TIDM35PG
RNS Number : 1171A
Friends Life Group plc
27 March 2012
FRIENDS LIFE GROUP plc
(formerly FRIENDS PROVIDENT HOLDINGS (UK) plc)
Preliminary results for the year ended
31 December 2011
Good progress towards building a sustainable business
Highlights
Significant strategic momentum in 2011
-- Acquisition of Bupa Health Assurance and completion of final
elements of AXA UK Life transaction
-- Continued progress on separation and integration with
successful launch of Friends Life brand in first quarter of
2011
-- Announcement of UK Heritage and Go to Market management structures
-- Development of asset management business announced with GBP6
billion of assets due to be recaptured by mid-2012
-- Transformational outsourcing transaction with Diligenta;
enabling increase in synergy target to GBP143 million by 2015
-- Run-rate synergies ahead of target, GBP45 million achieved;
outsourcing contractualisinfurther GBP60 million
-- Capital optimisation program delivered GBP281 million of
synergies against GBP235 million guidance
-- Strengthened senior management team, with blend of internal
promotions and external appointments
Good progress in the UK, International impacted by weak
markets
-- IFRS operating profit before tax of GBP722 million (including
the benefit of GBP404 million of capital synergies and one-off
items)
-- UK operations made good progress reflecting management actions on capital and costs
-- UK target Go to Market platforms delivering improved new business profitability
-- International and Lombard operations impacted by difficult markets
Resilient capital position maintained
-- IGCA surplus of GBP2.1 billion representing a surplus of 219%
-- Balance sheet has low exposure to higher risk European sovereign and corporate debt
Andy Briggs, Chief Executive Officer said; "Significant progress
was made in 2011 to build Friends Life's business and deliver on
our cash and synergy targets. I have strengthened my management
team and brought in valuable experienced professionals in the shape
of Tim Tookey our new CFO, and Rosie Harris our new Chief Risk
Officer, to help take the Company forward. The ground breaking
outsourcing deal with Diligenta, which has now gone live, secures
significant savings and removes risk from our business.
The UK 'Go to Market' businesses made good progress on
integration and driving improved profitability despite continuing
tough economic and trading conditions. The UK Heritage, Retirement
Income and Asset Management businesses will transform the way
Friends Life operates and position the Group strongly for the
future. Meanwhile despite a resilient performance in our core
international markets, particularly Asia, profits in our
International business have been impacted by economic and other
factors. John Van Der Wielen, who joined the Group in November, is
undertaking a strategic review of the division to build on the
International growth strategy and prosper in all our key global
markets.
Friends Life has a clear strategy to build a sustainable and
profitable long-term business underpinned by rigorous financial
disciplines, with a team to deliver. We will continue to make
targeted investments in major initiatives that drive a significant
improvement in business performance."
Journalists requiring further information should contact:
+44 (0) 1306 871
Peter Timberlake Friends Life 834
+44 (0) 1306 634
Emma Evans Friends Life 909
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
Overview
Transformational year
2011 represented a transformational year for the Group as it
transitioned from the acquisition phase of the UK Life Project
towards the delivery of a focused and integrated life business.
The acquisition of Bupa Health Assurance Limited (since renamed
Friends Life BHA Limited) ("BHA") in January 2011 brought with it a
well regarded and efficient protection platform as well as a range
of market leading individual and group protection products. In
addition, the second phase of the acquisition of the AXA UK Life
Business was formally completed with the acquisition of Winterthur
Life UK Limited ("WLUK") and disposal of the Guaranteed over Fifty
("GOF") and Trustee Investment Plan ("TIP") portfolios in November
2011.
In March 2011, the acquired businesses were rebranded as Friends
Life. In August, the Group announced the restructuring, for
management purposes, of the UK business into distinct Heritage and
'Go to Market' businesses: Corporate Benefits, Protection and
Retirement Income.
In November, the Group set out its intention to develop in-house
asset management capabilities with the creation of Friends Life
Investments ("FLI") to manage its significant portfolio of fixed
income assets. It also announced a transformational 15 year
outsourcing partnership with IT and customer service specialist,
Diligenta. This outsourcing partnership has allowed the Group to
increase its cost savings target from GBP112 million to GBP143
million (30% of UK 2010 baseline costs). On 1 March 2012, the new
outsourcing partnership commenced with most of the Group's
remaining UK Heritage service operations transferring across to
Diligenta.
In December, the Group completed various Part VII transfers
combining a number of smaller life companies into Friends Life
Limited ("FLL") (formerly Friends Provident Life and Pensions
Limited), restructuring the acquired businesses to maximise capital
synergies and to continue the restructuring that supports the
future direction of the business.
Business performance
The UK operating result has shown significant improvement with
good progress towards strategic objectives reflecting both the
improved trading performance, as the businesses integrate, and a
number of one-off items including the Diligenta outsourcing
arrangement.
The Corporate Benefits and Protection businesses have
demonstrated improvements in internal rates of return ("IRR") and
new business strain ("NBS") with the focus on strategic products
platforms and expense reductions driving the overall development of
these results and offsetting the impact of adverse pensions
persistency. The Retirement Income business continues to exceed its
targeted IRR. The performance of the UK Heritage business reflects
the challenging market conditions, adverse persistency and
provisions established in respect of the Retail Distribution Review
("RDR") partially offset by the positive impact of mortality and
morbidity experience.
The good progress in the UK business was offset by a poor
performance in the International business; despite a 6% increase in
sales volumes, IRR reduced due to an increase in the proportion of
the existing lower margin 'Premier' products in Asia and a lower
proportion of higher margin German business sales. The continued
review of the in-force portfolio, which commenced in the first half
of 2011, highlighted further issues and the business's performance
was also impacted adversely by the effect of economic markets
through an increased cost of guarantees in respect of certain
Overseas Life Assurance Business ("OLAB") products. The
International management team has been strengthened, a strategic
review is well advanced and the business is focused on improving
profitability, driving through reductions in new business strain
and is working to meet its cash generation target.
Lombard continued to perform well, but again results reflect the
economic downturn in Europe, with some adverse impact on sales.
Notwithstanding these difficult conditions, Lombard has
outperformed its peers.
The following table shows the IRR performance of the key
business lines compared with the targets set for 2013.
2010
IRR % (unless otherwise 2013 2011 Full year 2010
stated) Target Full year baseline(i) Full year
---------------------------- -------- ----------- ------------- -----------
UK n/a(ii) 7.7 5.9 7.1
International 20+ 12.7 15.4 15.4
Lombard(iii) 20+ >25.0 >25.0 >25.0
---------------------------- -------- ----------- ------------- -----------
Blended group new business
IRR(iii) 15+ 10.0 8.6 11.2
---------------------------- -------- ----------- ------------- -----------
New business cash strain
(GBPm) 192 278 392 238
---------------------------- -------- ----------- ------------- -----------
(i) 2010 full year baseline includes an estimate of 12 months
BHA and AXA UK Life Business results.
(ii) Target IRRs for the Go to Market businesses are set out in
the relevant sections of the UK operating review.
(iii) 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.
Market environment
As well as affecting the operational performance, the difficult
economic environment in the year has negatively impacted IFRS total
profits. Income on shareholder assets and the value of annual
management charges ("AMCs") have fallen and reserves for certain
guarantees have increased resulting in a reduced operating
result.
Capital strength
The Group's robust capital position has been maintained during
2011 with an IGCA surplus as at 31 December 2011 of GBP2.1 billion
(31 December 2010: GBP2.3 billion). The movement in the year
principally reflects:
-- the surplus generated offset by economic impacts, primarily
credit spreads;
-- the impact of the BHA transaction; and
-- dividends paid to Resolution Holdings (Guernsey) Limited
("RHG").
Significant capital synergies were delivered in the year, but
much of this benefit has been eroded by widening credit spreads.
The Group changed its capital policy in the year from 160% to 150%
of Group Capital Resources Requirements (excluding WPICC),
reflecting reduced integration risk. The reduction in Pillar 1
capital requirements and increases in Pillar 2 from market
movements mean that the Group is now on the cusp of both Pillars
biting and accordingly capital management actions in 2012 are
focused on the management of both bases.
The Group's balance sheet remains strong and the shareholder
exposure to the higher risk government debts of Spain, Portugal,
Italy, Ireland and Greece remains low at GBP6 million (31 December
2010: GBP7 million).
Dividends
The directors are recommending an interim dividend for the year
to 31 December 2011 of GBP250 million (2010: GBP250 million)
payable by 31 March 2012.
Outlook
2011 has been an important year for the Group with the ground
work completed and progress made towards the delivery of a
sustainable, profitable business which is underpinned by rigorous
financial discipline. The Group's strategy has delivered a strong
set of results with good progress towards 2013 financial targets.
