liability.
The majority of financial assets held are readily realisable,
however, amounts of GBP87,707 million (2009: GBP44,852 million) are
not expected to be realised until more than 12 months after the
balance sheet date in line with the expected maturity of
insurance/investment contract liabilities.
Asset Backed Securities (excluding those held by the linked
funds) amount to GBP2,505 million (2009: GBP1,167 million) and 92%
(2009: 89%) of these are at investment grade.
(b) Determination of fair value hierarchy
In accordance with the requirements of IFRS 7 Financial
Instruments: Disclosures, financial assets at fair value have been
classified into three categories as set out below. Financial assets
at fair value include shares and other variable yield securities,
government securities, corporate bonds (including ABS), derivative
financial instruments and deposits with credit institutions.
Level 1 - quoted prices (unadjusted) in active markets for
identical assets. An active market is one in which transactions
occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. Examples include listed equities
and bonds in active markets and quoted unit trusts/OEICs.
Level 2 - inputs other than quoted prices included within Level
1 that are observable for the asset, either directly (i.e. as
prices) or indirectly (i.e. derived from prices). This category
generally includes assets that are priced based on models using
observable market inputs. Examples include certain corporate bonds,
certificates of deposit and derivatives.
Level 3 - inputs for the asset that are not based on observable
market data. Assets with single price feeds and/or limited trading
activity are included in this category. Examples include unlisted
equities and private equity investments.
The majority of the Group's assets held at fair value are valued
based on quoted market information or market observable data.
Approximately 4.5% (4% excluding unit-linked assets) are based on
valuation techniques where significant observable market data is
not available or the price is not observable from current market
transactions. However, the fair value measurement objective of
these assets remains the same, that is, an exit price from the
perspective of the Group.
The requirements of IFRS 7 also require financial liabilities at
fair value to be categorised into the above Level 1, 2 or 3
hierarchies. Financial liabilities at fair value include
unit-linked contracts, amounts due to reinsurers, net asset value
attributable to unit-holders (minority interest in the OEICs that
are consolidated) and derivative financial instruments. The
classifications take into account the types of inputs used to
determine the fair value measurements. For unit-linked funds this
has been undertaken on a fund-by-fund basis. For the net asset
value attributable to unit holders, this has been analysed in the
same proportion as the underlying consolidated investments
categorisation.
The Group has financial liabilities which contain a
discretionary participation feature of GBP9,123 million (2009:
GBP3,974 million) that form part of its with-profits funds.
Products giving rise to these liabilities are mainly investment or
pension contracts with a unitised with-profits element. The Group
is unable to measure the fair value of these financial liabilities
reliably due to the lack of a robust basis to measure the
supplemental discretionary returns arising on with-profits
contracts and because there is not an active market for such
instruments. These liabilities have therefore been excluded from
the fair value hierarchy analysis below.
An analysis of financial assets and liabilities held at fair
value in accordance with the fair value hierarchy is set out below.
The table shows both the total financial assets and liabilities and
the total excluding unit-linked assets and liabilities, as
shareholders have no direct exposure to profits or losses on
unit-linked assets (other than through investment management
fees).
