TIDM35PG
RNS Number : 4091M
Friends Life Group plc
16 August 2011
FRIENDS LIFE GROUP plc
(formerly FRIENDS PROVIDENT HOLDINGS (UK) plc)
INTERIM MANAGEMENT REPORT AND RESULTS FOR THE HALF YEAR
ENDED
30 JUNE 2011
Overview
The Friends Life Group ("the Group") has made solid progress in
the first half of 2011. The acquisition of the AXA UK Life Business
in 2010 and completion of the acquisition of Bupa Health Assurance
Limited ("BHA") in January has increased the Group's scale and
capabilities in its core markets. BHA was the third business
acquired in the UK Life Project and forms an important part of the
integrated business.
In February the results of the Group's strategic review were
announced, setting out the Group's focus in the UK on three key
business lines, being corporate benefits, individual protection and
retirement income. The Group has particular strengths in each of
these product areas and will consolidate new business flows onto
selected platforms within the Group to improve new business
profitability.
The integration of the UK businesses is on track and the Group
remains confident of delivering the synergy target of GBP112
million, with GBP24 million of run-rate savings delivered by the
half year. The integration activities are key to building an
efficient and cost effective base for the combined business. In
March 2011, the Group launched the 'Friends Life' brand which
brings together all of the parts of our business in the UK and is a
key step in the integration, both for our customers and for our
people.
The International and Lombard businesses continue to perform
well with International benefiting from the growth in the Asian
markets and Lombard recording the second highest first half sales
in its 20 year history. Lombard sales are however down compared to
2010 when they benefited from the stimulus provided by the European
Savings Directive ("EUSD") and the Italian tax amnesty.
Andy Briggs was appointed as Friends Life's Chief Executive
Officer in June 2011. Andy joined from Lloyds Banking Group, where
he was CEO of General Insurance, having previously been CEO of
Scottish Widows.
Under Andy Briggs' leadership, Friends Life will establish a new
business unit to manage the requirements of customers with products
that we are no longer actively marketing to new customers. This UK
Heritage Business will be led by Evelyn Bourke who has been
appointed Chief Commercial Officer. The Friends Life Chief
Commercial Officer role includes responsibility for Friends Life
strategy and capital. Risk will now report directly to the Chief
Executive Officer. As a result of the strategy announced in
February, and subsequent related decisions, a number of business
lines are no longer being actively marketed. These lines will be
managed in the UK Heritage Business alongside customers with legacy
products that have previously been closed to new business. The
creation of the UK Heritage Business to run alongside the corporate
benefits, protection and retirement income business units will
enable Friends Life to focus on the distinct value drivers for all
of its products and ensure that the Group meets the needs of all
customers.
Further information on Resolution Limited's results and strategy
can be found in its preliminary announcement issued today,
(www.resolution.gg).
Key financial highlights
Half year Half year Full year
GBPm (unless otherwise stated) 2011 2010 2010
------------------------------------ ---------- ---------- ----------
IFRS based operating profit before
tax 406 159 290
IFRS profit after tax 61 86 848
APE 601 458 1,012
Estimated IGCA surplus capital
(GBPbn) 2.0 1.0 2.3
Asset quality(i) for shareholder
related assets 96% 97% 95%
------------------------------------ ---------- ---------- ----------
(i) Corporate debt and asset-backed securities at investment
grade or above.
-- IFRS based operating profit before tax up from GBP159 million
to GBP406 million reflecting the inclusion of the acquired
businesses and a GBP221 million one-off benefit following the
release of negative reserves in the acquired AXA UK Life Business
and BHA.
-- IFRS profit after tax of GBP61 million reflects higher
amortisation of intangible assets (arising from the acquisitions
and an accelerated charge to offset the negative reserves release),
negative goodwill on the acquisition of BHA and non-recurring
costs.
-- Friends Life sales volumes totalled GBP601 million in the six
month period and reflect the increased scale following the
inclusion of the acquired UK businesses. Sales through the
International business have shown strong growth in the period
driven by strength in the Asian markets, whilst sales generated in
Lombard, although solid, are down compared to a strong period of
growth in 2010.
-- Estimated IGCA surplus capital of GBP2.0 billion as at 30
June 2011, down from GBP2.3 billion at the end of 2010 principally
reflecting the GBP350 million dividend paid from the life
businesses to Resolution Limited.
-- Continued high asset quality, with no significant shareholder
exposure to the sovereign debt or corporate bonds of higher risk
European economies.
Outlook
Friends Life is now on a clear path to creating a sustainable
business that is focussed on profitable new business, cost
synergies and cash generation. The implementation of the strategy
will continue as the Group progresses the separation and
integration of the acquired businesses.
The outlook for Friends Life's core product markets is good with
the Group having existing advantages of scale as well as respected
customer service. This along with appropriate capital allocation
and clear financial discipline, that includes a focus on value over
volume, should allow the Group to differentiate itself and generate
returns for shareholders.
Journalists requiring further information should contact:
Peter Timberlake Friends Life +44 (0) 845 641 7834
Emma Wylie Friends Life +44 (0) 845 268 4909
Notes to the editors
1. Friends Life Group 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.friendslife.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
Group summary
The Group's results for the half year reflect the enlarged
group, including the results of the AXA UK Life Business and, from
31 January, BHA. The IFRS based operating profit before tax of
GBP406 million (30 June 2010: GBP159 million) benefitted from the
implementation of certain elements of PS06/14 as part of the
capital synergies programme for the UK business.
The operating results of the Group are set out below and are
discussed in more detail in the operating reviews that follow.
IFRS based operating profit analysis by segment
2011 2010
Half Half
GBPm UK Int'l Lombard Corporate year year
-------------------------- ----- ------ -------- ---------- ------ -----
New business strain (66) (20) (17) - (103) (60)
In-force surplus 214 69 40 - 323 209
Long-term investment
return 4 - (1) (17) (14) 17
Reserving changes and
one-offs 222 (6) - - 216 6
Development costs (10) (3) (1) - (14) (11)
Other income and charges - 1 - (3) (2) (2)
-------------------------- ----- ------ -------- ---------- ------ -----
IFRS based operating
profit
before tax 364 41 21 (20) 406 159
-------------------------- ----- ------ -------- ---------- ------ -----
The strategic review, announced in February 2011, set a number
of targets for improvement in the profitability of new business in
the UK. A number of critical early steps have now been taken. The
selection of the BHA protection platform and the Friends Provident
corporate benefits platform, as the new business platforms for the
future, ensures that future new business will benefit from the low
unit cost associated with these platforms. The IRRs of the business
written on these platforms are already close to or above the target
returns announced in February with the target platform for
corporate benefits business achieving an IRR of 8.8% in the period
and the target platform for the individual protection business
achieving an IRR of 26.4%. The UK business has commenced the
development of its annuity proposition and has recruited a number
of key individuals to lead the retirement income business. The
objective of significantly growing the Group's market position in
retirement income will be achieved through increasing the
capture of internal vestings, while maintaining overall
profitability, as well as through the development of an open market
proposition.
The UK life assurance sector continues to face regulatory
uncertainty with the expected implementation of Solvency II, the
introduction of auto-enrolment, and the Retail Distribution Review
("RDR").
The new capital regime under Solvency II is expected to present
insurers with a changing capital framework. Disappointingly, there
is a lack of clarity on the final position with respect to Solvency
II, and it is expected that the implementation date looks likely to
be delayed. Friends Life is supportive of the principle of having a
risk-based capital framework.
The introduction of auto-enrolment in the second half of 2012,
under which employees will automatically be enrolled into a
qualifying scheme, will also impact the corporate pension
landscape. Friends Life currently expects auto-enrolment to fuel
market growth, with a good uplift in pension scheme membership.
Friends Life will continue to develop its pension proposition,
segment the customer base and optimise the development of
profitable business. Friends Life believes that auto-enrolment
represents a considerable opportunity for the business to generate
a significant increase in new members from both new and existing
schemes. It will be used as an opportunity to develop a market
leading proposition for clients, supporting employers with the
heavy compliance requirements imposed on them as a result of
pensions reform.
The RDR will drive significant change in the distribution
landscape, with many advisers expected to either retire or retrench
to a much more limited panel-based advice proposition. Friend Life
expects the individual wealth market, particularly single premium
bond sales, to be adversely affected as this market has
historically been driven by the higher levels of commission that
can be paid as compared with mutual funds. Friends Life closed its
IFA single premium bond proposition following the UK strategic
review and therefore the Group does not expect a significant impact
from this. Protection is outside the RDR regime and the Group's
focus in the corporate pensions market is on the nil
commission/funded commission market.
In summary, Friends Life is well placed to deal with the
regulatory uncertainty facing the UK life sector which will
contribute to the development of a sustainable business.
International is making good progress with its strategy as it
seeks deeper penetration in the markets in which it has established
positions. It has benefitted from strong growth in the Asian
markets serviced through the Hong Kong and Singapore branches and
is on track to deliver the financial targets by 2013.
Lombard continues to perform well with new business in the first
half of 2011 the second highest first half sales Lombard has seen
in its 20 year history. Sales are reduced compared to the first
half of 2010 which benefitted from the impact of the EUSD and the
final phase of the Italian tax amnesty.
Profitable new business
The following table shows the IRR performance of the key
business lines compared with the targets set for 2013.
Full
Half Half year Half Full
Target year year baseline year year
2013 2011 2011 (i) 2010 2010 2010
All target
IRR (%) platforms platforms
------------------------ ------ --------- --------- -------- ----- -----
UK corporate benefits 10+ 5.3 8.8 4.2 8.2 6.2
UK individual
protection 20 5.0 26.4 3.3 2.1 2.7
UK retirement income 15+ 23.8 16.5 n/a 20.0
------------------------ ------ --------- --------- -------- ----- -----
International 20+ 13.5 15.4 18.3 15.4
Lombard(ii) 20+ 19.0 26.7 23.1 26.7
------------------------ ------ --------- --------- -------- ----- -----
Blended group new
business
IRR(ii) 15+ 9.6 8.6 15.1 11.2
------------------------ ------ --------- --------- -------- ----- -----
New business cash
strain (GBPm) 192 161 392 110 238
------------------------ ------ --------- --------- -------- ----- -----
(i) 2010 full year baseline includes an estimate of 12 months
BHA and AXA UK Life Business results.
(ii) The 2011 Lombard IRR (and therefore the blended group IRR)
now takes account of the Luxembourg regulatory regime in which DAC
is an allowable asset.
Cost synergies
The UK Life Project has brought together the Friends Provident
operations, the AXA UK Life Business and BHA through a series of
acquisitions from November 2009 to January 2011. There is a unified
executive team responsible for the day to day management of the
business and this has overseen the development and roll out of a
single set of corporate values, an integrated staff grading
structure, a streamlined pay and reward system and the alignment of
performance management processes across the acquired businesses.
The Friends Life brand was launched in March 2011, supported by
significant brand activity including sponsorship of the Friends
Life t20 cricket tournament.
The separation and integration programme remains on track. This
includes the separation of the former AXA UK Life Business and BHA
and the creation of a fully integrated Friends Life business.
Joint separation plans have been agreed with AXA and exits from
transitional service agreements are in line with expectations (25%
exited to date). Significant expenditure has been committed with
the Group's external partners to deliver the separation of IT
infrastructure from AXA Technology Services and to migrate certain
blocks of policies onto strategic IT platforms.
The separation of BHA remains on plan with IT infrastructure
changes due to be delivered ahead of the 12-month deadline ending
January 2012, and all Finance and HR-related service agreements
terminated ahead of schedule (including payroll and general ledger
migrations).
The integration of these three businesses is expected to deliver
synergy benefits of GBP112 million by the end of 2013, of which
GBP39 million is expected to be realised by the end of 2011 on a
run-rate basis. To date, a total of GBP24 million run-rate cost
savings have been delivered through:
-- creating an integrated and streamlined sales capability for a
targeted and rationalised individual protection proposition;
-- integrating the sales and marketing model for corporate
benefits;
-- rationalising the combined brand budgets;
-- improving contractual negotiations with strategic sourcing
suppliers; and
-- restructuring the senior management team and central
functions.
The platform acquired with BHA has been chosen to provide a
cost-effective solution for the individual and group protection
businesses, both for targeted IFA and controlled distribution. The
restructure of the combined sales force, marketing capability and
customer service functions are well advanced.
The Group has announced the planned closure of the Coventry site
by the middle of 2012. Further closures of the Loudwater,
Manchester, Basingstoke and the BHA London offices, in line with
the Group's target operating model are planned during 2011 and
2012.
Cash delivery
The Group has committed to deliver both distributable cash and a
capital efficient business. The group is confident that through the
delivery of the targeted cost savings, the move to selected new
business platforms and implementation of PS06/14 that the targeted
reduction of new business strain by GBP200 million will be achieved
by 2013.
UK operating segment
The Group's strategy focuses on products and distribution
channels in the UK market where Friends Life has a significant
existing presence and the prospect of generating attractive
returns. The key product lines in the UK are corporate benefits,
protection and retirement income. Full implementation plans are
being executed and tracked to ensure delivery on the 2013
targets.
Management structures have been reorganised to bring individual
protection and group protection under a single executive,
consistent with the plan to write all new group protection and
individual protection business on the existing BHA platforms.
In UK product lines where Friends Life will not be able to
generate satisfactory returns (principally individual pensions and
investment bonds), steps have been taken to exit or scale back to
reduce new business strain.
GBPm
(unless 2011 Half year 2010 2010
otherwise Corporate Individual Group Retirement Half Full
stated) benefits protection protection income Other Total year year
----------- ---------- ----------- ----------- ----------- ------ ------ ----- ------
New
business
cash
strain (39) (41) (4) 7 (21) (98) (38) (149)
IRR (%) 5.3 5.0 7.0 23.8 8.9 7.0 10.8 7.1
APE 242 44 12 19 55 372 203 472
IFRS based
operating
profit
before tax 364 99 187
----------- ---------- ----------- ----------- ----------- ------ ------ ----- ------
IFRS based operating profit before tax in the first half of 2011
was GBP364 million (30 June 2010: GBP99 million) reflecting the
enlarged scale of the UK business following the acquisitions, as
well as the one-off benefit following the implementation of
negative reserves.
New business profitability is not comparable year on year due to
the inclusion of the acquired AXA UK Life Business and BHA. The
profitability of new business will improve significantly as the
remainder of the synergies and implementation actions are
delivered. The profitability of the selected platforms is already
close to or above target returns with the target corporate benefits
platform at 8.8% (target: 10%) and the target individual protection
platform at 26.4% (target: 20%). As such, Friends Life remains
confident of meeting the targeted product metrics by the end of
2013. The relevant sections below contain a detailed commentary on
the results for each proposition.
Corporate benefits
The Friends Life corporate benefit business has continued to
deliver against a difficult economic back drop. The market has seen
membership declining in recent years as a result of employers
implementing recruitment freezes, and rationalising their
workforces. There has also been an increasing trend in employers
opting for pay freezes, this coupled with increasing pressure on
disposable income means there have been limited opportunities to
grow existing pension arrangements. Despite this pressure, Friends
Life has been able to drive significant volume growth from the
existing in-force schemes.