Looking forwards the Group, with the strong management team built
over 2011, is now well placed to drive forwards into the chosen
core product markets.
Group results
Key performance indicators
The Group's results for 2011 include the post acquisition
results of the acquired businesses and are therefore not currently
directly comparable from period to period where acquisitions have
taken place in the year under review. The 2010 results included
Friends Provident for 12 months and the AXA UK Life Business for
four months while the 2011 results include Friends Provident and
the AXA UK Life Business for 12 months, Bupa Health Assurance
Limited ("BHA") for 11 months and Winterthur Life UK Limited
("WLUK") for two months.
The Group uses the following key performance indicators. The
Group has also set a number of targets for the life operating
businesses which are detailed in the following sections.
GBPm (unless otherwise stated) Full year Full year
2011 2010
------------------------------------------ ---------- ----------
IFRS based operating profit before tax 722 290
IFRS profit after tax 10 848
IGCA surplus capital (GBPbn) 2.1 2.3
Asset quality(i) for shareholder related
assets 97% 95%
------------------------------------------ ---------- ----------
(i) Corporate debt and asset-backed securities at investment grade or above.
-- IFRS based operating profit before tax of GBP722 million (31
December 2010: GBP290 million) benefited from the increased scale
of the UK business as well as the actions taken to release negative
reserves, the Diligenta outsourcing transaction and other
favourable assumption changes. These were offset by the adverse
impact on operating profit of poor market conditions (reflected
through reduced AMCs, higher cost of guarantees and reduced
long-term investment return) and the inclusion of a full year's
financing costs.
-- IFRS profit after tax of GBP10 million (31 December 2010:
GBP848 million profit) reflects investment market losses as well as
the impact of one-off costs relating to separation and integration
spend, the Diligenta outsourcing transaction and other project
activity. Amortisation and impairment of acquired intangibles
includes the one-off impact of adoption of negative reserves and a
full year charge for the AXA UK Life Business. The result benefits
from the gains recognised on the acquisition of BHA and WLUK whilst
the prior year result reflects the much larger gain on the
acquisition of the AXA UK Life Business.
-- Group IGCA surplus capital of GBP2.1 billion (31 December
2010: GBP2.3 billion) reflects the GBP350 million dividend paid to
RHG and the acquisition of BHA, partially offset by surplus
emergence in the year. The IGCA at the end of February increased to
GBP2.2 billion, with the impact of positive investment performance
partially offset by separation and integration spend.
-- The Group has maintained high asset quality, with 97% of
shareholder-related corporate debt and asset-backed securities at
investment grade or above (2010: 95%). The Group has no significant
shareholder exposure to sovereign debt or corporate bonds of higher
risk European economies.
Group IFRS profit
The Group's IFRS results are set out below, including a
reconciliation from IFRS based operating profit to the IFRS result
after 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.
These results include the results of the acquired Friends
Provident business, AXA UK Life Business, BHA and WLUK from the
deemed dates of their acquisitions, which were 4 November 2009, 3
September 2010, 31 January 2011 and 7 November 2011 respectively.
The results of the GOF and TIP portfolios are included for the
period from 3 September 2010 until their disposal on 1 November
2011.
GBPm UK Int'l Lombard Corporate 2011 2010
----------------------------------------------- ------ ------ -------- ---------- --------- --------
New business strain (112) (36) (33) - (181) (145)
In-force surplus 402 97 73 - 572 466
Long-term investment return (5) 1 (1) (21) (26) 13
Principal reserving changes and one-off items 416 (12) - - 404 (13)
Development costs (28) (7) (1) - (36) (28)
FLG other income and charges (1) (3) - (7) (11) (3)
IFRS based operating profit/(loss) before tax 672 40 38 (28) 722 290
Short-term fluctuations in investment return (261) 24
Acquisition accounting adjustments:
Amortisation and impairment of acquired in-force business (675) (364)
Amortisation of other acquired intangible assets (84) (64)
Non-recurring items:
Gain on acquisition of businesses 116 883
Costs associated with the business acquisitions (3) (14)
Other non-recurring items (293) (68)
STICS interest adjustment to reflect IFRS accounting for STICS as
equity 31 31
Returns on F&C Commercial Property Trust - 23
------------------------------------------------------------------------------------- --------- --------
IFRS (loss)/profit before shareholder tax (447) 741
Shareholder tax 457 107
------------------------------------------------------------------------------------- --------- --------
IFRS profit after tax 10 848
------------------------------------------------------------------------------------- --------- --------
IFRS based operating profit for 2011 was GBP722 million
comprising the operating profit of the life businesses of GBP750
million and GBP28 million of corporate costs for the Group. This
result includes GBP404 million of principal reserving changes and
one-off items which comprised:
-- GBP221 million one-off benefit in respect of PS06/14;
-- GBP71 million release of expense reserves, including the
benefit of the savings secured through the Diligenta outsourcing;
and
-- a further GBP124 million of positive UK assumption changes
offset by GBP12 million adverse changes in International.
The exclusion of these items and the equivalent one-off changes
in 2010 leads to an underlying IFRS based operating profit of
GBP318 million for 2011 compared to GBP303 million for 2010. The
increase in the size of the Group and the improvements to new
business strain (reflecting cost reductions and transition to
target platforms) have been offset by the adverse impact of market
conditions on operating profit (resulting in lower annual
management charges for UK business, higher cost of guarantees for
certain International business and lower long-term investment
return assumptions), the ongoing negative impact of the adoption of
PS06/14 and the poor performance in International. Further details
on the operating performance of the Group are included in the
relevant business unit operating sections.
Non-operating items
Investment market performance has been volatile throughout 2011
and deteriorated in the second half of the year. As a result
negative short-term fluctuations in investment return amounted to
GBP261 million, principally relating to variances against the
expected return on assets backing the non-profit funds. The major
movements comprise:
-- adverse variances as a result of mismatches between the
assets backing the Friends Life annuity portfolios and the related
liabilities. These variances are a consequence of the Group's
asset/liability matching approach which is typically undertaken on
a realistic basis. As policyholder liabilities are reported in the
results according to their treatment on a regulatory basis the
differing approaches create a mismatch;
-- credit default assumptions have been strengthened following
the worsening of economic conditions during the second half of 2011
as evidenced by the significant widening of corporate bond spreads;
and
-- negative shareholder fluctuations of GBP46 million represent
the difference between actual and expected investment returns, due
to the Group's higher holding in cash combined with lower than
expected rates of return.
Acquisition accounting adjustments, totalling GBP759 million,
represent the amortisation and impairment of the intangible assets
recognised on the acquisitions. These charges comprise GBP675
million of amortisation and impairment of acquired in-force
business, and GBP84 million of amortisation of other intangible
assets. The amortisation of acquired in-force business includes a
one-off charge of GBP201 million (GBP130 million for the AXA UK
Life Business and GBP71 million for BHA) reflecting the accelerated
run-off of in-force surplus following the recognition of negative
reserves in these businesses.
Non-recurring items include gains on acquisitions of GBP116
million. The completion of the BHA and WLUK acquisitions has
resulted in gains of GBP68 million and GBP48 million respectively,
offset by acquisition costs of GBP3 million.
The disposal of the GOF and TIP portfolios did not have a
significant impact on the Group results.
Other non-recurring costs of GBP293 million include GBP84
million of costs relating to the 15 year outsourcing arrangement
with Diligenta; and GBP209 million of other non-recurring costs.
These comprise:
-- separation and integration programme costs of GBP128
million;
-- finance transformation costs of GBP55 million including
Solvency II;
-- capital optimisation project costs of GBP19 million; and
-- other costs of GBP7 million.
The Diligenta impact of GBP84 million in 2011 reflects the
reserving required for transition and service improvement costs in
relation to in-force insurance contract business. In accordance
with IFRS, no reserves have been established for the investment
contracts business. Total implementation costs for both in-force
insurance and investment business are expected to be GBP250 million
with the remainder incurred over 2012 to 2014.
Interest payable on the FLG STICS of GBP31 million is included
as a GBP26 million deduction to corporate long-term investment
return in the operating profit analysis, and GBP5 million adverse
investment fluctuation. As the STICS are accounted for as equity in
IFRS (with interest being recorded as a reserve movement), GBP31
million is added back to the non-operating result to reflect the
requirements of IFRS.