Including unit-linked Excluding unit-linked
Level Level Level Level Level Level
31 December
2010 1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Financial
assets held
at fair
value
Shares and
other
variable
yield
securities 48,139 8,892 3,349 60,380 7,109 271 983 8,363
Debt
securities
and other
fixed
income
securities:
Government
securities 16,094 51 - 16,145 8,500 1 - 8,501
Corporate
bonds 12,317 8,035 1,103 21,455 9,601 6,051 358 16,010
Derivative
financial
instruments 54 402 - 456 51 381 - 432
Deposits with
credit
institutions 351 1 - 352 3 - - 3
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Total
financial
assets held
at
fair value 76,955 17,381 4,452 98,788 25,264 6,704 1,341 33,309
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Financial
liabilities
held at
fair value
Unit-linked
investment
contracts - 62,492 - 62,492 - - - -
Amounts due
to
reinsurers - 1,666 - 1,666 - 1,666 - 1,666
Net asset
value
attributable
to
unit-holders 1,173 - - 1,173 11 - - 11
Derivative
financial
instruments 27 138 - 165 27 127 - 154
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Total
financial
liabilities
held
at fair value 1,200 64,296 - 65,496 38 1,793 - 1,831
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Including unit-linked Excluding unit-linked
Level Level Level Level Level Level
31 December
2009 1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Financial
assets held
at fair
value
Shares and
other
variable
yield
securities 25,445 207 4,720 30,372 2,283 - 396 2,679
Debt
securities
and other
fixed
income
securities:
Government
securities 6,297 13 - 6,310 4,507 - - 4,507
Corporate
bonds 5,996 4,287 688 10,971 5,195 2,215 90 7,500
Derivative
financial
instruments - 181 - 181 - 173 - 173
Deposits with
credit
institutions 343 58 - 401 - 26 - 26
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Total
financial
assets held
at
fair value 38,081 4,746 5,408 48,235 11,985 2,414 486 14,885
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Financial
liabilities
held at
fair value
Unit-linked
investment
contracts - 36,410 - 36,410 - - - -
Amounts due
to
reinsurers - 1,610 - 1,610 - 1,610 - 1,610
Net asset
value
attributable
to
unit-holders - 668 - 668 - - - -
Derivative
financial
instruments - 54 - 54 - 54 - 54
-------------- ------- ------- ------ ------- ------- ------ ------ -------
Total
financial
liabilities
held at
fair value - 38,742 - 38,742 - 1,664 - 1,664
-------------- ------- ------- ------ ------- ------- ------ ------ -------
(c) Transfers between Level 1 and Level 2
In the period, the Group has refined the methodology for
classifying certain assets under the IFRS hierarchy. In the prior
period, corporate bonds were classified based on the existence of
recent traded prices and if none existed, by reference to credit
risk. The refined classification methodology takes into account a
liquidity assessment of each bond rather than a credit assessment.
The liquidity assessment is based on bid/offer spreads. The impact
in the period is that GBP2,495 million of corporate bonds have been
reclassified from Level 1 to Level 2.
In addition to the reclassification of corporate bonds above,
GBP958 million of shares and other variable yield securities were
transferred from Level 1 to Level 2 and GBP735 million (2009:
GBP181 million) of corporate bonds, shares and other variable yield
securities were transferred from Level 2 to Level 1. These
movements arose from changes in the availability of current quoted
prices and market activity. There were no significant transfers
between Level 1 and Level 2 for other financial assets.
(d) Financial instruments
The following table shows a reconciliation of Level 3 financial
assets which are recorded at fair value.
At At
31
1 Jan Gains/ Foreign Dec
Acq
2010 (i) (losses) Purchases Sales Transfers exchange 2010
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------ ----- --------- ---------- ------ ---------- --------- ------
Financial
assets
held at
fair
value
Shares and
other
variable
yield
securities 4,720 529 394 1,100 (889) (2,477) (28) 3,349
Corporate
bonds
(including
ABS) 688 213 180 216 (99) (58) (37) 1,103
------------ ------ ----- --------- ---------- ------ ---------- --------- ------
Total
financial
assets held
at fair
value 5,408 742 574 1,316 (988) (2,535) (65) 4,452
------------ ------ ----- --------- ---------- ------ ---------- --------- ------
(i) Acquired through business combinations
Total gains or losses for the year for assets held at 31
December 2010 include unrealised gains of GBP184 million in shares
and other variable yield securities and unrealised gains of GBP139
million in corporate bonds.
Transfers out of Level 3 arise due to availability of prices in
active markets and the refinement of methodology that took place
during the year.