Financial performance
2011 2011
2013 Half Half 2010
Full year year Full 2010
GBPm (unless otherwise year all target year Half
stated) target platforms platforms baseline(i) year
------------------------
New business cash
strain (75) (39) (23) (80) (25)
IRR 10%+ 5.3% 8.8% 4.2% 8.2%
APE n/a 242 176 399 152
------------------------ ------- ---------- --------- ------------ -----
(i) 2010 full year baseline includes an estimate of 12 months
AXA UK Life Business results.
Strong incremental new business, combined with cost synergies
has led to the significant improvement in profitability in the
period, although at 5.3% this is clearly not satisfactory. Overall
returns are impacted by the less profitable new business on the
acquired AXA UK Life Business platforms, however the profitability
of business written on the target Friends Provident NGP platform
has been better, delivering an IRR of 8.8%. This platform is
expected to achieve the 10% target return during 2012 as the cost
synergies and migration of business onto NGP takes effect.
New scheme wins in the first half of 2011 (40 scheme wins) were
restricted as a result of both market caution around the AXA UK
Life Business acquisition and a significant restructure of the new
business sales force in January, in order to drive out cost
savings. The outlook for the second half of 2011 is promising with
a strong pipeline of new business skewed towards single premium
business, and a significant step-change in the quality of schemes
being secured (average APE per scheme is significantly higher in
2011 compared to 2010).
Over the first half of 2011 group pensions assets have grown by
approximately GBP1 billion and now stand at GBP18 billion.
The business is confident of achieving the 2013 financial
targets as a result of:
-- Expected business growth, benefiting from the combination of
Friends Life's highly regarded proposition and a significant growth
in customer premium flows driven by Auto-Enrolment ("AE"). This
will increase revenues on a primarily fixed cost base.
-- Ongoing separation and integration, in particular the
migration of the AXA-owned platform Embassy, onto the more
efficient NGP platform with reducing operational complexity and
cost; and
-- Continuing realisation of cost synergies as part of the wider
programme to reduce the overall cost base of the business.
Protection
Individual protection
In March, the Group announced the decision to consolidate the
individual protection business onto the acquired BHA platform. It
is a low cost operating platform which will deliver the required
functionality to support the business going forward. The
proposition will be further enhanced by improving the functionality
available on the platform, drawing upon the best features across
the three former propositions.
The enhanced proposition is expected to be delivered in October
2011, with focused activity in train with each distribution partner
to ensure the transition of all targeted IFA new business to the
new platform by the end of 2011. The Group will also work with
existing controlled distribution partners on a case by case basis
throughout 2011 and 2012 to achieve the same outcome.
Financial performance
2011 2011
2013 Half Half 2010
Full year year Full 2010
year all target year Half
GBPm (unless otherwise
stated) target platforms platforms baseline(i) year
------------------------- ------- ---------- --------- ------------ -----
New business cash strain (30) (41) (2) (193) (18)
IRR 20% 5.0% 26.4% 3.3% 2.1%
APE n/a 44 10 106 18
------------------------- ------- ---------- --------- ------------ -----
(i) 2010 full year baseline includes 12 months BHA and AXA UK
Life Business results.
The individual protection market has held up well in a difficult
economic climate, including a depressed housing market. Friends
Life envisages this continuing in the lead up to the RDR
implementation. As protection is excluded from the main impacts of
the RDR there is an expectation of an increased focus on protection
sales by intermediaries in the short term.
The growth in sales volumes reflects the acquisitions of the AXA
UK Life Business and BHA in 2010 and 2011. However, as the strategy
is delivered the volumes will reduce from the 2010 baseline as
there is more selective market participation through greater
pricing discipline and increased focus on profitable product lines.
This change, combined with the transition to the target BHA
platform and emerging cost synergies, is expected to result in a
reduction in the 2011 full year new business strain of some GBP100
million.
The IRR of individual protection business has improved to 5.0%
in the period with the lower new business strain benefiting the
half year result. The improvement is expected to continue through
to 2013 as the strategy is delivered, with further efficiencies
achieved as new business is migrated to the BHA platform and an
increased proportion of the higher margin critical illness and
income protection business is written. The current returns on the
BHA platform are significantly higher than those being delivered
through the Friends Provident and AXA UK Life Business with the IRR
for the half year at 26.4% already in excess of the 20% target. As
more business is migrated to the BHA platform and the mix of
business changes, returns in excess of the target IRR are expected
to be maintained although it is likely that there will be some
fluctuation in the level of return achieved from period to
period.
Group protection
2011 2010
GBPm (unless otherwise stated) Half year Half year
New business cash strain (4) (2)
IRR 7.0% 4.0%
APE 12 2
-------------------------------- ---------- ----------
The BHA proposition has made a significant difference to the
scale of the Friends Life group protection proposition with sales
in the period of GBP12 million APE significantly higher than that
recorded in the first half of 2010. BHA contributed GBP7 million
APE in the period with the Friends Provident proposition also
performing well, recording GBP5 million APE (30 June 2010: GBP2
million).
New business profitability with an IRR of 7.0% is expected to
improve as business is consolidated onto the BHA platform and
volumes of income protection and critical illness are
increased.
Retirement income
The Group has started to implement the annuity strategy which
will focus on building the enhanced range of capabilities needed to
retain vesting pensions and provide optionality for entry into the
open market. The developments will include sophisticated mortality
analysis to inform a highly targeted pricing approach, new customer
management systems to support improved engagement with customers
and distributors in the run up to retirement and the development of
more sophisticated capability for the selection and management of
investments such as credit. The developments are expected to
deliver enhanced capabilities over a 12-18 month timeframe which
will drive increased volumes and profitability during 2013. A good
start has been made in building the team with the appointment of
David Still, as Managing Director of Retirement Income, and Richard
Willets, as Director of Longevity.
Financial performance
2013
Full 2010
year 2011 Full year 2010
GBPm (unless otherwise baseline
stated) target Half year (i) Half year
New business cash strain n/a 7 26 11
IRR 15%+ 23.8% 16.5% n/a
APE n/a 19 39 14
-------------------------- ------- ---------- ---------- ----------
(i) 2010 full year baseline includes an estimate of 12 months
AXA UK Life Business results.
Half year sales volumes of GBP19 million represent a 40%
increase on the 2010 half year comparative, reflecting the
acquisition of the AXA UK Life Business in the second half of 2010.
Annuity sales in the first half of 2010 were boosted by the change
to early retirement rules in April last year, which resulted in a
spike of retirements from 50-55 year olds who might otherwise not
have been able to take their benefits for up to a further five
years.
The key financials remain attractive for the retirement income
proposition with high revenue margin and IRR (23.8%) for annuity
new business. Annuity business also continues to be cash generative
before allowance for capital requirements. A significant portion of
sales continues to be driven by internal vestings with a guaranteed
annuity option where margins are lower.
Retention rates as a percentage of vesting funds have fallen
marginally compared to 2010, reflecting the general move towards
open market options seen in the market more widely. The benefits of
the strategy to improve the value retained from maturing pensions
business are not expected to be reflected in improvements to this
retention rate until later in 2012.
UK: Other products and Sesame Bankhall Group
Other products
2011 2010
GBPm (unless otherwise stated) Half year Half year
-------------------------------- ---------- ----------
New business cash strain (21) (3)
IRR 8.9% n/a
APE 55 17
-------------------------------- ---------- ----------
Other products include the combined individual pensions and
investment propositions of Friends Provident and the AXA UK Life
Business. The Group does not expect to be able to generate the
minimum target returns required from these product lines and as a
result sales are being limited.
Other sales in the period principally relate to the onshore bond
proposition acquired with the AXA UK Life Business. The decision
was made to close to IFA new business applications on 31 March 2011
in line with the UK new business strategy announced in February.
New business continues to be written through the Group's inherited
tied bancassurance relationships with GBP14 million APE being
written in the period.
Sesame Bankhall Group
Sesame Bankhall Group ("SBG") is the UK's largest distributor of
retail financial advice and operates three market leading brands.
Sesame is the leading appointed representative network, Bankhall is
the largest support service provider for directly regulated IFAs
and PMS is the biggest mortgage club for intermediaries. SBG traded
profitably in line with expectations in the first six months,
whilst making significant investments in its technology
infrastructure and in new services for its customers, and has
commenced a number of implementation activities ahead of the
requirements of the RDR.
The operating result for the first six months of the year
(GBPnil) reflects this program of investment (30 June 2010: GBP2
million).
UK operating segment - IFRS based operating profit
UK IFRS based operating profit
2011 (i) 2010 (ii) 2010 (iii)
Half year Half year Full year
GBPm GBPm GBPm
------------------------------------- ---------- -------------- -----------
New business strain (66) (27) (89)
In-force surplus 214 113 280
Investment return and other items 4 16 35
Principal reserving changes and
one-off items 222 5 (15)
Development costs (10) (8) (21)
Other - - (3)
------------------------------------- ---------- -------------- -----------
IFRS based operating profit before
tax 364 99 187
------------------------------------- ---------- -------------- -----------
(i) 2011 half year results comprise six months results for
Friends Provident; six months for the AXA UK Life Business; and
five months for BHA.
(ii) 2010 half year results comprise six months results for
Friends Provident.
(iii) 2010 full year results include 12 months for Friends
Provident and four months for the AXA UK Life Business.
In the period to 30 June 2011 the UK segment delivered IFRS
based operating profit before tax of GBP364 million (30 June 2010:
GBP99 million), representing an increase of GBP265 million on the
prior period. The increase reflects a number of significant changes
to the UK segment including the acquisition of the AXA UK Life
Business and BHA, and the subsequent implementation of negative
reserves on both of these businesses.
Principal reserving changes reflects the implementation of
negative reserves on protection business which accelerates the
recognition of surplus. This earlier recognition of surplus has a
one-off positive impact on the overall UK result of GBP221 million.
This one-off benefit is offset by reduced ongoing in-force surplus
(due to the accelerated recognition referred to above) of GBP20
million in the first six months, with a further estimated GBP20
million expected in the second six months. There is also an impact
on the first half year through a reduction in new business strain
of GBP5 million.
Reconciliation of new business strain to IFRS
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
---------------------------- ---------- ---------- ----------
Total UK new business cash
strain (98) (38) (149)
DAC / DFF adjustments 33 11 59
Other IFRS adjustments (1) - 1
---------------------------- ---------- ---------- ----------
Total UK IFRS new business
strain (66) (27) (89)
---------------------------- ---------- ---------- ----------
IFRS new business strain of GBP66 million includes GBP31 million
in respect of the AXA UK Life Business and BHA; this explains the
majority of the increase from the half year ended 30 June 2010. In
addition, the strengthened annuitant mortality assumptions,
effective at the end of 2010, have increased new business strain
compared to 2010.
The implementation of PS06/14 reserving changes and the
recognition of negative reserves across the UK protection portfolio
means that DAC is no longer recognised on this business. This
change in treatment offsets the reserving benefits which are
apparent in cash strain and as a consequence there is no
significant reduction in protection IFRS new business strain. DAC
continues to be recognised on pensions and investments business and
has moved in line with expectations given the current product mix
and levels of new business.
In-force surplus
In-force surplus of GBP214 million is GBP101 million higher than
that recorded in the first half of 2010 due to the inclusion of the
AXA UK Life Business and BHA results. These account for GBP96
million of this income. IFRS surplus generated by the Friends
Provident UK business increased marginally to GBP118 million (30
June 2010: GBP113 million).
Investment return and other items
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------------------------- ---------- ---------- ----------
Longer-term return on life
and pension
shareholder funds - excluding
debt 35 37 76
Longer-term return on life
and pension
shareholder funds - debt (31) (23) (46)
Distribution businesses - 2 5
------------------------------- ---------- ---------- ----------
Total 4 16 35
------------------------------- ---------- ---------- ----------
Longer-term investment return on shareholder funds, net of debt,
was lower at GBP4 million (30 June 2010: GBP14 million) reflecting
a lower expected return on shareholder assets due to a decrease in
expected rates and a change in asset mix from bonds to cash. This
change has more than offset the effect of the higher asset base
from the inclusion of the AXA UK Life Business shareholder assets.
There was also an GBP8 million interest charge associated with the
GBP500 million debt issued by Friends Life in April 2011.
Distribution businesses relate to Sesame Bankhall Group, which
generated operating profits of GBPnil in the first six months of
2011 (30 June 2010: GBP2 million) and, for the period prior to its
disposal, in March 2010, of Pantheon Financial Limited.
Principal reserving changes and one-off items
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
----------------------------------- ---------- ---------- ----------
Negative reserving (PS06/14)
changes 221 - -
Annuitant longevity strengthening - - (39)
Modelling and methodology
changes 1 5 14
Scheme expense release - - 10
----------------------------------- ---------- ---------- ----------
Total 222 5 (15)
----------------------------------- ---------- ---------- ----------
The implementation of the PS06/14 reserving change to the AXA UK
Life Business and BHA has resulted in a one-off GBP221 million
release of reserves including a DAC write-off of GBP22 million in
the protection proposition.
UK operating expenses
2010
2011 Full year 2010 2010
baseline
Half year (i) Half year Full year
GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ----------
Acquisition 89 220 46 130
Maintenance 130 256 37 140
------------- ---------- ---------- ---------- ----------
219 476 83 270
Development 10 23 8 21
------------- ---------- ---------- ---------- ----------
Total 229 499 91 291
------------- ---------- ---------- ---------- ----------
(i) 2010 full year baseline includes an estimate of 12 months
AXA UK Life Business, BHA and WLUK operating expenses
UK operating expenses, which exclude commission payments and
non-recurring costs, were GBP229 million compared to GBP91 million
in the first half of 2010 reflecting the increased scale of the
business. Operating expenses remain a key focus with the delivery
of the GBP112 million targeted synergies critical to driving a step
change in UK business performance.
Acquisition and maintenance costs total GBP219 million in the
six month period compared to the full year 2010 baseline of GBP476
million. The 2010 baseline includes GBP31 million of Winterthur UK
Life Limited ("WLUK") operating costs, which the Group is due to
acquire by the end of 2011. After adjusting for the inclusion of
WLUK, costs are slightly below baseline on a run-rate basis and
reflect a number of the early synergies, which include the
reorganisation of sales, marketing and new business processing
functions. These are however partially offset by temporary
increases for VAT on transitional services from AXA UK, and
increases in finance and governance, to support business as usual
activities during a period of significant change.
To date in 2011, development costs of GBP10 million include GBP5
million expenditure on the development of the corporate platform,
refinement and progression of the Group's retirement income
strategy and a number of other projects spanning the UK Life
business.
International operating segment
The majority of the International business' core markets appear
to have recovered well from the recession, in particular in Asia
where demand is strong, although Europe remains a difficult
environment and is expected to remain so over the course of
2011.
In this climate the International business has delivered strong
new business flows, with APE growing to GBP132 million in the first
half of 2011. The operating result reflects the growing book of
business which generates an increasing return on the in-force book,
offset by a number of one-off items that are explained further
below.
The Friends Life strategy is to grow the value of the
International business and its component parts, improving overall
growth prospects and returns. As the business grows, the level of
cash generation is expected to improve to deliver the targeted
sustainable cash generation of at least GBP20 million per annum by
2013 whilst increasing new business IRR to at least 20%.
The business has continued to invest in building capability,
developing propositions and platforms, and revising product
structures to improve profitability and persistency. New business
profitability will be enhanced by the development and rollout over
the next 18 months of an improved Friends Provident International
Limited ("FPIL") regular premium product.