A shareholder tax credit of GBP457 million is recognised in the
period and is significantly higher than the loss before tax of
GBP447 million would imply. The principal differences between the
implied and actual shareholder tax credit relate to:
-- GBP69 million one-off shareholder tax credit triggered by the
change in pricing basis on certain unit-linked funds to reflect the
fact these funds were contracting;
-- GBP60 million shareholder tax credit relating to the
reduction in the rate of UK corporation tax;
-- GBP68 million and GBP48 million gains on the acquisitions of
BHA and WLUK respectively, which are not taxable (the tax impact of
this is GBP31 million); and
-- GBP190 million shareholder credit for tax reliefs, expenses
and exemptions predominantly in relation to the life insurance
companies in the Group which are taxed on the I minus E basis, an
element of which is matched by liabilities which are accounted for
within policyholder liabilities and form part of the loss before
tax.
The tax credit includes a GBP194 million credit in respect of
the amortisation and impairment of AVIF and other acquired
intangibles in the year.
The GBP23 million return on F&C Commercial Property Trust in
2010 reflects the market return attributable to third parties for
the period up to April 2010. This was the date at which the Group
ceased to consolidate the results of this company, as holdings had
been reduced to below the level requiring consolidation, hence
there is no impact on the 2011 results.
Summary IFRS balance sheet
31 December 31 December
GBPm 2011 2010
------------------------------------------- ------------ ------------
Acquired value of in-force business 4,437 4,685
Other intangible assets 410 455
Financial assets 103,643 99,465
Cash and cash equivalents 8,690 9,057
Other assets 8,132 8,492
------------------------------------------- ------------ ------------
Total assets 125,312 122,154
------------------------------------------- ------------ ------------
Insurance and investment contracts 112,455 107,492
Loans and borrowings 972 1,012
Other liabilities 5,737 7,102
------------------------------------------- ------------ ------------
Total liabilities 119,164 115,606
------------------------------------------- ------------ ------------
IFRS net assets 6,148 6,548
------------------------------------------- ------------ ------------
Equity attributable to equity holders of
the parent 5,825 6,226
STICS 318 318
Attributable to non-controlling interests 5 4
------------------------------------------- ------------ ------------
Total equity 6,148 6,548
------------------------------------------- ------------ ------------
At 31 December 2011, IFRS total equity was GBP6,148 million (31
December 2010: GBP6,548 million), with equity attributable to
equity holders of the parent of GBP5,825 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. Asset quality has been maintained with
96.9% of shareholder-related corporate bonds and asset-backed
securities held at investment grade or above.
UK operating review
In August 2011, the Group announced the creation of distinct 'Go
to Market' and 'Heritage' UK business units, reflecting the Group's
desire to improve the focus on both the profitable products and
markets, and the existing in-force customer base. The Go to Market
businesses are Corporate Benefits, Protection, and Retirement
Income. They represent scale markets where good margins are
generally available and where the Group has strong market positions
enabling access to those margins. The Heritage business manages
products not being marketed actively and the dedicated Heritage
management team is focused on retention, cash and capital. The
Heritage business unit forms the bulk of the UK business by
assets.
2011
Percentage UK funds under management Full year
-------------------------------------- -----------
UK Heritage 81%
Corporate Benefits 17%
Retirement Income 2%
-------------------------------------- -----------
Total UK funds under management GBP88bn
-------------------------------------- -----------
Profitability of new business
2011 Full year
--------------------------------------------
Heritage Go to Market
------------------------------------
2010
2011 Full 2010
GBPm (unless Corporate Retirement Half year Full
otherwise stated) Benefits Protection income Total year baseline year
New business
cash strain (54) (51) (77) 13 (169) (98) (303) (149)
IRR (%) 6.0 8.3 5.5 22.0 7.7 7.0 5.9 7.1
-------------------- --------- ---------- ----------- ----------- ------ -------- ---------- -------
APE 157 440 92 32 721 372 677 472
-------------------- --------- ---------- ----------- ----------- ------ -------- ---------- -------
The Group's new business strategy focuses on products and
distribution channels in the UK market where the Group has a strong
market position and the potential to access attractive returns.
This strategy drives the focus of the Group's UK Go to Market
business units whilst steps have been taken to exit or scale back
sales in product lines where Friends Life will not be able to
generate satisfactory returns (mainly individual pensions and
investment bonds). The creation of a UK Heritage business unit will
allow more active management of the products no longer actively
marketed.
A number of critical steps have now been taken as part of the
drive to improve profitability to meet the Group's 2013 targets.
The recognition of negative reserves in the acquired AXA UK Life
Business and BHA protection books has significantly reduced new
business cash strain. In addition, the focus on new business
profitability across Friends Life has served to reduce cash strain
down to GBP169 million in the year, representing a GBP134 million
reduction on the GBP303 million 2010 baseline and demonstrates the
significant progress made toward the target set out in early 2011
to reduce UK cash strain by GBP200 million.
A significant proportion of the Go to Market Protection and
Corporate Benefits new business is now written on their respective
target platforms. The profitability of the selected platforms is
already close to or above the target 2013 returns with the target
Corporate Benefits platform delivering 9.4% IRR (target: 10%) and
the target Individual Protection platform delivering 20.0% IRR
(target: 20%). The UK blended new business IRR has improved
throughout the year with a progression from 5.9% in the 2010 full
year baseline improving to 7.7% at the end of 2011. As a result,
Friends Life remains confident of meeting the targeted product
metrics by the end of 2013. The relevant sections below contain
detailed commentary on the results for each component business
within the UK operating segment.
Cost savings
Separation and Integration
The separation and integration programme is progressing well
with the BHA acquisition absorbed without interruption in January
2011. The BHA separation was completed at the end of January 2012
with the exit from Bupa transitional service arrangements
("TSAs").
The joint separation plans and operational service provision
between AXA and Friends Life continues to work well, with 59% of
transitional service arrangements exited by the end of 2011.
Further arrangements have been exited early in 2012 and the
separation from AXA IT infrastructure, the most significant
component of the Friends Life and AXA separation agenda, is well
advanced.
There have been five site closures announced to date, being
Coventry, Manchester Spring Gardens, Basingstoke, Preston and
London Crosswall (the former offices of BHA, where employees moved
across to Friends Life's One New Change offices at the end of
January 2012).
The integration projects remain on plan with GBP45 million
run-rate savings achieved by the end of 2011 with cumulative costs
of GBP67 million incurred to date (GBP58 million in 2011). This
progress represents an acceleration of synergy delivery primarily
across Customer Services and IT, and has been delivered through
closing legacy products to new business as well as the initial
impacts of announced site exits. Cumulative separation project
costs of GBP72 million (GBP57 million incurred in 2011) are also in
line with plan at this stage of the project.
Diligenta
The Diligenta transaction complements the current outsourcing
arrangements already in place with Capita. The service start date
of this transformational transaction was 1 March 2012 when the
remaining UK Heritage IT and Customer Services functions were
outsourced thereby materially de-risking the future expense levels
of the UK business together with significantly enhancing the level
of synergies available. This certainty of future cost levels for a
significant proportion of the business has been recognised in the
operating results.
IFRS based operating profit has benefited by GBP71 million in
2011 reflecting the release of maintenance expense reserves.
Implementation costs of GBP84 million (which exclude costs relating
to investment contracts in accordance with IFRS) have been reserved
for and are presented within non-recurring costs. This results in a
small net loss included in IFRS profit before tax of GBP13
million.
The Diligenta outsourcing is expected to generate annual cost
savings of GBP60 million by 2015. Included in these expected
savings is an amount of GBP29 million which relates to IT and
Customer Service integration synergies that would otherwise have
been delivered as part of the previously announced GBP112 million
cost savings target. The contract, therefore, delivers additional
expected cost savings of GBP31 million allowing the Group to
increase the cost savings target to GBP143 million which will, in
turn, drive improved profitability and lower new business strain.
The previously committed element of the savings will still be
delivered by the end of 2013 with the additional GBP31 million to
be delivered by the end of 2015.
The total one-off costs of delivering the outsourcing
arrangement are expected to be GBP250 million although GBP20
million of previously expected one-off costs will be avoided,
resulting in net additional one-off cost of GBP230 million over
2011 to 2014. Combined with the GBP45 million of other run-rate
savings delivered in 2011 and referred to above, a total of GBP105
million of savings has now been achieved or contractualised.
Expenses
The Group has made good progress in reducing the UK cost base
during 2011. UK acquisition and maintenance expenses totalled
GBP441 million, which includes GBP14 million of temporary cost,
primarily VAT on transitional service arrangements as part of the
separation of the AXA UK Life Business from AXA UK, and GBP7
million of expenses incurred by the GOF and TIP businesses prior to
their transfer back to AXA UK. Including a full year impact of WLUK
expenses would increase 2011 underlying UK expenses from GBP420
million to GBP446 million. This represents a reduction on 2010 UK
baseline expenses of GBP476 million on a comparable basis,
including the effect of inflation during 2011. The full effect of
the run-rate savings set out above will be realised in 2012.