At At
10 31
Aug Gains/ Foreign Dec
Acq
2009 (i) (losses) Purchases Sales Transfers exchange 2009
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----- ------ --------- ---------- ------ ---------- --------- ------
Financial
assets
held at
fair
value
Shares and
other
variable
yield
securities - 5,096 (927) 325 (73) 299 - 4,720
Corporate
bonds
(including
ABS) - 687 (9) 11 (1) - - 688
------------ ----- ------ --------- ---------- ------ ---------- --------- ------
Total
financial
assets held
at fair
value - 5,783 (936) 336 (74) 299 - 5,408
------------ ----- ------ --------- ---------- ------ ---------- --------- ------
(i) Acquired through business combinations
Total gains or losses for the period ended 31 December 2009 for
assets held at 31 December 2009 include unrealised losses of GBP930
million in shares and other variable yield securities and
unrealised losses of GBP9 million in corporate bonds.
Transfers into Level 3 arise due to prices no longer being
readily available in an active market.
(e) Level 3 sensitivity analysis
2010 2009
Effect of Effect of
reasonably reasonably
possible possible
Carrying alternative Carrying alternative
amount assumptions amount assumptions
GBPm GBPm GBPm GBPm
---------------------------- --------- ------------ --------- ------------
Unit-linked investments 3,111 - 4,922 -
Shares and other variable
yield
securities 983 196 396 79
Corporate bonds (including
ABS) 358 36 90 9
---------------------------- --------- ------------ --------- ------------
4,452 232 5,408 88
---------------------------- --------- ------------ --------- ------------
For unit-linked funds, the policyholders bear the investment
risk and any change in asset values is matched by a broadly
equivalent change in the liability. Shareholder profits from annual
management charges levied on such funds will, however, vary
according to the change in asset values leading to some limited
investment risk.
For shares and other variable yield securities, where there is
no active market, the price at year end could reasonably be
expected to be higher or lower by approximately 20%.
For corporate bonds, it could reasonably be expected that the
current prices could be higher or lower by approximately 10% to
reflect changes in the credit ratings of the underlying bonds.
(f) Loans
2010 2009
GBPm GBPm
---------------- ----- -----
Mortgage loans 61 3
Other loans 616 77
---------------- ----- -----
Total loans 677 80
---------------- ----- -----
Other loans include GBP600 million of loan assets held as a
result of financial arrangements with Barclays Bank plc and Morgan
Stanley. The loans which will be repaid in March 2011 are backed by
collateral, which is routinely reviewed to ensure its valuation
covers the loan value. As at 31 December 2010, the fair value of
the collateral received from the counterparties was GBP645 million.
No collateral received from the counterparties has been sold or
re-pledged. The 2009 comparative includes GBP68 million due from
the FPPS (see Note 4) which was repaid in 2010. The fair value of
loans is considered to be the same as their carrying value.
(g) Unit-linked net assets
The amounts included in the statement of financial position in
respect of net assets held within unit-linked funds are as
follows:
2010 2009
GBPm GBPm
-------------------------------------------- ------- -------
Investment properties 1,831 506
Shares and other variable yield securities 52,180 27,341
Debt securities and other fixed-income
securities 11,893 5,042
Derivative financial instruments 25 8
Deposits with credit institutions 349 375
Other receivables 356 120
Cash and cash equivalent 4,879 3,126
-------------------------------------------- ------- -------
Total assets 71,513 36,518
-------------------------------------------- ------- -------
Other payables (235) (141)
-------------------------------------------- ------- -------
Total unit-linked net assets 71,278 36,377
-------------------------------------------- ------- -------
The impact of consolidating OEICs in which the Group has a
holding in excess of 50% has been excluded from the above analysis
of unit-linked net assets, however the underlying holdings in the
OEICs are included within shares and other variable yield
securities.