International new business sales ("APE") increased by 10%
compared with the first half of 2010, with a 14% increase for FPIL
partially offset by a 7% reduction for Overseas Life Assurance
Business ("OLAB"). The results were driven by strong sales in Asia
and the UK, offset by weaker European sales, where market
conditions remain challenging.
Funds under management as at 30 June 2011 total GBP5.9 billion
and have increased by 3% in the six months. Fund flows are largely
driven by the growth of the FPIL business with net in-flows in the
period of GBP0.3 billion.
IFRS based operating profit
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------------------------------ ---------- ---------- ----------
New business strain (20) (11) (28)
In-force surplus 69 58 120
Investment return and other items - 1 3
Principal reserving changes and
one-off items (6) 2 2
Development costs (3) (2) (6)
Other 1 (1) 4
------------------------------------ ---------- ---------- ----------
IFRS based operating profit before
tax 41 47 95
------------------------------------ ---------- ---------- ----------
International generated IFRS based operating profits of GBP41
million in the six month period to 30 June 2011 compared to GBP47
million in the first six months of 2010.
Reconciliation of new business strain to IFRS
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
-------------------------- ---------- ---------- ----------
New business cash strain (52) (57) (83)
DAC / DFF adjustments 105 97 210
Other IFRS adjustments (73) (51) (155)
-------------------------- ---------- ---------- ----------
IFRS new business strain (20) (11) (28)
-------------------------- ---------- ---------- ----------
New business cash strain has reduced by GBP5 million to GBP52
million period on period, principally as a result of the increased
benefit from financial reinsurance. Higher acquisition costs as
sales volumes increased have partly offset this benefit.
IFRS new business strain has increased to GBP20 million from
GBP11 million at half year 2010, largely due to modelling
improvements as well as increased new business volumes. Other IFRS
adjustments include the elimination of financial reinsurance from
IFRS new business strain as well as the elimination of actuarial
funding and sterling reserves which are a feature of the products
sold by the International business.
In-force surplus
In-force surplus on the IFRS basis increased from GBP58 million
in the first half of 2010 to GBP69 million at half year 2011,
benefitting from the growth of the back book although this growth
has been restricted by adverse economic variances.
Principal reserving changes and one-off items
Adverse principal reserving changes and one-off items of GBP6
million comprise a number of small adjustments principally relating
to FPIL.
Operating expenses
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------ --------- --------- ---------
Acquisition 15 13 28
Maintenance 13 10 22
Development 3 2 6
Other - - 1
------------ --------- --------- ---------
Total 31 25 57
------------ --------- --------- ---------
International operating expenses, which exclude commission
payments and non-recurring costs, have increased to GBP31 million
from GBP25 million in the first six months of 2010. Expense
increases across the business reflect the higher new business
volumes and improvements to propositions and distribution
capabilities as well as the costs of strengthening the governance
and controls to meet the needs of a growing, complex business.
Development costs relate to the German business and the development
of the International business' platform.
Lombard operating segment
2010 was an exceptional period for the cross-border life
insurance market with this being particularly evident in the first
six months of the year. Total Luxembourg life insurance market
premiums were estimated at around EUR22 billion with Lombard
accounting for 16% of the market, underpinning its market leading
position.
Market activity has been markedly lower in the first half of
2011 as the EUSD and the Italian tax amnesty, which drove volume in
the first half of 2010, were not prominent and there were no other
similar event drivers. Additionally, whilst Lombard's performance
is not directly linked to investment markets the continued market
uncertainty and pervasive risk arising from the ongoing uncertainty
in sovereign debt and general market-related volatility has led to
clients postponing actions to structure their investments and
manage intergenerational transfer of their wealth.
Notwithstanding the challenging short-term market conditions,
the longer term drivers of the demand for compliant
"Privatbancassurance" solutions remain compelling.
There are three core elements of Lombard's strategy including
strengthening the sales force, investment in marketing and
deepening partner relationships, and improving the maintenance and
servicing of policies whilst streamlining the business' operating
model. It is envisaged that these initiatives will contribute to
the delivery of the financial outcomes by 2013 (IRR above 20% and
GBP30 million dividend).
Financial performance
Overall, business in the first half of 2011 is below 2010
levels, with sales volumes of GBP97 million APE 28% below the same
period in 2010. The lower volumes have directly affected the IRR of
19.0% which has reduced on that generated last year. Historically,
the IRR has increased in the second half of the year and
accordingly the current levels should not be extrapolated for the
full year. Compound annual growth rate ("CAGR") for
sales in the first half of the year is 11% between 2007 and
2011.
Performance in the period has been impacted by a number of
factors including the strong drivers of the 2010 comparatives
referred to above. Other factors include lower IFA activity in
Northern Europe and UK as well as a general increase in the time it
takes to close large client deals due to market uncertainties in
certain European countries.
Despite the above factors several markets have performed
strongly including Finland, France, Italy, Sweden and Asia, which
are significantly above 2010 business levels. These improvements
reflect the benefits from sales force enhancement, and continued
deepening of relationships with partners in these markets. The
growth in these regions is encouraging and highlights the valuable
market diversity of Lombard's business.
Whilst the external environment is challenging, it is
anticipated that activity will be significantly higher in the
second half of 2011. This reflects the natural switch in the focus
of the sales force from developing leads and client opportunities
to closing business. The second half of the year also traditionally
benefits from the December fiscal year end in operation within most
markets. It is anticipated that Lombard will continue to attract a
significant share of its target high and ultra-high net worth
market segment.
Albeit below 2010 levels, the pipeline of new business remains
high and large case prospects in development are encouraging.
IFRS based operating profit
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------------------------------ ---------- ---------- ----------
New business strain (17) (22) (28)
In-force surplus 40 38 66
Investment return and other items (1) (1) (4)
Principal reserving changes and
one-off items - (1) -
Development costs (1) (1) (1)
------------------------------------ ---------- ---------- ----------
IFRS based operating profit before
tax 21 13 33
------------------------------------ ---------- ---------- ----------
Lombard generated operating profit before tax of GBP21 million
in the six month period to 30 June 2011, up 62% on 2010.
Reconciliation of new business strain to IFRS
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
-------------------------- ---------- ---------- ----------
New business cash strain (11) (15) (6)
DAC / DFF adjustments (6) (7) (21)
Other IFRS adjustments - - (1)
-------------------------- ---------- ---------- ----------
IFRS new business strain (17) (22) (28)
-------------------------- ---------- ---------- ----------
Period on period, levels of new business strain have remained
higher than the 2010 full year, despite the lower sales volumes to
date. This is due to local rules on deferral of acquisition costs
which meant that DAC has been indirectly restricted by the lower
level of new business to date. This proportion is expected to
return to consistent levels in the second half of the year.
Excluding the impact of deferred acquisition costs, actual new
business strain cash flows have improved significantly compared to
the first half of 2010.
Surplus generated has benefitted principally from the growth in
the existing book of business with the increase in charges
generated reflecting the growing scale of the managed asset
base.
Average funds under management have increased significantly from
GBP14.5 billion in the first half of 2010 to GBP17.7 billion in
2011 as a result of both investment market growth in 2010 and the
significant sales volumes brought onto the book in the second half
of 2010. The business has delivered net business inflows of GBP0.6
billion through the first half of 2011.
Operating expenses
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------ -------------------- --------- ---------
Acquisition 20 19 47
Maintenance 12 9 19
Development 1 1 1
Other - - 2
------------ -------------------- --------- ---------
Total 33 29 69
------------ -------------------- --------- ---------
The operating expenses of Lombard, which exclude both commission
payments and non-recurring costs, are set out in the table above.
Notwithstanding the growth in the in-force book, Lombard has
maintained tight control of expense levels which, on a constant
currency basis, and excluding an accrual for the management long
term incentive plan, are 5% higher than 2010, while average funds
under management increased by 17%.
Development costs consist of expenses related to new product and
market development.
FLG corporate segment
The FLG corporate segment includes the corporate holding and
principal service companies of the Friends Life Group.
FLG corporate IFRS based operating profit
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
----------------------------- ---------- ---------- ----------
Investment return and other
items,
excluding debt 40 23 47
Expected return on debt (57) (22) (61)
Other (3) (1) (11)
----------------------------- ---------- ---------- ----------
IFRS based operating profit
before
tax (20) - (25)
----------------------------- ---------- ---------- ----------
The corporate result is primarily driven by the expected return
on the debt held in the Group, offset by the investment return on
shareholder assets. Corporate costs of GBP3 million primarily
relate to the FLG long term incentive scheme.
Group IFRS profit
The Group's IFRS results are set out below, including a
reconciliation from operating profit to IFRS based profit before
tax. The Group uses the operating profit measure as the Board
considers that this better represents the underlying performance of
the business and the way in which it is managed.
Half year Half year Full year
GBPm 2011 (i) 2010 (ii) 2010 (iii)
----------------------------------------- ---------- ---------- -----------
UK 364 99 187
International 41 47 95
Lombard 21 13 33
Corporate (20) - (25)
IFRS based operating profit before
tax 406 159 290
Short-term fluctuations in investment
return (2) 64 24
Returns on F&C Commercial Property
Trust - 23 23
Acquisition accounting adjustments:
Amortisation and impairment of acquired
in-force business (453) (142) (364)
Amortisation of other acquired
intangible assets (41) (25) (64)
Non-recurring items:
Gain on acquisition of businesses 68 - 883
Costs associated with the business
acquisitions (1) - (14)
Other non-recurring items (79) (3) (68)
STICS interest adjustment to reflect
IFRS
accounting for STICS as equity 16 16 31
-----------------------------------------
IFRS (loss)/ profit before shareholder
tax (86) 92 741
Shareholder tax 147 (6) 107
----------------------------------------- ---------- ---------- -----------
IFRS profit after tax 61 86 848
----------------------------------------- ---------- ---------- -----------
i) 2011 half year results comprise six months results for
Friends Provident; six months for the AXA UK Life Business; and
five months for BHA.
ii) 2010 half year results comprise six months results for
Friends Provident.
iii) 2010 full year results include 12 months for Friends
Provident and four months for the AXA UK Life Business.
IFRS based operating profit for 2011 was GBP406 million
comprising the operating profit for the life business of GBP426
million and GBP20 million of corporate costs. A detailed review of
the operating profit of each segment has been provided in the
relevant segmental review section of this business review.
Non-operating items
Short-term fluctuations in investment return of GBP2 million
includes a GBP9 million benefit from the unwind of the credit
default allowance in excess of actual defaults within the
non-profit fund. This is partially offset by a GBP7 million
variance on expected investment return.
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 so the result for 2011 is nil. The GBP23 million return
on F&C CPT in 2010 reflects the market return attributable to
third parties for the period up to April 2010.
Acquisition accounting adjustments, totalling GBP494 million,
represent the amortisation and impairment of the intangible assets
recognised on the acquisitions. These charges include GBP252
million of amortisation of acquired in-force business, and GBP41
million of amortisation of other intangible assets. Following the
implementation of negative reserves within the AXA UK Life business
and BHA, an acceleration of AVIF amortisation amounting to GBP201
million has been recognised to reflect the earlier recognition of
surplus within operating profit.
Non-recurring items include the gain on acquisition of BHA of
GBP68 million and GBP1 million costs associated with this. Other
non-recurring costs totalling GBP79 million include Solvency II and
other finance transformation costs of GBP24 million, separation and
integration programme costs of GBP41 million, capital optimisation
programme costs of GBP8 million and other non-recurring costs of
GBP6 million.
Interest payable on the Friends Provident STICS of GBP16 million
is included as a GBP13 million deduction to corporate long term
investment return in the operating profit analysis, and GBP3
million adverse investment fluctuation. As the STICS are accounted
for as equity in IFRS (with interest being recorded as a reserve
movement), GBP16 million is added back to the non-operating result
to reflect the requirements of IFRS.
A shareholder tax credit of GBP147 million is recognised in the
period and is significantly higher than the loss before tax of
GBP86 million would imply. The principal differences between the
implied and the actual shareholder tax credit relate to:
-- a GBP48 million one-off shareholder tax credit triggered by
the change in pricing basis on certain unit-linked funds to reflect
the fact that these funds were contracting. The discounted tax
provision previously included in the pricing (and thus reflected in
policyholder liabilities) has been replaced by an undiscounted
provision for asset gains. This facilitated the release of a
shareholder tax provision which was previously established, as IFRS
does not permit the discounting of tax provisions;
-- a GBP30 million shareholder tax credit relating to the
reduction in rate of UK corporation tax; and
-- the GBP68 million accounting gain on the acquisition of BHA,
which is non-taxable.
Summary IFRS balance sheet
GBPm 30 Jun 2011 31 Dec 2010
------------------------------------- ------------ ------------
Acquired value of in-force business 4,439 4,685
Other intangible assets 431 455
Financial assets 101,089 99,465
Cash and cash equivalents 8,532 9,057
Other assets 9,032 8,492
------------------------------------- ------------ ------------
Total assets 123,523 122,154
------------------------------------- ------------ ------------
Insurance and investment contracts 108,608 107,492
Loans and borrowings 1,007 1,012
Other liabilities 7,668 7,102
------------------------------------- ------------ ------------
Total liabilities 117,283 115,606
------------------------------------- ------------ ------------
IFRS net assets 6,240 6,548
------------------------------------- ------------ ------------
Equity attributable to equity
holders of the
parent 5,926 6,226
STICS 310 318
Attributable to non-controlling
interests 4 4
------------------------------------- ------------ ------------
Total equity 6,240 6,548
------------------------------------- ------------ ------------
At 30 June 2011, IFRS total equity was GBP6,240 million (31
December 2010: GBP6,548 million), with equity attributable to
equity holders of the parent of GBP5,926 million (31 December 2010:
GBP6,226 million).
Financial assets are predominantly invested in listed shares,
other variable yield securities and corporate bonds and asset
backed securities where 96% are at investment grade or above.
Included in the assets that were acquired within the AXA UK Life
Business are certain portfolios of insurance business (the
Guaranteed over Fifty, "GOF", and Trustee Investment Plan, "TIP"
portfolios) that are expected to be transferred back to AXA UK via
Part VII transfers as part of the separation process agreed between
FLG and AXA UK. In line with the agreed timetable for the
finalisation of the AXA UK Life Business transaction, this transfer
is anticipated to take place in the final quarter of 2011. Other
assets and other liabilities shown above include GBP284 million of
net assets in respect of the GOF and TIP portfolios which 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 the businesses to be retained by AXA UK have been removed from
WLUK. This acquisition is also on track to take place in the final
quarter of 2011. WLUK will only be included in the Group's accounts
once the acquisition has taken place in 2011 and is not therefore
included within these financial statements.
Group capital management
The Friends Life 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 Friends
Life Group considers the following:
-- establishing targets for the main UK life companies at the
greater of 150% of Pillar 1 CRR (excluding WPICC) and 125% of
Pillar 2 CRR including ICG - the capital required to mitigate the
risk of insolvency to a 99.5% confidence level over a one year
period;
-- at the FLG level, to hold sufficient capital to meet 160% of
the Group CRR (excluding WPICC);
-- 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 regulatory
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 implemented including fund mergers and the
optimisation of the corporate structure, to ensure capital
efficiency and maximise the fungibility of capital resources.
Solvency II
The implementation of the EU Solvency II Directive continues to
be a key focus of attention for the Group. The Group has been
closely following the emerging regulations and monitoring their
potential impact on the Group balance sheet. Friends Life Group is
closely involved with the industry in lobbying on key areas where
uncertainty remains.