Capital optimisation
The Group's strategy to improve cash delivery is materially
influenced by the actions taken within the UK business.
Capital optimisation
The recognition of negative reserves has materially reduced the
cash strain of the Protection business and the business as a whole.
The progress and control of new business strain is also a key lever
in the Group's drive to improve cash generation. Further
operational improvements will be delivered as the business focuses
new business on the highly efficient Protection and Corporate
Benefits strategic platforms whilst the outsourcing arrangement
with Diligenta has enabled the UK Heritage business to variabilise
its cost base, de-risking the inevitably detrimental effect of a
fixed cost base on incremental business written on products that
are no longer marketed.
The impact of adopting certain elements of PS06/14 guidance in
the acquired BHA and AXA UK Life Business significantly benefitted
the 2011 IFRS based operating profit. The recognition of negative
reserves, and resulting reduced capital requirements on protection
products, has effectively accelerated the surplus generated on
these products although lower in-force surplus releases are
subsequently expected in future as a result. In addition, as the
profit profile of these products has changed, the corresponding
amortisation of deferred acquisition costs ("DAC") has likewise
been accelerated. The resulting one-off benefit to IFRS based
operating profit is GBP221 million in the year, with a
corresponding benefit of GBP12 million to new business strain and a
reduction of GBP40 million in the emerging in-force surplus in
2011. This reduction in in-force surplus is expected to reduce to
GBP25 million to GBP30 million in 2012 based on current
expectations of in-force run-off. The overall net impact on IFRS
based operating profit for 2011 (excluding improvements in new
business strain) is GBP181 million. IFRS based profit after tax
remains largely unaffected, despite the increased one-off benefit
as the earlier recognition of surplus is offset by the accelerated
run-off of acquired value of in-force business.
Further capital efficiencies have been delivered in the second
half of 2011 through the completion of a number of Part VII
transfers. These have successfully transferred business from a
number of smaller life companies into FLL. The completion of these
transfers has reduced aggregate Pillar 1 capital requirements by
around GBP113 million and released GBP181 million of surplus
capital. Further Part VII transfers are planned for 2012 with these
aiming to reduce the number of UK life companies from the current
five down to two by the end of 2013.
Financial results
UK IFRS based operating profit
2011(i) 2011(ii) 2010(iii)
Full year Half year Full year
GBPm GBPm GBPm
----------------------------------------------- ----------- ----------- -----------
New business strain (112) (66) (89)
In-force surplus 402 214 280
Longer-term investment return (5) 4 30
Principal reserving changes and one-off items 416 222 (15)
Development costs (28) (10) (21)
Other income and charges (1) - 2
----------------------------------------------- ----------- ----------- -----------
IFRS based operating profit before tax 672 364 187
----------------------------------------------- ----------- ----------- -----------
(i) 2011 full year results comprise 12 months results for
Friends Provident and the AXA UK Life Business, 11 months for BHA
and two months for WLUK.
(ii) 2011 half year results comprise six months results for
Friends Provident, six months for the AXA UK Life Business and five
months for BHA.
(iii) 2010 full year results include 12 months results for
Friends Provident and four months for the AXA UK Life Business.
In the year to 31 December 2011 the UK segment delivered IFRS
based operating profit before tax of GBP672 million (31 December
2010: GBP187 million), representing an increase of GBP485 million
on the prior year. The increase reflects the greater scale of the
UK business, in particular a full 12 months of operating profit
from the AXA UK Life Business, and improved performance including
the recognition of management actions and other reserving
benefits.
Despite these operating improvements, on an underlying basis,
after removing principal reserving changes and one-off items, the
full year profit of GBP256 million is lower than the annualised
half year result of GBP284 million. This reduction principally
reflects the impact of adverse economic conditions on in-force
surplus generation, partially offset by reduced new business strain
as the cost reductions and transition to target platforms take
effect.
UK new business strain and in-force surplus
Details of new business strain and in-force surplus for the UK
business are set out below.
Reconciliation of new business cash strain to IFRS new business
strain
2011 2011 2010
Full year Half year Full year
GBPm GBPm GBPm
----------------------------------- ----------- ----------- -----------
Total UK new business cash strain (169) (98) (149)
DAC/DFF adjustments 60 33 59
Other IFRS adjustments (3) (1) 1
----------------------------------- ----------- ----------- -----------
Total UK IFRS new business strain (112) (66) (89)
----------------------------------- ----------- ----------- -----------
New business cash strain has benefitted from a number of factors
in the year with good progress being made towards the target GBP200
million reduction in UK new business cash strain. IFRS new business
strain of GBP112 million reflects some of these benefits with the
principal driver of improvement, in the second half of the year,
being a reduction in costs as Protection new business is
transferred to the target platform.
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 the benefit to IFRS
new business strain is reduced. 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.
Reconciliation of in-force cash surplus to IFRS in-force
surplus
2011 2011 2010
Full year Half year Full year
GBPm GBPm GBPm
------------------------ ----------- ----------- -----------
Total UK cash surplus 354 207 268
DAC/DFF adjustments (7) (1) 8
Other IFRS adjustments 55 8 4
------------------------ ----------- ----------- -----------
Total UK IFRS surplus 402 214 280
------------------------ ----------- ----------- -----------
UK cash surplus generated in the year of GBP354 million (30 June
2011: GBP207 million) reflects the volatility in the macro economic
environment in particular lower average equity markets and lower
risk free rates. The lower level of equity markets resulted in a
reduction in fees generated on unit-linked funds in the year as
well as leading to an increase in reserves to reflect the impact of
lower annual management charges in the future. In addition, the
fall in risk free rates has resulted in an increased cost of
product guarantees, whilst the basis changes to income protection
morbidity removed the benefit of the half year positive variance
from the full year surplus.
The effect of the negative economic impacts on the IFRS in-force
surplus, GBP402 million (30 June 2011: GBP214 million) is partially
reduced by the reversal of the increased reserving level referred
to above, which is not allowable on the IFRS basis. This is
reflected in the proportionally higher size of other IFRS
adjustments to the change in cash surplus compared to previous
periods.
The GBP7 million net amortisation of DAC and deferred front end
fees ("DFF") reflects the relatively small value of these costs
that has been capitalised in the post-acquisition period. On the
acquisition of the business, the existing capitalised DAC and DFF
were eliminated and recognised within the acquired value of
in-force ("AVIF"). In the post-acquisition period, as new business
is written, the capitalisation of acquisition expenses and front
end fees resumed and hence the amortisation charged against
in-force surplus will increase each year for pensions and
investments business.
Longer-term investment return
2011 2011 2010
Full year Half year Full year
GBPm GBPm GBPm
--------------------------------------------------------------------------- ----------- ----------- -----------
Longer-term return on life and pension shareholder funds - excluding debt 70 35 76
Longer-term return on life and pension shareholder funds - debt (75) (31) (46)
Total (5) 4 30
--------------------------------------------------------------------------- ----------- ----------- -----------
Longer-term investment return has fallen in the second half of
2011 with a net loss of GBP5 million in the year driven by an
increase in financing costs. This primarily reflects the increased
debt held in the UK business with GBP500 million transferred from
Friends Life holding companies in April 2011 and a further GBP200
million transferred in December 2011.
Principal reserving changes and one-off items
Principal reserving changes and one-off items comprise a GBP221
million one-off benefit in respect of PS06/14, GBP71 million
release of expense reserves, including the benefit of the savings
secured through the Diligenta outsourcing, and a further GBP124
million of assumption changes primarily in respect of favourable
mortality and morbidity experience and some positive persistency
experience in protection.
UK operating expenses
2010
2011 2011 Full 2010
Full Half year Full
year year baseline(i) year
GBPm GBPm GBPm GBPm
------------- ------ ------ ------------- ------
Acquisition 178 89 220 130
Maintenance 263 130 256 140
------------- ------ ------ ------------- ------
441 219 476 270
Development 28 10 23 21
------------- ------ ------ ------------- ------
Total 469 229 499 291
------------- ------ ------ ------------- ------
(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 totalled GBP469 million in the year with
acquisition and maintenance expenses amounting to GBP441 million.
Acquisition and maintenance expenses remain the focus for the UK
business in the drive to reduce expenses by GBP143 million (GBP112
million by the end of 2013) from a 2010 baseline of GBP476 million.
2011 expenses include two months of WLUK operating expenses whilst
the baseline includes a full 12 months charge of GBP31 million.