10. Loans and borrowings
The Group's loans and borrowings are as follows:
Coupon 2010 Coupon 2009
% GBPm % GBPm
------------------------------------- ----------- ------ ----------- -----
Subordinated liabilities:
Lombard undated subordinated
loans Various 3 Various 4
GBP162m Friends Provident Holdings
(UK) plc subordinated debt due
2021 (i) 12.00 186 12.00 189
Debenture loans:
Box Hill Life Finance plc
securitisation
notes - class A-1 due 2016 (ii) - 3m LIBOR 15
+0.20
Box Hill Life Finance plc
securitisation
notes - class A-2 due 2019 (ii) - 3m LIBOR 100
+0.23
F&C Commercial Property Trust
secured
bonds due 2017 (iii) - 5.23 219
Reinsurance:
Lombard financial reinsurance
treaties Various 15 EURIBOR 27
+2.12
Friends Provident financial
reinsurance
treaty - 3m EURIBOR 4
+1.75
Friends Provident financial
reinsurance 3m EURIBOR
treaty (iv) +3.60 29 -
Other:
GBP700m fixed rate unsecured
notes (v) 9.00 700
Amounts owed to credit institutions -
(overdrafts) 79 32
------------------------------------- ----------- ------ ----------- -----
Total loans and borrowings 1,012 590
------------------------------------- ----------- ------ ----------- -----
Unless otherwise stated below, the carrying values of
interest-bearing loans and borrowings closely approximate fair
value.
(i) On 21 May 2009 FPG exchanged GBP322 million of its STICS for
GBP162 million 12 per cent Sterling Denominated Fixed Rate
Subordinated Guaranteed Notes due 2021. These notes are irrevocably
guaranteed on a subordinated basis by FPLP. The subordinate debt is
carried at amortised cost based on the fair value at the date of
acquisition of FPG of GBP186 million (2009: GBP186 million), being
GBP162 million (2009: GBP162 million) principal less capitalised
issue costs of GBP2 million (2009: GBP2 million) plus a fair value
adjustment of GBP26 million (2009:GBP29 million). On 15 December
2010, the STICS were transferred to the Company in connection with
a simplification of Group debt capital structure, and the Company
has replaced for FPG as the issuer.
(ii) On 16 December 2004 FPLP raised GBP380 million of core
regulatory capital in the form of floating rate secured notes
through a securitisation of the cash flows expected to emerge from
a book of life insurance policies. GBP280 million was raised
through class A-1 notes due 2016 and GBP100 million through class
A-2 notes due 2019. The floating rate notes were repaid in April
2010.
(iii) Following the reduction in the Group's investment in the
F&C CPT on 23 April 2010 the entity is no longer consolidated
by the Group. The retained holding is accounted for as a financial
investment at fair value through the profit or loss.
(iv) On 30 June 2010, FPLP entered into a financial reinsurance
agreement with Munich Reinsurance Company UK Life Branch to finance
new German unit-linked pension business written since 1 January
2010. The amount owed to Munich Re as at 31 December 2010 was GBP29
million.
(v) On 14 September 2010, FPH issued fixed rate unsecured loan
notes, due in 2020, to Resolution Holdings (Guernsey) Limited with
an agreed principal amount of GBP700 million.
Total interest-bearing loans and borrowings are repayable as
follows:
2010 2009
GBPm GBPm
------------------------------ ------ -----
Within one year or on demand 123 166
Between one and two years - 10
Between two and three years 3 8
Between three and four years - 7
Between four and five years - 3
In more than five years 886 396
Total loans and borrowings 1,012 590
------------------------------ ------ -----
Total interest expense for financial liabilities not measured at
fair value through profit or loss, which arises solely from
interest bearing loans and borrowings is GBP61 million (2009:GBP6
million).
11. Other reserves
Other reserves included in equity attributable to equity holders
of the parent are as follows:
For the year ended 31 December 2010
Foreign
currency
Merger Contributed Retained translation
reserve capital earnings reserve Total
GBPm GBPm GBPm GBPm GBPm
--------------------- -------- ------------ --------- ------------ ------
At 31 December 2009 102 312 2,571 (5) 2,980
Prior year
adjustment (i) - - 119 - 119
--------------------- -------- ------------ --------- ------------ ------
1 January 2010
(as restated) 102 312 2,690 (5) 3,099
Profit for the
period - - 794 - 794
Actuarial loss on
defined
benefit schemes - - (21) - (21)
Foreign exchange
and
other adjustments - - - (9) (9)
Tax relief on STICS
interest - - 9 - 9
Share based payments - - 4 - 4
Dividends - - (65) - (65)
Capital reduction - - 1,900 - 1,900
At 31 December 2010 102 312 5,311 (14) 5,711
--------------------- -------- ------------ --------- ------------ ------
(i) Prior year adjustment of STICS impacting a gain arising on
FPG acquisition as set out in Note 2.