During the first half of the year, Friends Life Group
participated in the EIOPA stress test exercise, an EU wide set of
stress tests performed by the large insurance companies assessing
companies' ability to meet their Solvency II Minimum Capital
Requirements ("MCR") under a set of specified stress tests. Friends
Life Group also continues to be closely engaged in the development
of the tax proposals including any changes arising as a result of
Solvency II.
The development and streamlining of some financial systems and
tools are included within the Solvency II implementation programme
and the overall implementation programme is on track against its
plans and budget.
FLG is committed to applying for internal model approval
pursuant to the Solvency II Directive and is planning accordingly.
The Group has been accepted into the FSA's pre-application
process.
The Group assesses strategic developments and opportunities on a
Solvency II basis.
The Solvency II requirements are not completely specified, but
if the industry is successful in achieving a satisfactory outcome
to the key outstanding policy decisions, the Group believes that it
will have a favourable capital impact on the Friends Life Group
relative to current Pillar 1 solvency requirements.
Insurance Groups Capital Adequacy
In addition to individual company requirements FLG, 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
CRR (excluding WPICC). This policy was increased from 150%
following the acquisition of the AXA UK Life Business.
The balance sheet remained strong at the Friends Life group
level, with an IGCA surplus of GBP2.0 billion at 30 June 2011, with
Group Capital Resources being 209% of Group CRR (excluding WPICC).
Group Capital Resources were GBP0.9 billion in excess of the amount
required to satisfy the FLG group capital policy of holding 160% of
Group CRR (excluding WPICC).
The IGCA surplus would reduce by around GBP0.1 billion for a 40%
fall in equity markets from 30 June 2011 levels and would reduce by
slightly less if interest rates were to rise by 100bps across the
yield curve.
The movement in IGCA surplus over the period largely reflects
the expected surplus emerging in the period after financing costs
and less amounts retained in the long term funds, non-recurring and
non-operating costs of GBP62 million (including integration costs),
offset by the GBP132 million impact of acquiring BHA (GBP169
million cost of investment offset by a GBP37 million IGCA surplus
at the acquisition date) and the GBP157 million benefit (on an IGCA
basis) of negative reserves released in Friends Life Company
Limited ("FLC") and BHA businesses. Additional surplus of GBP46
million relating to surplus generated in Friends Provident Life and
Pensions Limited ("FPLP") during the year is not available in IGCA
until it is transferred to shareholder funds after the full year
actuarial valuation. The surplus is also impacted by financing and
dividend costs, which include the GBP350 million of dividends paid
to the Resolution holding companies in the period as well as
interest costs at Friends Life Group.
Asset quality and exposure
The vast majority of the Group's exposure to sovereign debt
holdings is to UK gilts. The Group has GBP8 million shareholder
exposure (including shareholder fund exposure to non-profit and
with-profit funds) to the higher risk government debts of Spain,
Portugal, Italy, Ireland and Greece (31 December 2010: GBP7
million).
In addition the Group's shareholder exposure to various
corporate securities issued by companies domiciled in Spain,
Portugal, Italy, and Ireland is GBP439 million (31 December 2010:
GBP444 million). The Group's shareholder exposure to Greek
corporate securities and sovereign debt is less than GBP1 million.
56% by value of these corporate securities are 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, 23% of these are
not linked to the institution's domestic economy. In all cases 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 96% of the corporate bond and asset backed securities, to
which the shareholder funds are exposed, 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.
No defaults have been experienced in the year.
Liquidity
The liquidity of the Group remains strong.
FLG has an undrawn GBP500 million funding facility with a
consortium of banks. This facility is due to run until June 2013
but can be extended at the option of FLG for a further two
years.
Financial strength ratings
A number of the Group's life businesses are attributed financial
strength ratings.
Fitch Moody's Standard & Poor's
----- ------------ ------------ ----------------------
FPLP A+ (strong) A3 (strong) A-(strong)
FLC A+ (strong) A2 (strong) A-(strong)
FLAS A+ (strong) A2 (strong) NR
----- ------------ ------------ ----------------------
The Group targets financial strength ratings in the single A
range and expects them to remain there for the foreseeable
future.
Principal risks and uncertainties
The Group included details of the principal risks and
uncertainties related to its business on pages 15-18 of its 2010
Annual Report and Accounts. These were published under the
following headings:
1) Economic conditions
2) Acquisition of target companies
3) Integration and restructuring
4) Regulatory change and compliance
5) Mortality and other assumption uncertainties
6) Counterparty and third party risks
7) Reputation and contagion risks
All of these remain relevant and applicable for the remainder of
2011.
As stated in Note 1 to the condensed consolidated financial
statements, the directors are satisfied that the Group has
sufficient resources to continue in operation for the foreseeable
future, a period of not less than 12 months from the date of this
report. Accordingly, they continue to adopt the going concern basis
in preparing the condensed consolidated financial statements.
Statement of directors' responsibilities
Each of the directors confirm that to the best of their
knowledge:
-- The condensed consolidated IFRS interim financial information
has been prepared in accordance with IAS 34: Interim Financial
Reporting, as adopted by the European Union ("EU").
-- The interim report includes a fair review of the information
required by Disclosure and Transparency Rule 4.2.7, namely
important events that have occurred during the period and their
impact on the condensed set of financial statements, as well as a
description of the principal risks and uncertainties faced by the
Company and the undertakings included in the condensed consolidated
financial statements taken as a whole for the remaining six months
of the financial year; and
-- The interim report includes a fair review of material related
party transactions that have taken place in the first six months of
the current financial year and any material changes in related
party transactions described in the last annual report as required
by Disclosure and Transparency Rules 4.2.8.
By order of the Board
Andy Parsons
Executive Director Finance
INDEPENDENT REVIEW REPORT TO FRIENDS LIFE GROUP plc
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the half yearly financial report for the
six months ended 30 June 2011 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
IFRS based operating profit, the condensed consolidated statement
of financial position, the condensed consolidated statement of
changes in equity, the condensed consolidated cash flow statement
and the related notes 1 to 11. We have read the other information
contained in the half yearly financial report and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
(UK and Ireland) 2410 "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Services Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half yearly
financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half yearly financial report for the six months ended 30
June 2011 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
Ernst & Young LLP
London
15 August 2011
Condensed consolidated income statement
For the half year ended 30 June 2011
2011 2010 2010
Half year Half year Full year
Notes GBPm GBPm GBPm
---------------------------------- ------ ---------- ---------- ----------
Revenue
Gross earned premiums 2 1,069 426 1,288
Premiums ceded to reinsurers 2 (296) (50) (241)
---------------------------------- ------ ---------- ---------- ----------
Net earned premiums 2 773 376 1,047
Fee and commission income and
income
from service activities 410 323 751
Investment return 2,579 1,182 8,424
---------------------------------- ------ ---------- ---------- ----------
Total revenue 3,762 1,881 10,222
---------------------------------- ------ ---------- ---------- ----------
Other income 2 78 - 891
---------------------------------- ------ ---------- ---------- ----------
Claims, benefits and expenses
Gross claims and benefits paid 1,824 676 2,004
Amounts receivable from
reinsurers (318) (88) (322)
---------------------------------- ------ ---------- ---------- ----------
Net claims and benefits paid 1,506 588 1,682
---------------------------------- ------ ---------- ---------- ----------
Change in insurance contracts
liabilities (69) 86 891
Change in investment contracts
liabilities 928 473 5,863
Transfer to unallocated surplus 49 1 4
Movement in net assets
attributable to
unit-holders 30 (2) 139
---------------------------------- ------ ---------- ---------- ----------
Movement in policyholder
liabilities 938 558 6,897
---------------------------------- ------ ---------- ---------- ----------
Acquisition expenses 300 166 392
Administrative and other expenses 940 349 1,028
Finance costs 78 66 129
---------------------------------- ------ ---------- ---------- ----------
Total claims, benefits and
expenses 3,762 1,727 10,128
---------------------------------- ------ ---------- ---------- ----------
Share of profit/(loss) of
associate and
joint venture 1 (1) -
---------------------------------- ------ ---------- ---------- ----------
Profit before tax from continuing
operations 79 153 985
Policyholder tax 4 (165) (61) (244)
---------------------------------- ------ ---------- ---------- ----------
(Loss)/profit before shareholder
tax
from continuing operations (86) 92 741
---------------------------------- ------ ---------- ---------- ----------
Total tax charge 4 (18) (67) (137)
Policyholder tax 4 165 61 244
---------------------------------- ------ ---------- ---------- ----------
Shareholder tax 4 147 (6) 107
---------------------------------- ------ ---------- ---------- ----------
Profit for the period 61 86 848
---------------------------------- ------ ---------- ---------- ----------
Attributable to:
Ordinary shareholders (i) 45 47 794
STICS holders (ii) 16 - 1
---------------------------------- ------ ---------- ---------- ----------
61 47 795
Non-controlling interests
Equity attributable to STICS
holders (ii) - 16 30
Other - 23 23
---------------------------------- ------ ---------- ---------- ----------
Profit for the period 61 86 848
---------------------------------- ------ ---------- ---------- ----------
(i) All profit attributable to ordinary shareholders is from
continuing operations.
(ii) On 15 December 2010, the STICS ceased to be non-controlling
interests following an intra-group transfer of these equity
instruments from Friends Provident Group plc ("FPG") to the
Company.
The consolidated income statement includes the results of BHA
from the date of acquisition on 31 January 2011. The results for
the year ended 31 December 2010, include the results of the
acquired AXA UK Life Business from 3 September 2010.
Condensed consolidated statement of comprehensive income
For the half year ended 30 June 2011
Equity holders
-------------------------
Ordinary Non-
share STICS controlling
holders holders (iii) interests Total
GBPm GBPm GBPm GBPm
----------------------------- --------- -------------- ------------ ------
Profit for the period 45 16 - 61
----------------------------- --------- -------------- ------------ ------
Actuarial losses on defined
benefit
schemes (25) - - (25)
Foreign exchange adjustments
(i) 20 - - 20
Shadow accounting (ii) 2 - - 2
Aggregate tax effect of
above items 1 - - 1
----------------------------- --------- -------------- ------------ ------
Other comprehensive loss,
net of tax (2) - - (2)
----------------------------- --------- -------------- ------------ ------
Total comprehensive income,
net of tax 43 16 - 59
----------------------------- --------- -------------- ------------ ------
For the half year ended 30 June 2010
Equity Non-controlling
holders interests
--------- ----------------------
Ordinary
share STICS
holders holders (iii) Other Total
GBPm GBPm GBPm GBPm
------------------------------ --------- -------------- ------ ------
Profit for the period 47 16 23 86
------------------------------ --------- -------------- ------ ------
Actuarial losses on defined
benefit
schemes (78) - - (78)
Foreign exchange adjustments
(i) (46) - - (46)
Shadow accounting (ii) (8) - - (8)
Aggregate tax effect of
above items 40 - - 40
------------------------------ --------- -------------- ------ ------
Other comprehensive loss,
net of tax (92) - - (92)
------------------------------ --------- -------------- ------ ------
Total comprehensive income,
net of tax (45) 16 23 (6)
------------------------------ --------- -------------- ------ ------
For the year ended 31 December 2010
Non-controlling
-------------------
Equity holders interests
------------------- ------------------
Ordinary
share STICS STICS
holders holders holders Other Total
(iii) (iii)
GBPm GBPm GBPm GBPm GBPm
----------------------------- --------- -------- ---------- ------ ------
Profit for the period 794 1 30 23 848
----------------------------- --------- -------- ---------- ------ ------
Actuarial losses 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 loss,
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 relates to a gain of GBP2 million (30
June 2010: loss of GBP8 million; 31 December 2010: loss of GBP3
million) in respect of foreign exchange adjustments on translation
of overseas subsidiaries held by the with-profits fund of FPLP.
(iii) On 15 December 2010, the STICS ceased to be
non-controlling interests following an intra-group transfer of
these equity instruments from FPG to the Company.
Condensed consolidated statement of IFRS based operating
profit
For the half year ended 30 June 2011
2011 2010 2010
Half year Half year Full year
Notes GBPm GBPm GBPm
---------------------------------- ------ ---------- ---------- ----------
Profit before tax from continuing
operations 79 153 985
Policyholder tax (165) (61) (244)
Returns on Group-controlled funds
attributable to third parties - (23) (23)
---------------------------------- ------ ---------- ---------- ----------
(Loss)/profit before tax
excluding
returns generated within
policyholder
funds (86) 69 718
Non-recurring items 12 3 (801)
Amortisation and impairment of
acquired
present value of in-force
business 5 453 142 364
Amortisation of other intangible
assets 5 41 25 64
Interest payable on STICS (16) (16) (31)
Short-term fluctuations in
investment return 2 (64) (24)
---------------------------------- ------ ---------- ---------- ----------
IFRS based operating profit
before tax 406 159 290
Tax on operating profit (57) (25) 16
IFRS based operating profit after
tax
attributable to ordinary
shareholders
from continuing operations 349 134 306
---------------------------------- ------ ---------- ---------- ----------
Condensed consolidated statement of financial position
At 30 June 2011
30 June 30 June 31 December
2011 2010 2010
Notes GBPm GBPm GBPm
------------------------------------ ------ -------- -------- ------------
Assets
Pension scheme surplus 3 - 22
Intangible assets 5 4,870 3,021 5,140
Property and equipment 58 45 46
Investment properties 3,128 857 3,189
Investments in associate and
joint venture 33 33 32
Deferred tax assets - 8 4
Financial assets 6 101,089 49,053 99,465
Deferred acquisition costs 490 180 358
Reinsurance assets 2,614 1,926 2,637
Current tax assets 27 4 22
Insurance and other receivables 1,411 646 976
Cash and cash equivalents 8,532 4,955 9,057
Assets of operations classified
as held for
sale 1,268 - 1,206
------------------------------------ ------ -------- -------- ------------
Total assets 123,523 60,728 122,154
------------------------------------ ------ -------- -------- ------------
Liabilities
Insurance contracts 35,071 12,146 35,081
Unallocated surplus 1,148 275 1,098
Financial liabilities
Investment contracts 73,537 40,877 72,411
Loans and borrowings 7 1,007 282 1,012
Amounts due to reinsurers 1,650 1,713 1,666
Net asset value attributable
to unit-holders 1,199 697 1,173
Provisions 227 56 221
Pension scheme deficit - 35 -
Deferred tax liabilities 1,126 514 1,115
Current tax liabilities 29 19 11
Insurance payables, other payables
and
deferred income 1,305 555 893
Liabilities of operations
classified as held
for sale 984 - 925
------------------------------------ ------ -------- -------- ------------
Total liabilities 117,283 57,169 115,606
------------------------------------ ------ -------- -------- ------------
Equity attributable to equity
holders of
the parent
Attributable to ordinary
shareholders:
Share capital 515 250 515
Other reserves 5,411 2,995 5,711
------------------------------------ ------ -------- -------- ------------
5,926 3,245 6,226
STICS holders 310 - 318
------------------------------------ ------ -------- -------- ------------
6,236 3,245 6,544
Attributable to non-controlling
interests
STICS holders - 310 -
Other 4 4 4
------------------------------------ ------ -------- -------- ------------
Total equity 6,240 3,559 6,548
------------------------------------ ------ -------- -------- ------------
Total equity and liabilities 123,523 60,728 122,154
------------------------------------ ------ -------- -------- ------------
The financial statements were approved by the Board of directors
on 15 August 2011.