Actions to reduce operating expenses have been progressing well
with GBP45 million of run-rate saving being made to date. However
given the timing of these savings only a GBP27 million benefit is
reflected in the 2011 expense base. These include the
implementation of the revised strategy announced in February 2011
resulting in streamlined UK sales and marketing functions and
synergies from reorganisation of operations prior to outsourcing
services to Diligenta. Offsetting this reduction are a number of
temporary increases, including VAT on services provided by AXA UK
and short-term increases in Finance and Governance functions to
strengthen capabilities during integration, which will not recur
beyond 2013 as the integration of the UK businesses completes.
Development costs of GBP28 million mainly comprise GBP7 million
of spend on the new Corporate platform, GBP6 million investment
into the Retirement Income strategy and GBP4 million in the
development of auto-enrolment capabilities including the
development of an auto-enrolment hub aimed at reducing the
legislative burden on clients. Other development spend includes
investment in data modelling for the Protection business as well as
other smaller development projects.
UK other income and charges
Other UK IFRS based operating loss of GBP1 million includes the
GBP2 million trading profit generated by Sesame Bankhall Group
("SBG"). 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. In 2011 SBG retained its
position as the UK's largest distributor of mortgages through
intermediaries, with over GBP26.1 billion of mortgage applications
(an increase of GBP1.9 billion on 2010). This represents a 13.8%
share of the entire UK mortgage market (2010: 13.3%).
UK Heritage
Strategic Implementation
The UK Heritage business unit is fundamentally different to the
Go to Market propositions, with greater in-force scale, a large set
of closed products, complex legacy systems and over four million
customers. Consequently the business unit (which was created during
the course of 2011) is focused on different value drivers. The
three key value drivers for the Heritage business are:
-- management of an efficient cost base in line with business
scale;
-- minimisation of capital required for the business; and
-- retention of in-force business.
Good progress is being made in establishing a dedicated
management team focused on the Heritage business, consistent with
the aim to be the UK's leading legacy business manager, with the
knowledge and expertise to maximise the value created from these
books. This team is led by Friends Life's Chief Commercial Officer,
Evelyn Bourke.
The Heritage business has set out its plans to drive value with
the following strategic themes being the starting point.
Outsourcing
The Heritage business, absent further portfolio acquisitions, is
not a self perpetuating business. As a result, management of the
underlying cost base is critical to cash and profitability. The
significant policy administration and IT outsourcing deal with
Diligenta which commenced on 1 March 2012, together with the
existing outsource arrangement with Capita, mean that materially
all of Heritage policy administration is outsourced. The resulting
certainty around administration costs reduces the risk of expense
assumptions in the embedded value coming under pressure, as the
cost base is now more variable and will decrease as the business
runs off.
The outsourcing transaction also contractually secures and
extends the synergies arising from the combination of the Friends
Provident and AXA UK Life Business.
Building an in-house asset manager
Building in-house asset management capability supports the aim
of running to an efficient cost base with the expectation that
assets can be managed more efficiently internally in the longer
term. Friends Life Investments ("FLI") is due to launch in mid
2012, with the in-house capability presenting a significant
opportunity to deliver more value from the existing book through
optimised investment strategies at lower cost.
As announced in November 2011 the Group has GBP61 billion of
externally managed assets which will reach the end of their
contractual terms within the next nine years and are available for
recapture. The potential fee recapture associated with these assets
is in the order of GBP100 million per annum including VAT. In Phase
1, FLI will focus on the recapture of the core non-linked and
shareholder assets of the Group. These assets are principally fixed
income in nature. It is expected that the Group could recapture
fees of the order of GBP10 million per annum (including VAT) from
the GBP12 billion of assets targeted in Phase 1. The Group has
currently served notice on GBP8 billion of these assets with GBP6
billion expected by the middle of the 2012. Phase 2 principally
relates to fixed income assets currently managed in the Group's
with-profit and unit-linked funds.
The Group already has significant expertise in fixed income and
this was augmented with the recruitment of an experienced fixed
interest team in January 2012.
To assist in minimising the additional headcount, the middle and
back office support functions will all be wholly outsourced. This
will provide future scalability and flexibility whilst assuring
cost certainty.
Capital Optimisation Programme
There is a large capital optimisation programme underway to
simplify the legal structure of the business and remove capital
inefficiencies. Friends Life has five UK life companies within the
group and the ultimate result of the programme will be to reduce
this to two, broadly aligned to the Heritage business and Go to
Market business lines. The Group expects to reach this end state
during 2013.
With-profits fund management
A programme to develop and implement a uniform risk management
framework for the six with-profits funds within the Heritage
business is currently underway. The result will be a consistent
plan of management actions across the with-profits funds to
mitigate the risk of volatile returns for shareholders whilst
ensuring fair treatment of customers.
Customer value management
Friends Life aims to actively engage with its customers to
minimise avoidable policy lapses. Initiatives in place include both
pro-active and reactive customer communication, aimed at retaining
valuable customers within their existing product, or within the
Group as a post retirement annuitant.
Fund rationalisation
The Heritage business includes policies invested in a very wide
universe of investment funds, as a legacy of the businesses that
wrote the original policies. There are opportunities to increase
efficiency and reduce risk over the medium term by significantly
rationalising the number of funds and this process will begin
during 2012.
UK Heritage unit-linked assets under management
Unit-linked funds under management are a significant source of
future revenue in the form of annual management charges less
investment management fees and trail commission. In 2011, the Group
has seen net outflows of both unit-linked pensions and investment
business. Unit-linked pensions outflows in the year have been
driven by individual pensions business whilst unit-linked
investment business, primarily single premium bonds, reflects the
maturing of this book with new business having been modest for some
years. The Group no longer actively markets any bond products in
line with the Group's announcement to withdraw from the individual
bond market.
Unit-linked Unit-linked
pensions investments
GBPbn GBPbn
------------------------------------------------- ------------ -------------
Total Group unit-linked assets under management
31 Dec 2010 30.6 17.1
------------------------------------------------- ------------ -------------
Go to Market business unit (12.0) -
------------------------------------------------- ------------ -------------
Heritage unit-linked assets under management
31 Dec 2010 18.6 17.1
------------------------------------------------- ------------ -------------
Acquisition of WLUK 2.4 0.5
Inflows 0.7 0.5
Outflows (2.7) (2.1)
Market movements (0.1) 0.3
------------------------------------------------- ------------ -------------
Heritage unit-linked assets under management
31 Dec 2011 18.9 16.3
------------------------------------------------- ------------ -------------
At 31 December 2010, total unit-linked pensions funds under
management amounted to GBP30.6 billion. Following the creation of
the UK Heritage business unit, GBP12.0 billion of these unit-linked
pensions funds are now managed in the Corporate Benefits business
unit.
New business
Heritage Heritage Heritage Heritage 2011 2011
GBPm (unless otherwise pensions protection investments WP annuities Full Half
stated) year year
------------------------ ---------- ------------ ------------- -------------- ------ ------
New business cash
strain (31) (2) (23) 2 (54) (30)
IRR 2.2% >25.0% 7.6% 18.8% 6.0% 6.8%
------------------------ ---------- ------------ ------------- -------------- ------ ------
APE 108 7 34 8 157 87
------------------------ ---------- ------------ ------------- -------------- ------ ------
The Heritage business unit specifically focuses on those
products no longer actively marketed. It does not actively drive
new business, but the book delivers a significant level of ongoing
incremental business written across all product types. This
business remains important as a contributor to overall Group
overheads.
The Group expects new business to reduce in the medium term. In
particular new business strain relating to investments business is
expected to reduce in future years due to the closure of Bond
products to new business during 2011.
Go to Market: Corporate Benefits
The Go to Market Corporate Benefits business is being built on
the efficient and scalable New Generation Pension ("NGP") platform
and currently administers GBP15.4 billion of assets on behalf of
over 15,000 corporate clients. In addition to the current products
focused around both trust and contract-based pensions solutions,
the launch of the corporate platform in January 2012, with schemes
expected to be taken on in the second quarter, will extend the
reach of the business into the wider workplace savings market
providing complete savings solutions for customers.
The proposition remains highly regarded in the market, retaining
first place in the Greenwich 2012 DC survey of leading employee
benefits consultants ("EBCs"), and also being rated first in the
2011 NMG Corporate Wealth Programme.
Market environment
Friends Life expects the corporate benefits market to grow
strongly and to benefit from the ongoing structural shift from
defined benefit to defined contribution schemes, auto-enrolment and
demographic changes. However, although growth prospects remain
good, the traditional UK industry model is structurally
unattractive, delivering poor shareholder returns in a marketplace
historically characterised by intense price driven competition,
heavy intermediation and commission bias.