For the period from 10 August 2009 to 31 December 2009
Foreign
currency
Merger Contributed Retained translation
reserve capital earnings reserve Total
GBPm GBPm GBPm GBPm GBPm
--------------------- -------- ------------ --------- ------------ ------
On corporation: 10
August - - - - -
Profit for the
period - - 1,192 - 1,192
Actuarial gain on
defined
benefit schemes - - 30 - 30
Foreign exchange and
other adjustments - - - (5) (5)
Tax relief on STICS
interest - - 1 - 1
Acquisition of
subsidiaries - 312 - - 312
Issue of share
capital 102 - - - 102
Capital reduction - - 1,348 - 1,348
At 31 December as
originally reported 102 312 2,571 (5) 2,980
Prior year
adjustment -
profit for period - - 119 - 119
--------------------- -------- ------------ --------- ------------ ------
At 31 December 2009 102 312 2,690 (5) 3,099
restated
--------------------- -------- ------------ --------- ------------ ------
12. Contingent liabilities and commitments
(a) Contingent liabilities
In the normal course of its business, the Group is subject to
matters of litigation or dispute. While there can be no assurances
at this time, based on the information currently available to them,
the Directors believe that it is not probable that the ultimate
outcome of any of these matters will have a material adverse effect
on the financial condition of the Group.
(b) Commitments
Operating leases where the Group is lessee
The Group leases a number of properties under operating leases.
These leases typically run for a period of 50 years, with an option
of renewal at the end of the lease. Lease terms include annual
escalation clauses to reflect current market conditions.
The future minimum rentals payable under non-cancellable leases
are as follows:
2010 2009
Land
and Land and
buildings Other Total buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- ------ ------ ---------- ------ ------
Within one year 7 1 8 3 1 4
Between one and five
years 17 1 18 12 1 13
In more than five
years 26 - 26 10 - 10
---------------------- ---------- ------ ------ ---------- ------ ------
Total operating lease
payables 50 2 52 25 2 27
---------------------- ---------- ------ ------ ---------- ------ ------
(c) Other commitments
The Group has investment property commitments of GBP24 million
(2009: nil) relating to ongoing construction, renovation costs and
costs of acquiring existing properties.
The Group has potential commitments of GBP517 million (2009:
GBP217 million) to venture capital vehicles (partnerships and
similar vehicles) that allow exposure to private equity investments
in UK, US and European markets. All investments are held under
agreements between the private equity managers and the Group which
have committed the Group to providing an agreed maximum level of
funding to the managers to invest. As at 31 December 2010 there are
still funds that have yet to be utilised that, under the
agreements, are still available to the private equity managers and
hence are classified as potential commitments.
The Group has entered into a number of outsourcing arrangements
which have resulted in financial commitments amounting to GBP510
million as at 31 December 2010 (2009: nil). The average weighted
years remaining on these outsourcing contracts is 15 years as at 31
December 2010.
13. Business combinations
(a) Acquisition of AXA UK Life Business
On 3 September 2010, the FSA approved the change of control to
the Group of Friends AXA Sun Life Holdings Limited ("FASLH"), the
AXA UK Life Business. As the sale and purchase agreement in
relation to FASLH became unconditional upon obtaining the FSA
approval, the Group is deemed to have acquired control of FASLH on
3 September 2010 and has consolidated it from that point. On 15
September 2010, the Group legally completed the purchase of 100% of
the shares and voting rights of FASLH.
The acquisition is consistent with the Life Project of the
Group's ultimate parent, Resolution Limited, which aims to generate
value by consolidating UK life and asset management businesses.