Condensed consolidated statement of changes in equity
For the half year ended 30 June 2011
Attributable to Other
ordinary equity
shareholders holders Non-
Share Other STICS controlling
capital reserves Total holders interests Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- --------- ------ -------- ------------ ------
At 1 January
2011 515 5,711 6,226 318 4 6,548
Profit for the
period - 45 45 16 - 61
Other
comprehensive
loss - (2) (2) - - (2)
Total
comprehensive
income - 43 43 16 - 59
----------------- -------- --------- ------ -------- ------------ ------
Dividends on
equity shares - (350) (350) - - (350)
Interest paid on
STICS - - - (24) - (24)
----------------- -------- --------- ------ -------- ------------ ------
Appropriations
of profit - (350) (350) (24) - (374)
Tax relief on
STICS interest - 4 4 - - 4
Share based
payments - 3 3 - - 3
----------------- -------- --------- ------ -------- ------------ ------
At 30 June 2011 515 5,411 5,926 310 4 6,240
----------------- -------- --------- ------ -------- ------------ ------
For the half year ended 30 June 2010
Attributable to
ordinary Non-controlling
shareholders interests
Share Other STICS
capital reserves Total holders Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- -------- --------- ------ ---------- ------ ------
At 1 January 2010 250 3,099 3,349 318 297 3,964
Profit for the
period - 47 47 16 23 86
Other comprehensive
loss - (92) (92) - - (92)
Total comprehensive
income - (45) (45) 16 23 (6)
Dividends on equity
shares - (65) (65) - (7) (72)
Interest paid on
STICS - - - (24) - (24)
--------------------- -------- --------- ------ ---------- ------ ------
Appropriations of
profit - (65) (65) (24) (7) (96)
Tax relief on STICS
interest - 5 5 - - 5
Disposals of
businesses - - - - (309) (309)
Share based payments - 1 1 - - 1
--------------------- -------- --------- ------ ---------- ------ ------
At 30 June 2010 250 2,995 3,245 310 4 3,559
--------------------- -------- --------- ------ ---------- ------ ------
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 1 January
2010 250 3,099 3,349 - 318 297 3,964
---------------- -------- --------- ------ -------- -------- ------ ------
Profit for the
year - 794 794 1 30 23 848
Other
comprehensive
loss - (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
businesses - - - - - (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 - - - 318 (318) - -
---------------- -------- --------- ------ -------- -------- ------ ------
At 31 December
2010 515 5,711 6,226 318 - 4 6,548
---------------- -------- --------- ------ -------- -------- ------ ------
Condensed consolidated cash flow statement
For the half year ended 30 June 2011
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------------------------------------ ---------- ---------- ----------
Operating activities
Profit for the period 61 86 848
Adjusted for:
Other income (gain on acquisition) (68) - (883)
Net realised and unrealised gains on
assets at fair value (1,041) (133) (6,379)
Finance costs 78 65 129
Amortisation and impairment of intangible
assets 494 172 428
Depreciation of property and equipment 2 3 4
Movement in deferred acquisition costs (130) (136) (312)
Total tax charge 18 67 137
Net (purchase)/sale of shares and other
variable yield
securities (325) 552 (2,956)
Net sale of loans, debt securities and
other fixed income
securities 359 170 1,011
Net sale/(purchase) of investment
properties 98 (34) 14
(Decrease)/increase in insurance
contracts liabilities (167) 40 925
Increase/(decrease) in investment
contracts liabilities 501 (7) 7,372
Increase in unallocated surplus 50 2 2
Increase/(decrease) in provisions 5 21 (5)
Net movement in receivables and payables 58 (661) 668
------------------------------------------ ---------- ---------- ----------
Pre-tax cash (outflow)/inflow from
operating
activities (7) 207 1,003
Tax (paid)/received (33) - 15
------------------------------------------ ---------- ---------- ----------
Net cash (outflow)/inflow from operating
activities (40) 207 1,018
------------------------------------------ ---------- ---------- ----------
Investing activities
Acquisition of subsidiaries, net of cash
acquired (78) - 969
Additions to internally generated
intangible assets (2) (2) (4)
Net additions of property and equipment (14) (1) (1)
------------------------------------------ ---------- ---------- ----------
Net cash (outflow)/inflow from investing
activities (94) (3) 964
------------------------------------------ ---------- ---------- ----------
Financing activities
Proceeds from issue of ordinary share
capital - - 1,665
Proceeds from issue of long-term debt 497 - 729
Repayment of long-term debt (500) (128) (123)
Finance costs (69) (63) (126)
STICS interest (24) (25) (31)
Net movement in other borrowings, net of
expenses (4) 47 15
Dividends paid to equity holders of the
parent (350) (65) (65)
Dividends paid to non-controlling
interests - (7) (7)
------------------------------------------ ---------- ---------- ----------
Net cash (outflow)/inflow from financing
activities (450) (241) 2,057
------------------------------------------ ---------- ---------- ----------
(Decrease)/increase in cash and cash
equivalents (584) (37) 4,039
------------------------------------------ ---------- ---------- ----------
Balance at beginning of period 9,057 5,073 5,073
Exchange adjustments on the translation
of foreign
operations 59 (81) (55)
------------------------------------------ ---------- ---------- ----------
Balance at end of period 8,532 4,955 9,057
------------------------------------------ ---------- ---------- ----------
Notes to the condensed consolidated financial statements
1. Basis of preparation
The financial statements of the Company as at and for the half
year ended 30 June 2011 comprise the condensed consolidated
financial statements of the Company and its subsidiaries ("the
Group") and the Group's interests in associates and jointly
controlled entities.
On 31 January 2011, the Group through its subsidiary, FPLP,
acquired all of the share capital of BHA. The consolidated income
statement therefore includes the result of this business from that
date.
Under the terms of the acquisition of the AXA UK Life Business
it was agreed that certain portfolios owned by the Group as a
result of the acquisition are to be transferred back to AXA UK. In
particular, it is intended that the assets and liabilities of two
portfolios of insurance contracts, the GOF and TIP business, will
be transferred under the provisions of Part VII of the Financial
Services and Markets Act 2000 back to AXA UK and they are therefore
classified as held for sale assets and liabilities.
Insurance payables, other payables and deferred income includes
a liability for an amount of GBP34 million payable from the Company
to AXA UK on completion of the Part VII transfer of the GOF and TIP
portfolios of insurance business. The amount is part of the
wrong-pocket adjustment which will be made from the Company to AXA
UK to reflect the surpluses which have arisen in WLUK and FLC
respectively in respect of the businesses which will be transferred
during the second half of 2011. The GBP34m is calculated by
reference to the expected cash surplus arising on the GOF and TIP
portfolios in the period since the acquisition of the AXA UK Life
Business by the Group.
WLUK is still legally owned by AXA UK and control is expected to
pass to the Company in the second half of 2011. This is conditional
upon a transfer under Part VII of the Financial Services and
Markets Act 2000 of AXA retained business out of WLUK and FSA
approval of change of control being received. The results and net
assets of WLUK have therefore not been included in these financial
statements.
The June 2010 comparatives do not include either the acquired
AXA UK Life Business or BHA as they had not been acquired at the
time.
The annual financial statements of the group are prepared in
accordance with IFRS as adopted by the EU. The condensed
consolidated interim financial statements as at and for the half
year ended 30 June 2011 have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Services
Authority, with IAS 34: Interim Financial Reporting as adopted by
the EU and with accounting policies adopted in respect of the
financial statements for the year ended 31 December 2010, as
updated by changes that are intended to be made in the full year
2011 financial statements as a result of changes to IFRS. The
condensed consolidated interim financial statements do not
constitute statutory accounts as defined in Section 435 of the
companies Act 2006.
The directors are satisfied that the Group has sufficient
resources to continue in operation for the foreseeable future, a
period of not less than 12 months from the date of this report.
Accordingly, they continue to adopt the going concern basis in
preparing the financial statements.
The presentation currency of the Group is Sterling. Unless
otherwise stated the amounts shown in these financial statements
are in millions of pounds Sterling (GBP million).
During the period certain subsidiary companies, FLC and the
acquired BHA business, revised their reserving methodology by
allowing for negative reserves on protection business as allowed
for in PS06/14.
This has been treated as a change in estimates under IAS 8:
Accounting Policies, Changes in Accounting Estimates and Errors in
line with the accepted approach taken by the UK industry on
adoption of PS06/14.
The impact of this methodology changes was as follows:
-- a reduction in policyholder liabilities of GBP243 million and
a write-off of DAC on protection business of GBP22 million in the
AXA UK Life Business resulting in a one-off benefit to operating
profit of GBP221 million;
-- an acceleration of AVIF amortisation of GBP130 million in the
AXA UK Life Business and an AVIF impairment of GBP71 million in the
acquired BHA business resulting in a one-off adverse impact on
non-operating profit of GBP201 million; and
-- a reduction in the emerging surplus and new business strain
of GBP15 million.
The net impact on profit before tax was GBP5 million.
The International Accounting Standards Board ("IASB") issued the
following changes to existing standards and interpretations which
are effective for reporting periods beginning on or after 1 January
2011:
IFRS 7: Financial Instruments: Disclosures. This amendment
enhances the requirements for credit risk disclosures;
IAS 1: Presentation of Financial Statements. This amendment is
presentational in nature and does not have an impact on the Group
as the existing presentation complies with the standard;
IAS 24: Related Party Disclosures. This revision to IAS 24
clarifies the definition of a related party. It does not have a
material impact on the Group; and
IAS 34: Interim Financial Reporting. This amendment reinforces
the principles in IAS 34 with which the Group already complies;
The IASB issued the following new interpretation which is
effective for reporting periods beginning on or after 1 July
2010:
IFRIC 19: Extinguishing Financial Liabilities with Equity
Instruments. This interpretation does not have a material impact on
the Group.
The IASB issued the following changes to existing standards that
are effective for future reporting periods, but where early
adoption is permitted. The Group has not adopted them for half year
reporting since they have not yet been endorsed by the EU. The
impact on the Group is being assessed.
IFRS 7: Financial Instruments: Disclosures. This amendment
enhances disclosures about the risks arriving from derecognised
assets. Effective for reporting periods beginning on or after 1
July 2011.
IAS 12: Income Taxes. This amendment, in relation to deferred
tax, effective for reporting periods beginning on or after 1
January 2012, will not have material impact on the Group.
IAS 1: Presentation of Financial Statements. The amendment
requires companies to group together items within Other
Comprehensive Income that may be reclassified to the profit or loss
section of the income statement. The amendment is effective for
reporting periods beginning on or after 1 July 2012.
The IASB has issued the following new standards which are
effective for reporting periods beginning on or after 1 January
2013. These have not been endorsed by the EU and have not been
adopted for half year reporting. The impact on the Group is being
assessed.
IFRS 10: Consolidated Financial Statements provides a single
consolidation model that identifies control as the basis for
consolidation for all types of entities;
IFRS 11: Joint Arrangements establishes principles for financial
reporting by parties to a joint arrangement;
IFRS 12: Disclosure of Interests in Other Entities combines,
enhances and replaces the disclosure requirements for subsidiaries,
joint arrangements, associates and unconsolidated structured
entities; and
IFRS 13: Fair Value Measurement defines fair value and sets out
in a single IFRS a framework for measuring fair value.
2. 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 half year ended 30 June 2011 includes
BHA from 31 January 2011. The segmental information for the year
ended 31 December 2010 includes 12 months for the acquired Friends
Provident Business and four months for the acquired AXA UK Life
Business. The half year 2010 segmental information includes six
months of Friends Provident only.
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: Operating Segments:
-- UK - comprising Friends Provident UK life and pensions
business, the acquired AXA UK Life Business, BHA, Sesame Bankhall
and, for the period prior to 19 March 2010 when it was disposed,
Pantheon Financial Limited;
-- International - comprising FPIL, the overseas life assurance
business within the UK life and pensions subsidiaries and the
Group's share of AmLife; and
-- Lombard.
Corporate functions are not strictly 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.
(b) Operating segment information
(i) Operating profit
For the half year ended 30 June 2011
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----- ------ -------- ---------- ------
Life and pensions operating
profit 370 43 23 - 436
Longer-term return on
shareholder
funds 4 - (1) (17) (14)
Other income and charges - 1 - (3) (2)
Development costs (10) (3) (1) - (14)
--------------------------------- ----- ------ -------- ---------- ------
Operating profit/(loss)
before
tax 364 41 21 (20) 406
Tax on operating profit (57)
--------------------------------- ----- ------ -------- ---------- ------
Operating profit after tax
attributable to ordinary
shareholders of the parent 349
--------------------------------- ----- ------ -------- ---------- ------
For the half year ended 30 June 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----- ------ -------- ---------- ------
Life and pensions operating
profit 91 49 15 - 155
Longer-term return on
shareholder
funds 14 1 (1) 1 15
Other income and charges 2 (1) - (1) -
Development costs (8) (2) (1) - (11)
--------------------------------- ----- ------ -------- ---------- ------
Operating profit before
tax 99 47 13 - 159
Tax on operating profit (25)
--------------------------------- ----- ------ -------- ---------- ------
Operating profit after tax
attributable to ordinary
shareholders of the parent 134
--------------------------------- ----- ------ -------- ---------- ------
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----- ------ -------- ---------- ------
Life and pensions operating
profit 176 94 38 - 308
Longer-term return on
shareholder
funds 30 1 (4) (14) 13
Other income and charges 2 6 - (11) (3)
Development costs (21) (6) (1) - (28)
--------------------------------- ----- ------ -------- ---------- ------
Operating profit/(loss)
before tax 187 95 33 (25) 290
Tax on operating profit 16
--------------------------------- ----- ------ -------- ---------- ------
Operating profit after tax
attributable to ordinary
shareholders of the parent 306
--------------------------------- ----- ------ -------- ---------- ------
(ii) Reconciliation of operating profit before tax to profit
before tax from continuing operations
For the half year ended 30 June 2011
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------ -------- ---------- ------
Operating profit/(loss)
before
tax 364 41 21 (20) 406
Non-recurring items (i) (12) - - - (12)
Amortisation and impairment
of
acquired present value
of in-force
business (353) (67) (33) - (453)
Amortisation of other
acquired
intangible assets (22) (4) (15) - (41)
Interest payable on STICS 16 - - - 16
Short-term fluctuations
in
investment return 3 (1) - (4) (2)
----------------------------- ------ ------ -------- ---------- ------
Loss before tax excluding
profit generated within
policyholder funds (4) (31) (27) (24) (86)
Policyholder tax 165 - - - 165
Profit/(loss) before tax
from continuing operations 161 (31) (27) (24) 79
----------------------------- ------ ------ -------- ---------- ------
(i) UK non-recurring items include GBP68 million (GBP67 million
net of stamp duty expenses) in respect of the gain on acquisition
of BHA. Further details are set out in Note 9. This is offset by
GBP80 million of non-recurring costs comprising GBP41 million of
separation and integration costs in respect of the acquired BHA and
AXA UK Life Business, GBP24 million in respect of Solvency II and
finance system developments and GBP15 million of other costs.