The current competitive intensity and "land grab" in advance of
RDR is expected to subside post 2013 as the basis of competition
switches from price and commission to a quality of proposition. As
a result, the number of market competitors is expected to reduce as
the competitive intensity takes its toll, particularly with
providers who lack scale and who are unlikely to benefit from the
uplift in volumes expected from auto-enrolment within the back
book.
Strategy implementation
Friends Life expects to compete in this environment and
significant progress has been made in 2011 with the execution of
the Go to Market strategy. The transition to a lower cost platform
is reflected in improving business performance whilst new business
momentum and pipeline into 2012 are evident.
Returns in the Corporate Benefits business have historically
been low and the Group is focused on improving these through the
following four key levers:
Retain and develop existing schemes
Organic growth of the Corporate book will be driven through a
focus on key clients and distributors, supported by a strong
relationship management function already within the business.
Friends Life expects to enhance this client growth with additional
structural benefits from consolidation of schemes and closure of
defined benefit plans, in addition to the Group's success in the
Enhanced Transfer Value market. Worksite marketing and member
education activities will drive further growth. This is already
evidenced in the strong levels of new business generated in 2011
against a difficult economic backdrop.
Selectively take on new schemes
The selective acquisition of new schemes will be driven by a
limited number of key distribution relationships in Friends Life's
target market. Within this, the focus is on mid to large schemes
where Friends Life expects to be able to achieve the target returns
and most efficiently deploy the new business team. The launch of
the new corporate platform in 2012 will add a further strong
proposition to Corporate Benefits market leading offering.
Reduce costs
Friends Life remains focused on reducing costs across the
organisation. Having already restructured the distribution
function, work continues on building a lean front-office business.
In addition, the migration of assets from the Embassy platform on
to the market leading NGP platform will reduce operational costs
further. The outsourcing deal with Diligenta provides further cost
savings and certainty as the market enters a period of profound
change.
Position Friends Life for auto-enrolment and RDR
As the corporate market continues to develop, the Friends Life
offering is moving in line with it. Friends Life recently announced
a link with Tata Consultancy Services ("TCS") to develop an
auto-enrolment hub to reduce the legislative burden on clients.
This will further drive retention and growth in the existing book
and the acquisition of new clients whilst taking advantage of the
opportunity presented by auto enrolment. The launch of the new
corporate platform broadens the proposition from a retirement
savings business into a wider workplace marketing business.
Additionally, the removal of commission bias within the market with
the advent of RDR in 2013 will enable the Corporate Benefits
business to form relationships across the whole of the distribution
landscape with minimal change to the offering.
The implementation of these elements will enhance new business
IRRs and support the delivery of the 2013 new business financial
targets set out early in 2011.
Financial performance
2013
Corporate Benefits all platforms Full year 2011 2011
GBPm (unless otherwise stated) target Full year Half year
---------------------------------- ----------- ----------- -----------
New business cash strain (75) (51) (35)
IRR 10%+ 8.3% 6.6%
---------------------------------- ----------- ----------- -----------
APE n/a 440 219
---------------------------------- ----------- ----------- -----------
The contribution from Corporate Benefits new business shows a
strong financial performance in the second half reflecting both
improved mix of business and the delivery of synergy savings.
Overall returns have been enhanced by better than expected
results on the acquired AXA UK Life Business platforms, primarily
driven from cost savings. These business lines are now no longer
loss making and will be migrated onto the target platform in 2012,
realising further efficiencies and improvements in performance.
The profitability of business written on the target NGP platform
remains robust, delivering an IRR of 9.4%. Performance in the first
half of the year included DWP rebates which are weighted towards
the first half of the year while the full year result takes account
of the revised persistency assumptions, and the benefit of the
Diligenta outsourcing transaction.
2011 saw strong overall volumes with APE of GBP440 million
principally driven by increments and new entrants to existing
schemes. Market concerns around the merger with the acquired AXA UK
Life Business and a restructure of the sales team in January 2011
impacted adversely on new scheme wins, although performance picked
up strongly throughout the year, with a good pipeline of new
business in place for 2012.
Corporate Benefits target platform 2011 2011
GBPm (unless otherwise stated) Full year Half year
------------------------------------ ----------- -----------
New business cash strain (38) (23)
IRR 9.4% 8.8%
------------------------------------ ----------- -----------
APE 356 176
------------------------------------ ----------- -----------
This platform, which forms the core of the Go to Market business
is expected to achieve the 10% target return during 2012 as the
cost synergies and migration of business onto the more efficient
NGP platform take effect.
Corporate Benefits funds under management
Following the changes made to the Group management structure in
2011, the Corporate Benefits business manages a total of GBP15.4
billion customer assets including GBP2.5 billion of assets in
respect of the acquired WLUK business administered on the Embassy
system. These Embassy assets are due to migrate onto the NGP
platform in 2012.
Total Corporate
benefits
GBPbn
-------------------------------------------------------- ----------------
Group pension assets under management as reported
31 December 2010 17.0
-------------------------------------------------------- ----------------
Transfer to UK Heritage (4.7)
-------------------------------------------------------- ----------------
Corporate Benefits assets under management 31 December
2010 12.3
-------------------------------------------------------- ----------------
Acquired WLUK assets(i) 2.5
Inflows 2.3
Outflows (1.3)
Market movements (0.4)
-------------------------------------------------------- ----------------
Corporate Benefits assets under management 31 December
2011 15.4
-------------------------------------------------------- ----------------
(i) WLUK assets included from 7 November 2011 with movements
included for the final two months of 2011
(ii) Corporate benefits assets under management include GBP0.3
billion of unitised with-profits business managed on the NGP
platform
Despite poor equity market conditions group pensions assets for
the Corporate Benefits business now stand at GBP15.4 billion with
net inflows in the year of GBP1.0 billion. Of this, net outflows of
GBP0.2 billion related to the closed individual pension lines on
the NGP platform, with the core Corporate Benefits business
generating net flows of GBP1.2 billion. This increase in assets,
combined with the reduction in the cost base drives strong
underlying business performance. Although overall assets have
grown, there have also been significant outflows of business as a
result of scheme losses. These have primarily been lost to
commission paying providers and this level of outflow is not
expected to continue after the RDR comes into effect. This recent
experience has been recognised within the MCEV operating result
with an additional provision of GBP82 million set up to allow for
further short term adverse persistency impacts on VIF.
The outlook for 2012 is positive with a strong new business
pipeline and the start of auto-enrolment for Friends Life's larger
customers in the second half of the year. The development of an
auto enrolment proposition will support employers and aid further
growth and client retention. The continued development towards
these market changes is progressing well and the Group remains
confident of achieving the 2013 financial targets.
Go to Market: Protection
The Friends Life Protection business brings together the Friends
Provident individual and group protection propositions with those
acquired from the AXA UK Life Business and BHA. The Group now has
comprehensive market coverage with the proposition operating across
a wide range of distribution channels.
The individual protection business provides life, critical
illness and income protection cover to individuals and businesses.
These products are distributed through IFAs, banks, estate agents
and leading brands such as Tesco, Virgin and the AA.
The group protection business provides group income protection,
group life and group critical illness products, which are
distributed through EBCs and IFAs. In July 2011 the acquired
propositions were integrated and all new business is now written on
the strategic platform.
Market environment
The UK protection market is mature and concentrated, and has
remained stable over the last five years generating in force
premiums in the region of GBP6.6 billion per annum. The
developments made to date have placed Friends Life well into the
top five market participants with the Group having significant
scale in this market. Despite this position of relative strength
the focus on profitability remains paramount with a selective
approach to those channels and products which offer acceptable
levels of return.
The protection market will be affected by a number of
significant regulatory changes over the next two years including
the RDR, gender neutral pricing, life tax changes and Solvency
II.
Protection products are out of scope for the RDR, and the
industry consensus view expects the market to experience a short
term 'bounce' as intermediaries manage their cash flow and
transition their businesses. Friends Life supports this view and,
supported by the breadth of the Group's distribution footprint, is
well placed to benefit.
Changes regarding gender neutral pricing and life tax will have
an effect on the price of protection, with this impact varying by
provider. Friends Life operates a value based proposition focused
on product quality, as opposed to commoditised volume players
focused on price, and expects to be less sensitive to any general
price increase in the market, allowing the business to communicate
clearly and confidently to the Group's target partners.
The impact of these changes has been factored into the
Protection strategy from the start and the Group believes the
protection business and the wider Friends Life protection
proposition are well positioned to benefit from these changes.