The share capital of WLUK was not acquired at the acquisition
date. Under an option agreement between the Company and a
subsidiary of AXA UK plc ("the Subsidiary"), subject to certain
conditions, the Company has the right to require the Subsidiary to
sell and the Subsidiary has the right to require the Company to
acquire the shares of WLUK. However, some of the assets and
liabilities currently held by WLUK and its subsidiaries do not form
part of the acquisition and will therefore need to be transferred
to the AXA group before WLUK can be transferred to the Group. This
transfer will need to be carried out under Part VII of the
Financial Services and Markets Act 2000. Consequently, the transfer
is expected to be completed later in 2011. The effective date for
accounting purposes of the acquisition of this business will be at
the date when control is expected to pass to the Group.
Two other portfolios of business, GOF and TIP, are currently
owned by the Group, but under the terms of the AXA acquisition,
will be transferred to AXA during 2011. This is described in Note
14.
Under the framework agreement the net amount payable to AXA in
respect of the misplaced portfolios of business is GBP26 million
plus interest. The amount payable is subject to an adjustment to
reflect the actual value of shareholder net worth in the misplaced
portfolios of business at the transfer date, if it is different
from the value set out in the framework agreement.
In the period from the acquisition to 31 December 2010, AXA UK
Life Business contributed revenue of GBP3,339 million and a profit
after tax of GBP1 million. If the acquisition had occurred on 1
January 2010, management estimate that consolidated revenue would
have been GBP6,670 million, and consolidated profit after tax for
the year would have been GBP109 million. In determining these
amounts, management has assumed that the fair value adjustments
which arose on the date of acquisition would have been the same if
the acquisition had occurred on 1 January 2010.
The following summarises the major classes of consideration
transferred, and the recognised amounts of assets acquired and
liabilities assumed at the acquisition date:
GBPm
---------------------------------------------------- --------
Cash paid 2,224
Share capital issued to parent at par value 500
---------------------------------------------------- --------
Fair value of purchase consideration 2,724
Fair value of net assets acquired (3,607)
---------------------------------------------------- --------
Excess of the interest in the fair value of assets
acquired over costs (883)
---------------------------------------------------- --------
The consolidated income statement includes GBP14 million within
administrative and other expenses in relation to stamp duty payable
on the shares acquired.
Identifiable assets acquired and liabilities assumed
For the year ended 31 December 2010
Recognised
Values on
acquisition
GBPm
-------------------------------------------------------- ------------
Intangible assets:
Acquired value of in-force business 2,192
Distribution and customer relationships 122
Computer software 28
Property and equipment 2
Investment properties 2,292
Financial assets 43,191
Reinsurance assets 640
Current tax assets 37
Insurance and other receivables 939
Cash and cash equivalents 3,193
Assets of operations classified as held for sale
(i) 1,122
-------------------------------------------------------- ------------
Total identifiable assets 53,758
-------------------------------------------------------- ------------
Insurance contracts 22,050
Unallocated surplus 823
Financial liabilities:
Investment contracts 25,031
Loans and borrowings 23
Amounts due to reinsurers 25
Net asset value attributable to unit-holders 377
Provisions 155
Deferred tax liabilities 494
Insurance payables, other payables and deferred income 332
Liabilities of operations classified as held for
sale (i) 841
-------------------------------------------------------- ------------
Total identifiable liabilities 50,151
-------------------------------------------------------- ------------
Net identifiable assets acquired and liabilities
assumed 3,607
-------------------------------------------------------- ------------
Attributable to equity holders of the parent 3,607
-------------------------------------------------------- ------------
(i) The GOF/TIP business is presented as Held for Sale assets
and liabilities with a combined fair value of GBP281 million. A
GBP25 million deferred tax liability incurred on the disposal of
these portfolios is included in deferred tax liabilities.
The values of assets acquired and liabilities assumed,
recognised on acquisition, are their estimated fair values.
In determining the fair value of AVIF, the Group applied pre-tax
discount rates to the associated cash flows for each principal CGU
of 8% for UK.
In determining the fair value of distribution and customer
relationships acquired the Group applied pre-tax discount rates of
10% to the associated cashflows for each intangible asset.
The gain of GBP883 million recognised as a result of the
acquisition is attributable to the purchase price being at a
discount to the fair value of the net assets acquired which is
based on the market consistent embedded value of the AXA UK Life
Business plus the value of customer and distribution intangibles
relating to future business with existing customers and
distribution channels.