For the half year ended 30 June 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ----- ------ -------- ---------- ------
Operating profit before
tax 99 47 13 - 159
Non-recurring items (i) (73) (6) - 76 (3)
Amortisation of acquired
present
value of in-force business (44) (62) (36) - (142)
Amortisation of intangible
assets (11) (3) (11) - (25)
Interest payable on STICS 16 - - - 16
Short-term fluctuations
in
investment return 71 - 2 (9) 64
----------------------------- ----- ------ -------- ---------- ------
Profit/(loss) before tax
excluding profit generated
within policyholder funds 58 (24) (32) 67 69
Policyholder tax 61 - - - 61
Returns on Group-controlled
funds attributable to
third
parties 23 - - - 23
----------------------------- ----- ------ -------- ---------- ------
Profit/(loss) before tax
from continuing operations 142 (24) (32) 67 153
----------------------------- ----- ------ -------- ---------- ------
(i) Non-recurring items comprise of GBP3 million of UK project
costs. They also include GBP76 million which comprises of a
management recharge to the life companies for pension scheme
contributions. The net impact of the recharge for the Group is
GBPnil.
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------ -------- ---------- ------
Operating profit/(loss)
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 intangible
assets (27) (8) (28) (1) (64)
Interest payable on STICS 31 - - - 31
Short-term fluctuations
in
investment return 28 2 1 (7) 24
----------------------------- ------ ------ -------- ---------- ------
(Loss)/profit 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) 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.
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. Segment results also include GBP76 million of non-recurring
items which comprises of a management recharge to the life
companies for pension scheme contributions. The net impact of the
recharge for the Group is GBPnil.
(iii) Revenue and expenses
For the year ended 30 June 2011
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 2,604 545 969 - - 4,118
Investment
contract
premiums (i) (1,540) (540) (969) - - (3,049)
---------------- -------- ------ -------- ---------- ------------ --------
Gross earned
premiums 1,064 5 - - - 1,069
Premiums ceded
to
reinsurers (296) 1 - - (1) (296)
---------------- -------- ------ -------- ---------- ------------ --------
Net earned
premiums 768 6 - - (1) 773
Fee and
commission
income 273 80 57 - - 410
Investment
return 2,792 (76) (140) 21 (18) 2,579
---------------- -------- ------ -------- ---------- ------------ --------
Total revenue 3,833 10 (83) 21 (19) 3,762
---------------- -------- ------ -------- ---------- ------------ --------
Inter-segment
revenue 1 1 - 17 (19) -
Total external
revenue 3,832 9 (83) 4 - 3,762
---------------- -------- ------ -------- ---------- ------------ --------
Other income
(iii) 78 - - - - 78
---------------- -------- ------ -------- ---------- ------------ --------
Net claims and
benefits
paid 1,504 2 - - - 1,506
Movement in
insurance
and investment
contracts
liabilities 1,123 (80) (184) - - 859
Transfer to
unallocated
surplus 47 2 - - - 49
Movement in net
assets
attributable to
unit-holders 30 - - - - 30
Acquisition
expenses 257 20 23 - - 300
Administrative
and other
expenses 741 95 104 1 (1) 940
Finance costs 48 3 1 44 (18) 78
---------------- -------- ------ -------- ---------- ------------ --------
Total claims,
benefits
and expenses 3,750 42 (56) 45 (19) 3,762
---------------- -------- ------ -------- ---------- ------------ --------
Inter-segment
expenses 17 1 - 1 (19) -
Total external
claims,
benefits and
expenses 3,733 41 (56) 44 - 3,762
---------------- -------- ------ -------- ---------- ------------ --------
Share of
profits of
associate
and joint
venture - 1 - - - 1
---------------- -------- ------ -------- ---------- ------------ --------
Profit/(loss)
before tax
from continuing
operations 161 (31) (27) (24) - 79
---------------- -------- ------ -------- ---------- ------------ --------
Policyholder
tax (165) - - - - (165)
Shareholder tax 137 1 9 - - 147
---------------- -------- ------ -------- ---------- ------------ --------
Segmental
result after
Tax 133 (30) (18) (24) - 61
---------------- -------- ------ -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include inter-segment premiums and loan
interest. Inter-segment transactions are undertaken on an
arm's-length basis.
(iii) Includes gain on acquisition of BHA of GBP68 million.
For the half year ended 30 June 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 1,354 495 1,347 - - 3,196
Investment
contract
premiums (i) (934) (489) (1,347) - - (2,770)
---------------- ------ ------ -------- ---------- ------------ --------
Gross earned
premiums 420 6 - - - 426
Premiums ceded
to
reinsurers (49) - - - (1) (50)
---------------- ------ ------ -------- ---------- ------------ --------
Net earned
premiums 371 6 - - (1) 376
Fee and
commission
income 173 105 46 - (1) 323
Investment
return 760 135 290 10 (13) 1,182
---------------- ------ ------ -------- ---------- ------------ --------
Total revenue 1,304 246 336 10 (15) 1,881
---------------- ------ ------ -------- ---------- ------------ --------
Inter-segment
revenue 4 - 4 7 (15) -
Total external
revenue 1,300 246 332 3 - 1,881
---------------- ------ ------ -------- ---------- ------------ --------
Net claims and
benefits
paid 586 2 - - - 588
Movement in
insurance
and investment
contracts
liabilities 135 173 251 - - 559
Transfer to
unallocated
surplus 1 - - - - 1
Movement in net
assets
attributable to
unit-holders (2) - - - - (2)
Acquisition
expenses 145 5 16 - - 166
Administrative
and other
expenses 241 87 100 (72) (7) 349
Finance costs 56 2 1 15 (8) 66
---------------- ------ ------ -------- ---------- ------------ --------
Total claims,
benefits
and expenses 1,162 269 368 (57) (15) 1,727
---------------- ------ ------ -------- ---------- ------------ --------
Inter-segment
expenses 9 - 1 5 (15) -
Total external
claims,
benefits and
expenses 1,153 269 367 (62) - 1,727
---------------- ------ ------ -------- ---------- ------------ --------
Share of losses
of associate
and joint
venture - (1) - - - (1)
Profit/(loss)
before tax
from continuing
operations 142 (24) (32) 67 - 153
---------------- ------ ------ -------- ---------- ------------ --------
Policyholder
tax (61) - - - - (61)
Shareholder tax 3 3 12 (24) - (6)
---------------- ------ ------ -------- ---------- ------------ --------
Segmental
result after
Tax 84 (21) (20) 43 - 86
---------------- ------ ------ -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include inter-segment fee income and loan
interest. Inter-segment transactions are undertaken on an
arm's-length basis.
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
---------------- -------- -------- -------- ---------- ------------ --------
Inter-segment
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
---------------- -------- -------- -------- ---------- ------------ --------
Inter-segment
expenses 3 1 - 14 (18) -
Total external
claims,
benefits and
expenses 7,691 889 1,551 (3) - 10,128
---------------- -------- -------- -------- ---------- ------------ --------
Share of
profits of
associate
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 deposits under IFRS.
(ii) Eliminations include inter-segment loan interest.
Inter-segment transactions are undertaken on an arm's-length
basis.
(iii) Includes gain on acquisition of the AXA UK Life Business
of GBP883 million.
(iv) Products and Services
For the Half year ended 30 June 2011
Individual Group Other Total
Protection Investment Annuities Pensions Pensions (i)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Gross
earned
premiums 568 260 197 36 8 - 1,069
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Net earned
premiums 455 259 16 35 8 - 773
Fee and
commission
Income - 178 - 130 10 92 410
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Total
external
revenue 455 437 16 165 18 92 1,183
------------ ----------- ----------- ---------- ----------- --------- ------ ------
For the Half year ended 30 June 2010
Individual Group Other Total
Protection Investment Annuities Pensions Pensions (i)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Gross
earned
premiums 165 95 156 5 5 - 426
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Net earned
premiums 117 94 156 5 5 (1) 376
Fee and
commission
Income - 167 - 20 40 96 323
------------ ----------- ----------- ---------- ----------- --------- ------ ------
Total
external
revenue 117 261 156 25 45 95 699
------------ ----------- ----------- ---------- ----------- --------- ------ ------
For the 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 on 19 March
2010).
(v) Assets and liabilities
At 30 June 2011
Elimination
of inter-
segment
amounts
UK Int'l Lombard Corporate (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------- ------ -------- ---------- ------------ --------
Segment assets 96,419 7,341 19,072 1,601 (943) 123,490
Investment in
associate
and joint
venture 5 28 - - - 33
--------------- ------- ------ -------- ---------- ------------ --------
Total assets 96,424 7,369 19,072 1,601 (943) 123,523
--------------- ------- ------ -------- ---------- ------------ --------
Total
liabilities 91,652 7,007 18,611 956 (943) 117,283
--------------- ------- ------ -------- ---------- ------------ --------
At 30 June 2010
Elimination
of inter-
segment
amounts
UK Int'l Lombard Corporate (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------- ------ -------- ---------- ------------ -------
Segment assets 38,641 6,167 15,627 671 (411) 60,695
Investment in
associate
and joint
venture 8 25 - - - 33
---------------- ------- ------ -------- ---------- ------------ -------
Total assets 38,649 6,192 15,627 671 (411) 60,728
---------------- ------- ------ -------- ---------- ------------ -------
Total
liabilities 36,412 5,723 15,183 262 (411) 57,169
---------------- ------- ------ -------- ---------- ------------ -------
At 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
--------------- ------- ------ -------- ---------- ------------ --------
(i) Eliminations mainly comprise intercompany loans.
(c) Geographical segmental information
In presenting geographical segmental 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. BHA is reported as UK, as its customers are located in the
UK.
For the half year ended 30 June 2011
Rest of
UK the world Total
GBPm GBPm GBPm
--------------------------------- ------ ---------- ------
Gross earned premiums 1,063 6 1,069
Fee and commission income 282 128 410
--------------------------------- ------ ---------- ------
Revenue from external customers 1,345 134 1,479
Investment return 2,579
Premiums ceded to reinsurers (296)
--------------------------------- ------ ---------- ------
Total revenue 3,762
--------------------------------- ------ ---------- ------
For the half year ended 30 June 2010
Rest of
UK the world Total
GBPm GBPm GBPm
--------------------------------- ----- ---------- ------
Gross earned premiums 420 6 426
Fee and commission income 186 137 323
--------------------------------- ----- ---------- ------
Revenue from external customers 606 143 749
Investment return 1,182
Premiums ceded to reinsurers (50)
--------------------------------- ----- ---------- ------
Total revenue 1,881
--------------------------------- ----- ---------- ------
For the Year ended 31 December 2010
Rest of
UK 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
--------------------------------- ------ ---------- -------
3. Appropriations of profit
(a) Dividends paid on ordinary shares
Dividends paid during the period and recognised in reserves:
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
--------------------------------------- ---------- ---------- ----------
Dividend in respect of the year ended
31
December 2010 (2009) paid in 2011
(2010) 350 65 65
--------------------------------------- ---------- ---------- ----------
The distributable reserves of the Company at 30 June 2011 are
GBP3,514 million (30 June 2010: GBP1,377 million, 31 December 2010:
GBP3,478 million).
(b) STICS interest
The STICS are accounted for as equity instruments under IFRS and
consequently the interest on the STICS is recorded in the financial
statements as though it were a dividend.
Interest on the 2003 STICS is paid in equal instalments in May
and November each year at a rate of 6.875%. During the period ended
30 June 2011, interest of GBP7 million (30 June 2010: GBP7 million,
31 December 2010: GBP14 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 period ended 30 June 2011, interest of GBP17
million (30 June 2010: GBP17 million, 31 December 2010: GBP17
million) was paid to the 2005 STICS holders.
4. Taxation
(a) Tax charged to the income statement
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
----------------------------------------- ---------- ---------- ----------
Current tax
UK corporation tax at 26.5% (2010:
28%) 45 44 16
Adjustments in respect of prior periods (6) (5) (15)
Overseas taxation 11 4 7
----------------------------------------- ---------- ---------- ----------
Total current tax charge 50 43 8
----------------------------------------- ---------- ---------- ----------
Deferred tax
Origination and reversal of temporary
differences (32) 27 121
Adjustments in respect of prior periods - (3) 8
----------------------------------------- ---------- ---------- ----------
Total deferred tax (credit)/charge (32) 24 129
----------------------------------------- ---------- ---------- ----------
Total tax charge 18 67 137
----------------------------------------- ---------- ---------- ----------
Analysed as:
Policyholder tax 165 61 244
Shareholder tax (147) 6 (107)
----------------------------------------- ---------- ---------- ----------
Total tax charge 18 67 137
----------------------------------------- ---------- ---------- ----------
Policyholder tax is tax on the income and investment returns
charged to policyholders of linked and with-profits funds.
Shareholder tax is tax charged to shareholders on the profits of
the Group.
(b) Factors affecting tax charge for period
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
---------------------------------------- ---------- ---------- ----------
Profit before tax from continuing
operations 79 153 985
---------------------------------------- ---------- ---------- ----------
Profit before tax from continuing
operations
multiplied by the standard rate of
corporation
tax in the UK of 26.5% (2010: 28%) 21 43 275
Effects of:
Non-taxable income (147) (36) (115)
Deductions not allowable for tax
purposes 3 2 46
Tax on reserving adjustments 31 - 7
Overseas tax (1) - -
Valuation of excess expenses 12 (6) (8)
Valuation of tax losses (16) 12 (42)
Valuation of unrealised capital losses (1) 6 -
With-profits minority interest (i) - (7) (8)
Adjustments in respect of prior periods (1) (8) (7)
Non taxable gain on acquisition (18) - (247)
Reduction in corporation tax rate
to 26%
(2010: 27%) (30) - (8)
Policyholder tax 165 61 244
---------------------------------------- ---------- ---------- ----------
Total tax charge 18 67 137
---------------------------------------- ---------- ---------- ----------
(i) This relates to tax on F&C CPT prior to
deconsolidation.