Strategy implementation
The acquisition of BHA has transformed the Group's protection
product range and platform options. The implementation of the Go to
Market Protection strategy is progressing well and focuses on the
proposition's following key competitive advantages.
Customer solutions
The combination of the three acquired protection businesses has
enhanced the Group's range of protection products with the business
retaining the best elements of these. Building on this strength the
Go to Market protection business is able to offer a higher value
customer offering, which enables the products to be priced at a
premium. This includes:
-- Market leading income protection and critical illness cover,
with a breadth of illnesses covered;
-- A flexible exemption based approach to underwriting, with
pricing for exemptions and other innovative underwriting features
such as tele-underwriting; and
-- Value added benefits such as Bupa HealthLine and Best
Doctors.
Operational excellence
The strategy announced earlier in 2011 confirmed the selection
of the low cost and efficient BHA platform, with good progress made
to date in consolidating these platforms in the market. This
development enabled the integration of the Group Protection
proposition in July 2011 and culminated in the launch of the
Friends Life Protect+ menu proposition in October 2011 for the
Individual business. This has brought together the best features of
the three historic intermediary propositions. The Protection
business now has market leading individual critical illness and
income protection offerings, both with a Defaqto five star rating,
whilst loss making former Friends Provident and AXA UK Life
Business intermediary products have been closed to new business.
The transition to the Group's target end state will continue into
2012 with the controlled distribution partners due to migrate to
the strategic platforms over the course of the year.
Selective distribution
The business continues to build on the existing distribution
partnerships whilst managing the performance of existing
relationships. The active management of these relationships across
the breadth of different channels de-risks the impact of changes to
distribution as the market responds to the Retail Distribution
Review.
Supporting this, the implementation of a new tripartite
partnership between Friends Life, Sesame Bankhall Group and
Connells, one of the UK's largest estate agencies and property
services groups, has come into force in March 2012. The arrangement
encompasses a new single tie arrangement between Friends Life and
Connells as well as a long-term partnership between Sesame Bankhall
Group and Connells.
Financial expertise
The business has strong technical expertise in pricing,
reinsurance and claims management enabling us to deliver good
profitability and efficient use of capital. Leverage of this
expertise will drive strategic change and deliver improved
profitability in the targeted time scales.
Regulatory requirements, such as gender neutral pricing will
cause changes in pricing for Individual Protection. There is a
strategic focus on analysing business mix and price points in order
to optimise business performance and profitability in the market
during and after the changes. Reinsurance negotiations have already
given increased margin flexibility and work with reinsurers
continues in order to consider other innovations. Claims management
is consolidated with technical and investigative expertise that
works across the Individual and Group business. This expertise
enables efficient claims management as well as innovations such as
early intervention and early rehabilitation for Group Protection,
giving both product differentiation and cost benefits.
Financial performance
Protection all platforms 2013
Full year 2011 2011
GBPm (unless otherwise stated) target Full year Half year
--------------------------------- ----------- ----------- -----------
New business cash strain (30) (77) (43)
IRR 20.0% 5.5% 3.9%
--------------------------------- ----------- ----------- -----------
APE n/a 92 50
--------------------------------- ----------- ----------- -----------
Profitability of new business has improved significantly in the
year with the change in focus, towards the higher value critical
illness and income protection products as well as the migration to
the lower cost strategic platform the key drivers of this
improvement.
The new business strain continues to be reduced with strain in
the second half of GBP34 million down on the GBP43 million recorded
in the period to 30 June. The changes made to allow credit for
negative reserves materially improved new business strain compared
to 2010. New business strain is expected to continue to decrease in
2012 as profitability improves towards target.
Protection IRR has improved to 5.5% (30 June 2011: 3.9%) with
the improvement in profitability expected to continue in 2012 as a
full year impact from the changes made in the second half of 2011
and the migration of the controlled partners to the strategic
platform during 2012 take effect.
Protection volumes in the second half of 2011 amount to GBP42
million APE (30 June 2011: GBP50 million) as the increase in
pricing, launch of the Protect+ proposition and targeted focus on
critical illness and income protection marginally reduced
volumes.
Individual protection target platform
2011 2011
GBPm (unless otherwise stated) Full year Half year
--------------------------------------- ----------- -----------
New business cash strain (8) (2)
IRR 20.0% >25.0%
--------------------------------------- ----------- -----------
APE 22 10
--------------------------------------- ----------- -----------
Profitability of business written on the target platform remains
above the targeted level of 20% in the period, although the
transition to the target platform and changes in product mix may
result in some fluctuation from period to period.
Go to Market: Retirement Income
The Group has identified Retirement Income as a key strategic Go
to Market business unit with this founded on the acquired elements
of the Friends Provident and AXA UK Life Business. The Group
expects the retirement income market to provide an excellent
opportunity for the business to grow in what continues to be a
growing and profitable market segment.
Historically the Group has generated sales from internal
vestings with the vast majority of these reflecting the retirement
of Friends Life pension policyholders. The Group's strategy for the
annuity market was reviewed in 2011 and will target the creation of
a more sophisticated proposition to vesting policyholders alongside
the development of capabilities to support participation in the
open market.
Market environment
The annuity market continues to show underlying growth with 2011
market figures expected to show growth on 2010. Expectations for
future growth in this market remain strongly positive, driven by
the approaching retirement of the baby boomer generation as well as
the continued movement from defined benefit to defined contribution
pension products in the accumulation phase.
The removal of compulsory annuitisation, previously set at age
75, is widely expected to have a limited impact. The need for
individuals to meet minimum income requirements before they can
take advantage of this option is likely to restrict the additional
flexibility to those individuals with large retirement funds.
Growth in the open market option ("OMO") market continues to
benefit from the overall regulatory and industry drive to publicise
the benefits of the OMO, including access to impaired annuities.
The proportion of vesting pensions using the OMO continues to rise
(57% in the third quarter of 2011). The share of vestings
represented by impaired annuities also continues to rise and now
stands at 29% of the annuity market (50% of open market
annuities).
Competition within the annuity market has reduced over recent
years as the number of providers looking to compete at the top of
the open market has reduced and providers have looked to reflect
the impact of expected higher capital requirements under Solvency
II in their pricing.
Strategy implementation
Friends Life is well placed to grow its share of the annuity
market with the existing book generating GBP2 billion of maturing
pensions each year. As previously announced, Friends Life's
immediate objective is to retain a larger proportion of this
vesting population with an aspiration in the longer term to become
a top three provider in this segment. The improvement in retention
rates is expected to be sufficient to achieve the Retirement Income
new business financial targets with the potential entry into the
OMO market being additive to these.
Implementation of the strategy will focus on building the
enhanced range of capabilities including the following five key
initiatives:
Development of sophisticated pricing and underwriting
The recruitment of an experienced Managing Director and Director
of Longevity in the first half of 2011 will further advance the
business's underwriting capabilities, allowing a highly targeted
pricing approach.
Optimising and developing the investment strategy
The announcement in November 2011 of the creation of an internal
asset management business, FLI, which will, in particular, improve
the management of fixed income assets in respect of annuity
business. The development of FLI is progressing well with the
recruitment of an experienced team of fixed income investors in
January 2012. This team will enable the Group to deliver an
investment strategy aimed at optimising returns and improving
capital efficiencies on its annuity portfolio.
Provision of a broader product proposition
Friends Life currently has a relatively narrow range of annuity
products. The development and building of pricing and longevity
capabilities will allow the proposition to extend into more complex
lifestyle annuities.
Improving customer engagement
2012 plans include the launch of an enhanced annuity product and
the introduction of pilot initiatives to enhance customer
engagement, phased throughout the year.
Development of capabilities to support an open market
offering
As a whole these developments will enhance the current vesting
annuity proposition and will enable the Retirement Income business
unit to achieve its financial targets. These developments will also
underpin the development of an option for the business to enter the
OMO market in the future.
Financial performance
2013
Full year 2011 2011
GBPm (unless otherwise stated) target Full year Half year
-------------------------------- ----------- ----------- -----------
New business cash strain n/a 13 10
IRR 15%+ 22.0% >25.0%
-------------------------------- ----------- ----------- -----------
APE n/a 32 16
-------------------------------- ----------- ----------- -----------
Annuity new business IRR of 22.0% remains well above target
level of 15% but has been adversely affected in the second half of
2011.
Retention rates, at around 25% of vesting funds, have been
maintained over the year and, whilst the implementation of the
strategic initiatives is expected to improve this position towards
the targeted 50% level, this improvement is not expected to be seen
until later in 2012.
2011 sales volumes of GBP32 million are in line with the
performance seen in the first half of 2011 where sales of GBP16
million were achieved.