14. Disposal group classified as held for sale
Two portfolios of business, the GOF and TIP are currently
underwritten by FLC, an entity acquired by the Group through the
acquisition of the AXA UK Life Business. Under the terms of the AXA
acquisition, these businesses will be transferred under the
provisions of Part VII transfers back to AXA and are therefore
classified as held for sale assets. The transfer is expected to
take place during 2011.
The GOF and TIP portfolios are included in the 'UK' segment in
accordance with IFRS 8 Operating Segments.
The major classes of assets and liabilities of the GOF and TIP
businesses as at 31 December 2010 are disclosed in the table
below:
GBPm
------------------------------------------------------- ------
Intangible assets - AVIF 269
Deferred tax assets 20
Financial assets - shares and other variable yield
securities 904
Cash and cash equivalents 13
Assets of operations classified as held for sale 1,206
------------------------------------------------------- ------
Insurance contracts 21
Investment contracts 904
------------------------------------------------------- ------
Liabilities of operations classified as held for sale 925
------------------------------------------------------- ------
Net assets of operations classified as held for sale 281
------------------------------------------------------- ------
The income statement impact is consolidated on a line by line
basis in the core financial statements. The table below shows the
income statement of the held for sale business:
GBPm
---------------------------------------------- -----
Gross earned premiums 29
Gross claims and benefits paid (5)
Change in insurance contracts liabilities 7
Acquisition expenses (19)
Administrative and other expenses (15)
Profit before tax from continuing operations (3)
---------------------------------------------- -----
15. Related parties
In the ordinary course of business, the Group and its
subsidiaries carry out transactions with related parties, as
defined by IAS 24 Related party disclosures. Material transactions
for the year are set out below.
(a) Key management personnel compensation
Key management personnel consists of directors of FPH, and
members of the Group's leadership team.
In aggregate the compensation paid to key management is as set
out below:
2010 2009
Number
Number of of
employees GBPm employees GBPm
Short-term employee benefits
(i) 22 5.7 13 0.7
Post-employment benefits
(excluding defined benefit
scheme) 9 0.1 3 -
Termination benefits 1 0.3 2 0.2
-------------------------------- ---------- ----- ---------- -----
Total key management personnel
compensation charged to the
income statement 6.1 0.9
Post employment benefits -
defined
benefit schemes 2 - 5 0.3
-------------------------------- ---------- ----- ---------- -----
Total key management personnel
compensation 6.1 1.2
-------------------------------- ---------- ----- ---------- -----
(i) Includes GBP0.4 million to be paid in deferred shares as
part of 2010 bonus entitlement.
Post-employment benefits - defined benefit schemes comprises the
change in value of key management personnel accrued pension
benefits from the beginning of the relevant financial year to the
end of that year. This is consistent with the amounts disclosed as
'increase in transfer value during the year' in the Remuneration
Report of the Board in the Report and Accounts of Resolution
Limited. Details of pension schemes and share schemes operated by
the Group, and in which key management personnel participate are
given in Note 4.
There were GBPnil balances outstanding at the year end with key
management.
A number of key management personnel, and their close families,
have long term insurance policies with the Group. Such policies are
on normal commercial terms which are also available to other
members of staff. The Board has considered the financial effect of
such insurance policies and concluded that they are not material to
the Group or the individuals concerned.
All these transactions were completed on terms that were no
better than those available to other members of staff.
(b) Other related parties
Details of the Group's pension schemes, whose assets are managed
by three external investment managers, are provided in Note 4.
Transactions made between the Group and related parties were
made in the normal course of business. Loans from related parties
are made on normal arm's length commercial terms.