5. Intangible assets
Movements in intangible assets are as follows:
For the half year ended 30 June 2011
Goodwill AVIF Other Total
GBPm GBPm GBPm GBPm
------------------------------ --------- ------ ------ ------
Cost
------------------------------ --------- ------ ------ ------
At 1 January 2011 13 5,107 515 5,635
Acquisition of BHA - 172 8 180
Other additions - - 2 2
Foreign exchange adjustments 1 33 9 43
------------------------------ --------- ------ ------ ------
At 30 June 2011 14 5,312 534 5,860
------------------------------ --------- ------ ------ ------
Amortisation and impairment
------------------------------ --------- ------ ------ ------
At 1 January 2011 - 422 73 495
Amortisation charge for the
period - 382 41 423
Impairment charge - 71 - 71
Foreign exchange adjustments - (2) 3 1
------------------------------ --------- ------ ------ ------
At 30 June 2011 - 873 117 990
------------------------------ --------- ------ ------ ------
Carrying amounts at 30 June
2011 14 4,439 417 4,870
------------------------------ --------- ------ ------ ------
For the half year ended 30 June 2010
Goodwill AVIF Other Total
GBPm GBPm GBPm GBPm
------------------------------ --------- ------ ------ ------
Cost
------------------------------ --------- ------ ------ ------
At 1 January 2010 13 2,938 369 3,320
Other additions - - 2 2
Foreign exchange adjustments (1) (50) (12) (63)
------------------------------ --------- ------ ------ ------
At 30 June 2010 12 2,888 359 3,259
------------------------------ --------- ------ ------ ------
Amortisation
------------------------------ --------- ------ ------ ------
At 1 January 2010 - 59 10 69
Amortisation charge for the
period - 142 25 167
Foreign exchange adjustments - (3) 5 2
------------------------------ --------- ------ ------ ------
At 30 June 2010 - 198 40 238
------------------------------ --------- ------ ------ ------
Carrying amounts at 30 June
2010 12 2,690 319 3,021
------------------------------ --------- ------ ------ ------
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
-------------------------------- --------- ------ ------ ------
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
-------------------------------- --------- ------ ------ ------
An analysis of intangible assets by significant cash generating
unit ("CGU") is set out below:
Net
book
Cost Impairment Amortisation value
30 June 2011 GBPm GBPm GBPm GBPm
--------------------------- ------ ----------- ------------- ------
UK - Friends Provident
(life
and pensions including
Sesame Bankhall) 1,457 - (195) 1,262
UK - AXA UK Life Business 2,342 - (328) 2,014
UK - BHA 180 (71) (9) 100
International (including
FPI
and AmLife Berhad) 1,059 - (204) 855
Lombard 822 - (183) 639
--------------------------- ------ ----------- ------------- ------
Total 5,860 (71) (919) 4,870
--------------------------- ------ ----------- ------------- ------
Net book
Cost Amortisation value
30 June 2010 GBPm GBPm GBPm
---------------------------------- ------ ------------- ---------
UK - Friends Provident (life and
pensions
including Sesame Bankhall) 1,457 (86) 1,371
International (including FPI and
AmLife
Berhad) 1,056 (76) 980
Lombard 746 (76) 670
---------------------------------- ------ ------------- ---------
Total 3,259 (238) 3,021
---------------------------------- ------ ------------- ---------
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
---------------------------------- ------ ------------- ---------
Impairment
All identifiable intangible assets are reviewed at each
reporting date, or where impairment indicators are present, 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 30 June 2011, based on an impairment review
of each of the CGUs, the Directors are satisfied that none of the
Group's intangible assets are impaired except as stated below.
Impact of negative reserves
As explained in Note 1, the benefit of negative reserving has
been offset by an acceleration of AVIF amortisation of GBP130
million in the UK - AXA UK Life business CGU and by an impairment
charge against AVIF of GBP71 million in the acquired BHA CGU. This
is included within administrative and other expenses in the
condensed consolidated income statement.
The impairment arose from the implementation of negative
reserves which resulted in an earlier recognition of surplus and
the recoverable amount of the AVIF being assessed to be lower than
the carrying value. The AVIF asset which has been impaired is
included in the UK segment (disclosed in note 2).
For the purpose of the AVIF impairment test, the calculation of
the recoverable amount is consistent with its measurement at
initial recognition and is based on a current adjusted MCEV VIF
balance for pre-acquisition business only, which represents a
reasonable basis for determining future profits generated by the
asset acquired.
6. Financial assets
The Group's financial assets are summarised by measurement
categories as follows:
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
----------------------------------------- ---------- ---------- ----------
Fair value through the income statement
(Note 6 (a)) 100,882 49,041 98,788
Loans at amortised cost (Note 6 (c)) 207 12 677
----------------------------------------- ---------- ---------- ----------
Total financial assets 101,089 49,053 99,465
----------------------------------------- ---------- ---------- ----------
(a) Analysis of financial assets at fair value through the
income statement
As at 30 June 2011
Non
Non- -
With- Unit- linked linked Share-
profits linked Annuities Other holder Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- -------- ------- ---------- ------- ------- --------
Shares and other
variable
yield securities 7,771 53,709 - 202 7 61,689
Debt securities
and other
fixed-income
securities:
Government
securities 7,168 7,664 642 567 76 16,117
Corporate bonds 9,230 5,703 5,774 991 542 22,240
Derivative
financial
instruments 406 26 38 5 (6) 469
Deposits with
credit
institutions - 349 - 18 - 367
------------------- -------- ------- ---------- ------- ------- --------
Total financial
assets 24,575 67,451 6,454 1,783 619 100,882
------------------- -------- ------- ---------- ------- ------- --------
As at 30 June 2010
Non
Non- -
With- Unit- linked linked Share-
profits linked Annuities Other holder Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------- ------- ---------- ------- ------- -------
Shares and other
variable
yield securities 2,351 28,526 - 222 7 31,106
Debt securities and
other
fixed-income
securities:
Government
securities 3,752 1,906 347 247 183 6,435
Corporate bonds 4,085 3,380 2,526 525 361 10,877
Derivative
financial
instruments 278 8 - 4 (4) 286
Deposits with
credit
institutions - 337 - - - 337
-------------------- -------- ------- ---------- ------- ------- -------
Total financial
assets 10,466 34,157 2,873 998 547 49,041
-------------------- -------- ------- ---------- ------- ------- -------
As at 31 December 2010
Non
Non- -
With- Unit- linked 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
Derivative
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
-------------------- -------- ------- ---------- ------- ------- -------
The above unit-linked column and with-profits column include
GBP1,058 million (30 June 2010: GBP602 million; 31 December 2010:
GBP964 million) of financial assets comprising GBP794 million of
shares and other variable yield securities, GBP77 million of
corporate bonds and GBP187 million of government bonds (30 June
2010: GBP122m of shares and GBP480m of corporate bonds; 31 December
2010: GBP316 million of shares and GBP648 million of corporate
bonds) relating to the minority interests in the Open Ended
Investment Companies ("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.
Asset backed securities (excluding those held by the linked
funds) amount to GBP2,420 million (30 June 2010: GBP929 million; 31
December 2010: GBP2,505 million) and 91% (30 June 2010: 95%; 31
December 2010: 92%) of these are at investment grade as set out in
6 (b).
(b) Creditworthiness of financial assets
The following table gives an indication of the level of
creditworthiness of those categories of assets which are neither
past due nor impaired and are most exposed to credit risk using
principally ratings prescribed by Standard and Poor's and Moody's.
Assets held within unit-linked funds have been excluded from the
tables below as the credit risk on these assets is borne by the
policyholders rather than the shareholders. The carrying amount of
assets included in the statement of financial position represents
the maximum credit exposure.
Not
As at 30 June
2011 AAA AA A BBB BB B rated Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------ ------ ------ ------ ----- ----- ------ -------
Corporate
bonds 3,055 3,147 4,308 2,965 338 46 258 14,117
Asset backed
securities 529 709 618 344 120 2 98 2,420
Derivative
financial
instruments 66 139 244 - - - (6) 443
Reinsurance
assets - 2,377 236 - - - 1 2,614
Deposits with
credit
institutions - 18 - - - - - 18
Cash and cash
equivalents 1,624 872 1,551 38 - - 97 4,182
Total 5,274 7,262 6,957 3,347 458 48 448 23,794
--------------- ------ ------ ------ ------ ----- ----- ------ -------
% 22% 31% 29% 14% 2% 0% 2% 100%
--------------- ------ ------ ------ ------ ----- ----- ------ -------
Not
As at 30 June
2010 AAA AA A BBB BB B rated total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------ ------ ------ ----- ----- ----- ------ -------
Corporate bonds 1,408 2,439 1,746 506 186 19 264 6,568
Asset backed
securities 246 262 222 148 5 3 43 929
Derivative
financial
instruments - - 278 - - - - 278
Reinsurance
assets - 1,926 - - - - - 1,926
Cash and cash
equivalents 535 829 787 - - - 131 2,282
Total 2,189 5,456 3,033 654 191 22 438 11,983
---------------- ------ ------ ------ ----- ----- ----- ------ -------
% 18% 46% 25% 5% 2% 0% 4% 100%
---------------- ------ ------ ------ ----- ----- ----- ------ -------
Not
As at 31
December 2010 AAA AA A BBB BB B rated Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------ ------ ------ ------ ----- ----- ------ -------
Corporate
bonds 2,876 3,196 4,147 2,645 315 57 269 13,505
Asset backed
securities 560 825 622 289 110 2 97 2,505
Derivative
financial
instruments 46 141 245 - - - - 432
Reinsurance
assets - 2,349 287 - - - 1 2,637
Deposits with
credit
institutions - 3 - - - - - 3
Cash and cash
equivalents 1,831 945 1,210 36 - - 6 4,028
Total 5,313 7,459 6,511 2,970 425 59 373 23,110
--------------- ------ ------ ------ ------ ----- ----- ------ -------
% 23% 32% 28% 13% 2% 0% 2% 100%
--------------- ------ ------ ------ ------ ----- ----- ------ -------
The exposure of the Group to the debt of the governments and
companies of Ireland, Italy, Portugal and Spain in shareholder and
annuity funds is set out in the table below. There is no exposure
to Greece and the exposure to the economies of Ireland and Portugal
is relatively immaterial. The corporate debt is diversified across
industries and relates mainly to companies with trans-national
operations. Where the Group holds securities issued by financial
companies, it has considered the Company's financial strength and
the ability of the domicile government to provide financial support
in the event of stress.
Half year 2011 Half year 2010 Full year 2010
Govt Corporate Govt Corporate Govt Corporate
debt Debt Total debt debt Total debt debt Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------- ----- ---------- ------ ----- ---------- ------ ----- ---------- ------
Ireland - 38 38 - 35 35 - 50 50
Portugal - 12 12 - 2 2 - 14 14
Italy 8 217 225 - 30 30 7 221 228
Spain - 172 172 - 22 22 - 159 159
Total 8 439 447 - 89 89 7 444 451
---------- ----- ---------- ------ ----- ---------- ------ ----- ---------- ------
(c) Loans
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
---------------- ---------- ---------- ----------
Mortgage loans 3 3 61
Other loans 204 9 616
---------------- ---------- ---------- ----------
Total loans 207 12 677
---------------- ---------- ---------- ----------
Loan assets of GBP600m which were held at 31 December 2010 were
repaid in March 2011. A further GBP200 million collateralised loan
was provided to Barclays on 11 May 2011.
(d) 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:
2011 2010 2010
Half year Half year Full year
GBPm GBPm GBPm
------------------------------------------ ---------- ---------- ----------
Investment properties 1,759 548 1,831
Shares and other variable yield
securities 53,962 28,404 52,180
Debt securities and other fixed-income
securities 12,134 4,806 11,893
Derivative financial instruments 26 8 25
Deposits with credit institutions 349 337 349
Other receivables 461 173 356
Cash and cash equivalents 4,175 2,527 4,879
------------------------------------------ ---------- ---------- ----------
Total assets 72,866 36,803 71,513
------------------------------------------ ---------- ---------- ----------
Other payables (495) (126) (235)
------------------------------------------ ---------- ---------- ----------
Total unit-linked net assets 72,371 36,677 71,278
------------------------------------------ ---------- ---------- ----------
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.
7. Loans and borrowings
The Group's loans and borrowings are as follows:
30 June 30 June 31 Dec
Coupon 2011 2010 2010
% GBPm GBPm GBPm
------------------------------------ -------- -------- -------- -------
Subordinated liabilities:
Lombard undated subordinated
loans Various 3 4 3
Friends Life Group plc
subordinated debt due 2021
(i) 12.00 184 187 186
Friends Life Group plc
subordinated debt due 2022
(ii) 8.25 497 - -
Reinsurance:
Lombard financial reinsurance
treaties Various 13 20 15
Friends Provident financial
reinsurance treaties (iii) Various 50 12 29
Other:
Fixed rate unsecured notes
(iv) 9.00 200 - 700
Amount owed to credit institutions
(v) 60 59 79
Total loans and borrowings 1,007 282 1,012
------------------------------------ -------- -------- -------- -------
Unless otherwise stated below, the carrying values of
interest-bearing loans and borrowings closely approximate fair
value.
(i) The Friends Life Group plc subordinated debt due 2021 is
irrevocably guaranteed on a subordinated basis by FPLP. This debt
is carried at amortised cost. The fair value of this subordinated
debt is GBP208 million.
(ii) On 21 April 2011, the Company issued a GBP500 million Lower
Tier 2 (LT2) debt instrument with a coupon of 8.25% and a maturity
of 2022 which is guaranteed on a subordinated basis by FPLP. This
debt is carried at amortised cost being GBP500 million principal
less capitalised issue costs of GBP3 million.
(iii) FPLP has two financial reinsurance contracts with Munich
Reinsurance Company UK Limited ("Munich Re") to finance new German
unit-linked pensions business written in the years ended 31
December 2010 and 2011 respectively. The total amount owed to
Munich Re under these financial reinsurance arrangements as at 30
June 2011 was GBP42 million (30 June 2010: GBP10 million; 31
December 2010: GBP29 million).
On 30 June 2011, FPIL entered into a financial reinsurance
agreement with Munich Re to finance new Hong Kong Premier regular
premium savings business written since 1 January 2011. The amount
owed to Munich Re as at 30 June 2011 was GBP8 million.
(iv) On 14 September 2010, the Company issued fixed rate
unsecured loan notes, due in 2020, to Resolution Holdings
(Guernsey) Limited ("RHG") with an agreed principal amount of
GBP700 million. Following the issue of the subordinated debt,
detailed in note (ii), the company repaid GBP500 million of the
principal including interest due to RHG.
(v) Amounts owed to credit institutions (overdrafts) includes
GBP47m relating to credit balances held within OEICs that have been
consolidated as the Group holding is 50% or more.
8. Contingent liabilities
In the normal course of its business, the Group is subject to
matters of litigation or dispute or regulatory uncertainty. While
there can be no assurances at this time the directors believe,
based on the information currently available to them, 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.
9. Business combinations
Acquisition of Bupa Health Assurance
In January 2011, the Group through its subsidiary, FPLP,
acquired 100% of the shares in BHA from Bupa Investment Limited and
its parent Bupa Finance plc. The Group is deemed to have acquired
control of BHA on 31 January 2011, the date at which the last
substantive condition to legal completion was satisfied, and has
consolidated it from that point. 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 acquisition is consistent with the UK Life Project of the
Group's ultimate parent, Resolution Limited, which aims to generate
value by consolidating UK life and asset management businesses.
In the period from the acquisition to 30 June 2011, BHA
contributed revenue of GBP44 million and made a loss after tax of
GBP3 million. If the acquisition had occurred on 1 January 2011,
management estimate that consolidated revenue would have been GBP53
million, and the consolidated loss after tax for the half year
would have been GBP2 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 2011.
The following summarises the consideration transferred, and the
recognised amounts of assets acquired and liabilities assumed at
the acquisition date:
GBPm
---------------------------------------------------- ------
Cash paid 168
Fair value of purchase consideration 168
Fair value of net assets acquired (236)
---------------------------------------------------- ------
Excess of the interest in the fair value of assets
acquired over costs (68)
---------------------------------------------------- ------
The condensed consolidated income statement includes GBP1
million within administrative and other expenses in relation to
stamp duty payable on the shares acquired.
Identifiable assets acquired and liabilities assumed
Recognised
values on
acquisition
GBPm
-------------------------------------------------- ------------
Intangible assets:
Acquired value of in-force business 172
Other intangible assets 8
Financial assets 83
Current assets 30
Cash and cash equivalents 90
Total identifiable assets 383
-------------------------------------------------- ------------
Insurance liabilities 67
Other liabilities 80
Total identifiable liabilities 147
-------------------------------------------------- ------------
Net identifiable assets acquired and liabilities
assumed 236
-------------------------------------------------- ------------
Attributable to equity holders of the parent 236
-------------------------------------------------- ------------
The values of assets acquired and liabilities assumed,
recognised on acquisition, are their estimated fair values.