Services provided to related parties
2010 2009
Income Receivable Income Receivable
earned at year earned at
in year end in year year end
GBPm GBPm GBPm GBPm
Employee pension schemes - - - 2
Other related parties - - (1) -
-------------------------- -------- ----------- -------- -----------
Total - - (1) 2
-------------------------- -------- ----------- -------- -----------
Services provided to related parties
2010 2009
Income Receivable Income Receivable
earned at year earned at
in year end in year year end
GBPm GBPm GBPm GBPm
--------------- -------- ----------- -------- -----------
Joint venture 6 - 2 -
--------------- -------- ----------- -------- -----------
Total 6 - 2 -
--------------- -------- ----------- -------- -----------
As explained in Note 4, a Group company made a loan of GBP160m
to the FPPS in 2008, which had been fully repaid at 31 December
2010 (2009: GBP68m).
16. Post Balance Sheet event
(a) Acquisition of Bupa Health Assurance
On 31 January 2011 the entire issued share capital and business
of BHA was acquired by FPLP, a subsidiary company of FPH. The gross
consideration paid in cash was GBP168 million compared to an
announced price in October 2010 of GBP165 million. The increase in
price reflects an additional GBP3 million of capital injected into
BHA in December 2010 by British United Provident Association
Limited.
The work on the acquisition balance sheet is continuing and the
figures set out below should therefore be regarded as
provisional.
On an IFRS basis for the acquisition balance sheet, the net
assets acquired are estimated at GBP236 million which would give a
gain on acquisition of GBP68 million.
The draft IFRS acquisition balance sheet is summarised as
follows:
GBPm
---------------------------- -----
Acquired value of in-force 172
Other intangible assets 8
Investments and cash 173
Current assets 30
---------------------------- -----
Total assets 383
---------------------------- -----
Insurance liabilities 67
Other liabilities 80
---------------------------- -----
Total liabilities 147
---------------------------- -----
Net assets 236
---------------------------- -----
(b) Reorganisation
The Group recently completed a reorganisation of its operating
and service companies with all life companies now being direct
subsidiaries of the shareholder fund of FPLP, a subsidiary of
Friends Provident Limited ("FPL") and both the Friends Provident
and acquired AXA Service Companies becoming fellow subsidiaries of
FPL.
The reorganisation has enabled the Group to simplify its
internal finance structure. This will create a more focussed
management services operation and ensure that existing holders of
the Groups listed debt obligations are supported by all of the
operating company cash flows.
(c) EU Gender Directive
On 1st March 2011 the European Court of Justice ("ECJ")
announced that it had upheld the ruling on gender discrimination
that results in insurers not being able to use gender related
information to calculate insurance premiums and benefits. The ECJ
has declared that the adoption of unisex premiums and benefits will
apply with effect from 21 December 2012.
A transitional period has been granted to allow insurance
companies sufficient time to adjust to the new legal framework and
adapt its products and pricing policies accordingly. The Group is
currently assessing the impact of this recent judgement which may
have a significant impact on the way that future business is
underwritten.
(d) Changes in rates in corporation tax
A gradual reduction in the UK corporation tax rate from 28% to
24% over four years was announced in the Emergency Budget of 22
June 2010. The Finance (No. 2) Act 2010 enacted the first of the 1%
rate reductions with effect from April 2011, the effect of which is
to increase the Group's net asset by approximately GBP8 million.
Subsequent reductions will be dealt with by future legislation. The
benefit to the Group's net assets from the further 3% reduction in
the rate is estimated as approximately GBP84 million in total and
will be recognised as the legislation is substantively enacted.
In the budget on 23 March 2011 the chancellor announced a
reduction of a further 1% to the corporation tax rate in April 2011
(to 26%) in addition to the 1% already substantively enacted. The
final corporation tax rate following all planned changes will be
23%. Given the timing of the announcement relative to the date of
approval of the financial statements, it has not been possible to
quantify the impact on the Group's financial statements.
(e) Future tax regime applicable to life insurance companies
The Chancellor's Budget which took place on 23 March 2011
contained significant announcements in relation to the tax regime
applicable to life insurance companies following the consultation,
issued in March 2010, on the effect of Solvency II on the tax
regime. The announcements will be followed by a further period of
consultation and detailed rules will not be available until late
2011. Given the timing of the announcement and the detail which is
not as yet available, it is premature to assess the impact on the
deferred tax assets and liabilities recognised in the balance
sheet.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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