The gain of GBP68 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 BHA. The gain is
reported within other income in the condensed consolidated income
statement.
10. Related parties
In the ordinary course of business, the Group and its subsidiary
undertakings carry out transactions with related parties, as
defined by IAS 24 Related Party Disclosures. Material transactions
for the half year (period from acquisition in respect of
transactions related to BHA) are set out below.
(a) Services provided to related parties
No material transactions occurred in relation to services
provided to related parties.
(b) Services provided by related parties
2011 Half year 2010 Half year 2010 Full year
Income Receivable Income Receivable Income Receivable
earned at earned at earned at
in period in period in year year
period end period end end
GBPm GBPm GBPm GBPm GBPm GBPm
-------- -------- ----------- --------- ----------- -------- -----------
Joint - - - - 6 -
venture
Other - - - - - -
related
parties
-------- -------- ----------- --------- ----------- -------- -----------
Total - - - - 6 -
-------- -------- ----------- --------- ----------- -------- -----------
(c) Other related parties
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.
As detailed in Note 7 FPLP, a subsidiary, provided a guarantee
in respect of the GBP500 million LT2 debt instrument issued by the
Group on 22 April 2011.
11. Post Balance Sheet events
(a) Name Change
On 1 July 2011, Friends Provident Holdings (UK) plc changed its
name to Friends Life Group plc.
(b) Change in rates of corporation tax
During 2010 and the first half of 2011, legislation was
announced to bring in a phased decrease in the rate of corporation
tax commencing with a reduction to 26% on 1 April 2011 and further
reductions of 1% per annum until 1 April 2014, from when the rate
will be 23%. Under IFRS deferred tax is calculated using
substantively enacted rates and as such only the reduction to a 26%
rate has been taken into account in the closing deferred tax
balance (the opening balance is calculated using a 27% rate, being
the rate which was substantively enacted at 31 December 2010).
The reduction to 25% effective from 1 April 2012 became
substantively enacted on 5 July 2011 when Finance Bill 2011
completed the report stage and third reading in the House of
Commons. The effect of this is to increase the Group's net assets
by approximately GBP30 million.
Subsequent reduction (to 24% and 23%) will be dealt with by
future legislation. The benefit to the Group's net assets from the
further 2% reduction in the rate is estimated as approximately
GBP51 million in total and will be recognised as the legislation is
substantively enacted.
(c) 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, followed by a consultation
document which was issued on 7 April 2011 with the closing date for
responses being 28 June 2011. Detailed discussion is continuing and
draft legislation will not be published until late 2011. Given the
outstanding detail the impact on the deferred tax assets and
liabilities recognised in the balance sheet is too uncertain to
quantify.
(d) Supreme Court Judgement in the Case Scottish Widows plc v
Commissioners for Her Majesty's Revenue and Customs
The Supreme Court issued its judgement in respect of the above
case on 6 July 2011. The judgements found in favour of HMRC in this
court case involving the tax treatment of surplus assets
accumulated in a mutual and passed into a proprietary environment
on demutualisation. This decision impacts on the legacy Friends
Provident business which demutualised shortly after Scottish
Widows. However, the impact for Friends Life is minor based on the
Group's fact pattern, and a provision is held in the accounts to
cover the additional tax payable.
Appendix 1: New business information
Analysis of Life and Pensions new business
In classifying new business premiums the following basis of
recognition is adopted:
-- single new business premiums consist of those contracts under
which there is no expectation of continuing premiums being paid at
regular intervals;
-- regular new business premiums consist of those contracts
under which there is an expectation of continuing premiums being
paid at regular intervals, including repeated or recurrent single
premiums where the level of premiums is defined, or where a regular
pattern in the receipt of premiums has been established;
-- non-contractual increments under existing group pensions
schemes are classified as new business premiums;
-- transfers between products where open market options are
available are included as new business; and
-- regular new business premiums are included on an annualised
basis.
Regular and single premiums
Group
Regular premiums Single premiums
------------------------ ---------------------------
H1(i) H1(ii) H1(i) H1(ii)
2011 2010 Change 2011 2010 Change
GBPm GBPm % GBPm GBPm %
----------------------- ------ ------- ------- -------- -------- -------
UK Corporate
- pensions 209.3 140.1 49 327.1 120.3 172
- protection 11.8 2.5 372 0.0 0.0 -
UK Individual
- protection 44.0 18.0 144 0.0 0.0 -
- pensions 8.5 3.1 174 246.1 116.1 112
- investments 0.0 0.0 - 219.8 16.7 1216
Annuities 0.0 0.0 - 188.7 135.1 40
----------------------- ------ ------- ------- -------- -------- -------
Total UK Life and
Pensions 273.6 163.7 67 981.7 388.2 153
----------------------- ------ ------- ------- -------- -------- -------
International 96.0 97.2 (1) 361.6 232.6 55
Lombard 0.0 0.0 - 968.7 1,348.1 (28)
----------------------- ------ ------- ------- -------- -------- -------
Total International
Life and Pensions 96.0 97.2 (1) 1,330.3 1,580.7 (16)
----------------------- ------ ------- ------- -------- -------- -------
Total Life and
Pensions 369.6 260.9 42 2,312.0 1,968.9 17
----------------------- ------ ------- ------- -------- -------- -------
(i) includes the trading results of the acquired BHA business
for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA
UK Life business was acquired in Q3 2010
Friends Life excluding acquired businesses AXA UK Life and
BHA
Regular premiums Single premiums
----------------------- ---------------------------
H1 H1 H1 H1
2011 2010 Change 2011 2010 Change
GBPm GBPm % GBPm GBPm %
--------------------- ------ ------ ------- -------- -------- -------
UK Corporate
- pensions 153.4 140.1 9 275.1 120.3 129
- protection 4.4 2.5 76 0.0 0.0 -
UK Individual
- protection 14.0 18.0 (22) 0.0 0.0 -
- pensions 3.2 3.1 3 114.0 116.1 (2)
- investments 0.0 0.0 - 16.0 16.7 (4)
Annuities 0.0 0.0 - 109.2 135.1 (19)
---------------------
Total UK Life and
Pensions 175.0 163.7 7 514.3 388.2 32
--------------------- ------ ------ ------- -------- -------- -------
International 96.0 97.2 (1) 361.6 232.6 55
Lombard 0.0 0.0 - 968.7 1,348.1 (28)
--------------------- ------
Total International
Life and Pensions 96.0 97.2 (1) 1,330.3 1,580.7 (16)
--------------------- ------ ------ ------- -------- -------- -------
Total Life and
Pensions 271.0 260.9 4 1,844.6 1,968.9 (6)
--------------------- ------ ------ ------- -------- -------- -------
Acquired businesses of AXA UK Life and BHA
AXA UK Life BHA
-------------------- --------------------
Regular Single Regular Single
premiums premiums premiums premiums
6 months 6 months 5 months 5 months
2011 2011 2011 2011
GBPm GBPm GBPm GBPm
------------------------- --------- --------- --------- ---------
UK Corporate
- pensions 55.9 52.0 0.0 0.0
- protection 0.0 0.0 7.4 0.0
UK Individual
- protection 20.4 0.0 9.6 0.0
- pensions 5.3 132.1 0.0 0.0
- investments 0.0 203.8 0.0 0.0
Annuities 0.0 79.5 0.0 0.0
------------------------- --------- --------- --------- ---------
Total Life and Pensions 81.6 467.4 17.0 0.0
------------------------- --------- --------- --------- ---------
Group new business - APE
APE represents annualised new regular premiums plus 10% of
single premiums.
H1(i) H1(ii) Q2(i) Q1
2011 2010 Change 2011 2011 Change
GBPm GBPm % GBPm GBPm %
------------------------- ------ ------- ------- ------ ------ -------
UK Corporate
- pensions 242.0 152.1 59 128.8 113.2 14
- protection 11.8 2.5 372 7.3 4.5 62
UK Individual
- protection 44.0 18.0 144 21.9 22.1 (1)
- pensions 33.1 14.7 125 23.3 9.8 138
- investments 22.0 1.7 1,194 8.5 13.5 (37)
Annuities 18.9 13.5 40 10.1 8.8 15
-------------------------
Total UK Life and
Pensions 371.8 202.5 84 199.9 171.9 16
------------------------- ------ ------- ------- ------ ------ -------
International 132.2 120.6 10 68.8 63.4 9
Lombard 96.9 134.9 (28) 62.5 34.4 82
------------------------- ------ ------- ------- ------ ------ -------
Total International
Life
and Pensions 229.1 255.5 (10) 131.3 97.8 34
------------------------- ------ ------- ------- ------ ------ -------
Total Life and Pensions 600.9 458.0 31 331.2 269.7 23
------------------------- ------ ------- ------- ------ ------ -------
(i) includes the trading results of the acquired BHA business
for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA
UK Life business was acquired in Q3 2010
Friends Life excluding acquired AXA UK Life and BHA businesses -
APE
H1 H1 Q2 Q1
2011 2010 Change 2011 2011 Change
GBPm GBPm % GBPm GBPm %
---------------------------- ------ ------ ------- ------ ------ -------
UK Corporate
- pensions 180.9 152.1 19 95.4 85.5 12
- protection 4.4 2.5 76 1.9 2.5 (24)
UK Individual
- protection 14.0 18.0 (22) 6.6 7.4 (11)
- pensions 14.6 14.7 (1) 10.4 4.2 148
- investments 1.6 1.7 (6) 0.7 0.9 (22)
Annuities 11.0 13.5 (19) 5.8 5.2 12
----------------------------
Total UK Life and Pensions 226.5 202.5 12 120.8 105.7 14
---------------------------- ------ ------ ------- ------ ------ -------
International 132.2 120.6 10 68.8 63.4 9
Lombard 96.9 134.9 (28) 62.5 34.4 82
----------------------------
Total International
Life
and Pensions 229.1 255.5 (10) 131.3 97.8 34
---------------------------- ------ ------ ------- ------ ------ -------
Total Life and Pensions 455.6 458.0 (1) 252.1 203.5 24
---------------------------- ------ ------ ------- ------ ------ -------
Acquired businesses of AXA UK Life and BHA - APE
AXA UK Life BHA
-------------- -------------
Q2 Q1 Q2 Q1(i)
2011 2011 2011 2011
GBPm GBPm GBPm GBPm
---------------------------- ------ ------ ----- ------
UK Corporate
- pensions 33.4 27.7 0.0 0.0
- protection 0.0 0.0 5.4 2.0
UK Individual
- protection 9.4 11.0 5.9 3.7
- pensions 12.9 5.6 0.0 0.0
- investments 7.8 12.6 0.0 0.0
Annuities 4.3 3.6 0.0 0.0
---------------------------- ------ ------ ----- ------
Total UK Life and Pensions 67.8 60.5 11.3 5.7
---------------------------- ------ ------ ----- ------
(i) comprises the trading results for the period 1 February 2011
to 31 March 2011
International
H1 H1
2011 2010 Change
APE by region (actual exchange
rates) GBPm GBPm %
-------------------------------- ------ ------ -------
North Asia 55.4 47.8 16
South Asia 13.2 10.8 22
Middle East 24.2 23.3 4
Europe (Excl UK) 15.5 18.1 (14)
UK 9.7 5.3 83
Rest of World 10.0 9.8 2
Malaysia (AmLife) 4.2 5.4 (22)
-------------------------------- ------ ------ -------
Total 132.2 120.5 10
-------------------------------- ------ ------ -------
Lombard
H1 H1
2011 2010 Change
APE by region (actual exchange
rates) GBPm GBPm %
-------------------------------- ----- ------ -------
UK and Nordic 25.2 32.8 (23)
Northern Europe 18.0 53.2 (66)
Southern Europe 40.7 43.3 (6)
Rest of World 13.0 5.6 132
-------------------------------- ----- ------ -------
Total including large cases 96.9 134.9 (28)
-------------------------------- ----- ------ -------
Of which: Large cases (greater
than EUR10m) 38.6 40.6 (5)
-------------------------------- ----- ------ -------
Total excluding large cases 58.3 94.3 (38)
-------------------------------- ----- ------ -------
New business APE at constant exchange rates
All amounts in currency in the tables above other than Sterling
are translated into Sterling at a monthly average exchange rate.
The estimated new business assuming constant currency rates would
be as follows:
H1 H1
2011 2010 Change
GBPm GBPm %
--------------- ------ ------ -------
International 136.6 120.5 13
Lombard 96.3 136.2 (29)
--------------- ------ ------ -------
New Business - Present value of new business premiums
("PVNBP")
PVNBP equals new single premiums plus the expected present value
of new regular premiums. Premium values are calculated on a
consistent basis with the EV contribution to profits from new
business. Start of period assumptions are used for the economic
basis and end of period assumptions are used for the operating
basis. A risk free rate is used to discount expected premiums in
future years. The impact of operating assumption changes across a
whole reporting period will normally be reflected in the PVNBP
figures for the final quarter of the period that the basis changes
relate to. No change in operating assumptions will be reflected in
the PVNBP for the first and third quarters, when the contribution
to profits from new business is not published. All amounts in
currency other than Sterling are translated into Sterling at a
monthly average exchange rate.
H1(i) H1(ii) Q2(i) Q1
2011 2010 Change 2011 2011 Change
GBPm GBPm % GBPm GBPm %
--------------------- ------ ------- ------- ------ ------ -------
UK Corporate
- pensions 1,199 676 77 622 577 8
- protection 74 15 393 47 27 74
UK Individual
- protection 287 105 173 145 142 2
- pensions 288 128 125 206 82 151
- investments 220 17 1,194 86 134 (36)
Annuities 189 135 40 101 88 15
--------------------- ------ ------- ------- ------ ------ -------
Total UK Life
and 2,257 1,076 110 1,207 1,050 15
Pensions
--------------------- ------ ------- ------- ------ ------ -------
International 828 696 19 432 396 9
Lombard 969 1,348 (28) 625 344 82
--------------------- ------ ------- ------- ------ ------ -------
Total International
Life and Pensions 1,797 2,044 (12) 1,057 740 43
--------------------- ------ ------- ------- ------ ------ -------
Total Life and
Pensions 4,054 3,120 30 2,264 1,790 26
--------------------- ------ ------- ------- ------ ------ -------
(i) includes the trading results of the acquired BHA business
for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA
UK Life business was acquired in Q3 2010
Appendix 2: Analysis of 2010 full year baseline comparators
Adjustments
2010 2010
Full year Full year
GBPm (unless otherwise As reported Annualisation Inclusion Baseline
Stated) Total of ex-AXA of BHA Total
------------------------ ------------ -------------- ---------- ----------
UK products
Individual protection
NBS (85) (91) (17) (193)
IRR 2.7% 3.0% 7.1% 3.3%
APE 52 32 22 106
------------------------ ------------ -------------- ---------- ----------
Corporate benefits
NBS (58) (22) (80)
IRR 6.2% (0.3%) 4.2%
APE 330 69 399
------------------------ ------------ -------------- ---------- ----------
Retirement income
NBS 19 7 26
IRR 20.0% 10.3% 16.5%
APE 29 10 39
------------------------ ------------ -------------- ---------- ----------
Group
Blended new business
IRR (including Group
protection and other
products) 11.2% 8.6%
New business strain: (238) (392)
UK (149) (134) (20) (303)
International (83) (83)
Lombard (6) (6)
------------------------ ------------ -------------- ---------- ----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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