International operating review
The International segment comprises:
-- Friends Provident International Limited ("FPIL"), an Isle of
Man based company manufacturing unit-linked regular contribution
savings and single premium bond products with a focus on high net
worth expatriate individuals via distribution hubs in Hong Kong,
Singapore and Dubai;
-- Overseas Life Assurance Business ("OLAB"), the overseas
branch business of Friends Life Limited, benefiting from EU freedom
of services rules which allow regulated EU insurers to trade
anywhere within its borders;
-- Financial Partners Business AG ("fpb"), a German distributor
of OLAB unit-linked pensions business;
-- a 30% interest in AmLife Insurance Berhad ("AmLife"), a
Malaysian life insurance company, majority owned by AmBank Berhad,
a major Malaysian banking group; and
-- a 30% interest in AmFamily Takaful Berhad ("AmFamily") which
was established in December 2011 as a Malaysian family takaful
business.
2011 2010
GBPm (unless otherwise stated) Full year Full year
---------------------------------------- ----------- -----------
IFRS based operating profit before tax 40 95
New business cash strain (89) (83)
IRR 12.7% 15.4%
APE 252 238
---------------------------------------- ----------- -----------
The International results for 2011 have been impacted by a
number of adverse one-off items and challenging market conditions.
IRR has been adversely affected by changes in business mix,
operating assumption changes and modelling improvements despite
higher sales. In addition, a full review of FPIL actuarial models
and assumptions has taken place during the year as part of a
business-wide controls improvement project. This has resulted in
one-off charges, some of which were reported at half year, to IFRS
operating profit. A strategic review of the business is well
advanced and details of this will be included in a market update in
the second half of 2012.
Market environment
All core markets have delivered a resilient sales performance,
in particular Asia, where demand remains strong, despite
uncertainty in the International environment. The economic
environment in Europe has been challenging and is expected to
remain so in 2012.
The largest market is the North Asian region, predominantly Hong
Kong. This is a relatively mature and competitive market, although
it continues to grow strongly, with an established IFA distribution
segment servicing affluent local nationals, corporate clients and
expatriates. FPIL is one of the market leaders in offshore IFA
distributed business with very strong distribution relationships,
supported by strong service and leading propositions which include
a wide choice of funds available through FPIL's range of
unit-linked products. Quality of distribution relationships,
service, commitment to overseas markets, systems capability and
proposition development are fundamental to success in the region.
The region has strong growth prospects for the future.
The South Asia region is serviced through Singapore. This region
has continued to grow well although GDP growth in 2011 at 5-6% is
lower than 2010. Singapore continues to evolve as a wealth
management hub to rival Hong Kong and offers good growth
potential.
The United Arab Emirates and the wider Middle Eastern region are
relatively under-developed in terms of market penetration, but with
wealthy high net worth individuals in those markets and good growth
prospects.
In Germany, the business participates, through OLAB, in the
unit-linked individual pensions market, a growth segment where the
business has a well regarded product set. Whilst the market
environment is challenging in the short term, as low investment
market confidence drives consumers towards traditional with-profits
business, the unit-linked sector has good medium-term prospects
through demand for private sector savings and investments and the
move from state to private pensions provision. This market and the
product choices offered by local players are still dominated by
with-profits type investment products. However, the trend towards
lower guaranteed rates of return continues to reduce the
attractiveness of traditional product structures, whilst the impact
of Solvency II is expected to limit market participants' ability to
provide traditional with-profits product offerings. OLAB is well
positioned to benefit from these changes as the German unit-linked
pensions market continues to evolve.
AmLife participates in the Malaysian market through both an
agency and the bancassurance channel. This is a fast moving market
which is currently closed to further entrants through the rationing
of available licences. AmFamily was established in 2011 but is not
expected to contribute materially to results in 2012.
Overall the International business is well established to take
advantage of the opportunities that will arise in growth
markets.
Strategy implementation
The Friends Life strategy is to grow the value of the
International business and its component parts by improving its
overall growth prospects and returns through diversification and
focus on higher margin products. As the business grows, maintaining
discipline over margins, the level of cash generation is expected
to improve and the level of adverse one-off modelling impacts in
this year's results is not expected to recur. The business has a
target of achieving GBP20 million sustainable cash generation and
20% IRR by 2013.
The business has continued to invest in building capability,
developing propositions and product structures to improve
profitability and persistency. Investment has commenced in
developing a new administration platform for the business with
increased international capability and developing regional
infrastructure in the core Hong Kong region. The roll-out of the
new FPIL regular premium product is underway which is expected to
improve profitability and IRR. It is planned to launch in Singapore
and the Middle East in the second quarter of 2012, and in Hong Kong
in the final quarter of this year. It will be available in all
regions by the end of 2012.
The business is engaging in a strategic review and will give
further details of its objectives and strategy at the International
investor day in the second half of 2012.
Financial performance
New business profitability
The International IRR has reduced from 15.4% to 12.7%. This was
in part due to changes in the mix of business sold, with a larger
proportion of lower margin longer term Premier business sold in
2011 compared to 2010, proportionally lower single premium OLAB
sales (which are generally higher margin).
The business has a target to deliver IRR of 20% by 2013.
Improvements will be driven by the roll-out of the new FPIL regular
premium Premier product as mentioned above, a focus on other high
IRR product lines, and a review of the cost base as part of the
strategic review.
New business volumes
APE by region (GBPm, actual exchange 2011 2010 % change
rates) Full year Full year
-------------------------------------- ----------- ----------- ---------
North Asia 103 95 9
South Asia 26 19 35
Middle East 46 46 (1)
Europe (excluding UK) 32 35 (11)
UK 18 14 29
Rest of the world 21 19 11
AmLife (Malaysia) 6 10 (38)
APE total (at actual exchange
rates) 252 238 6
-------------------------------------- ----------- ----------- ---------
APE total (at constant exchange
rates) 257 238 8
-------------------------------------- ----------- ----------- ---------
The International business sales volumes continued the growth
seen in the first half of 2011, with sales at actual exchange rates
up 6%, driven by strong North and South Asian markets. UK sales
have also increased from a low base and there has been modest
growth in Germany within a difficult market. Other European sales
are down. Sales at constant exchange rates increased by 8%.
This performance is reflected in the underlying businesses with
FPIL sales at actual exchange rates increasing by 9% whilst OLAB
sales decreased by 3%.
Funds under management
1 January Market
Funds under management 2011 Net inflows/ and other 31 December
(GBPbn) restated(i) Inflows Outflows (outflows) movements 2011
------------------------ ------------- -------- --------- ------------- ----------- ------------
FPIL 5.3 1.1 (0.5) 0.6 (0.3) 5.6
OLAB 0.5 0.1 (0.1) - - 0.5
AmLife 0.1 - - - - 0.1
------------------------ ------------- -------- --------- ------------- ----------- ------------
International
total 5.9 1.2 (0.6) 0.6 (0.3) 6.2
------------------------ ------------- -------- --------- ------------- ----------- ------------
(i) Funds under management at 1 January 2011 have been restated
to include OLAB unitised with-profit funds of GBP0.2 billion
previously accounted for within the UK business segment.
Funds under management as at 31 December 2011 total GBP6.2
billion and have increased by 5% during the year. As a result of
record levels of new business sales, the business has generated
positive net inflows of GBP0.6 billion but these have been offset
by market falls, particularly in the Far East, of GBP0.3 billion,
mainly in the second half of the year.
IFRS based operating profit
2011 2010
Full year Full year
GBPm GBPm
----------------------------------------- ----------- -----------
New business strain (36) (28)
In-force surplus 97 120
Long term investment return 1 1
Principal reserving changes and one-off
items (12) 2
Development costs (7) (6)
Other (3) 6
----------------------------------------- ----------- -----------
IFRS based operating profit before tax 40 95
----------------------------------------- ----------- -----------
IFRS based operating profit has reduced by GBP55 million to
GBP40 million mainly because of an GBP8 million increase in new
business strain, a GBP23 million reduction in in-force surplus and
GBP12 million of adverse principal reserving and one-off items (a
GBP14 million adverse movement from the prior year). These items
are explained below.
New business strain
Reconciliation of new business cash strain to IFRS
2011 2010
Full year Full year
GBPm GBPm
-------------------------- ----------- -----------
New business cash strain (89) (83)
DAC/DFF adjustments 224 210
Other IFRS adjustments (171) (155)
-------------------------- ----------- -----------
IFRS new business strain (36) (28)
-------------------------- ----------- -----------
DAC adjustments relate to the deferral of acquisition costs
including initial commission and enhanced allocations. DFF relates
to the deferral of establishment charges on portfolio bond
business. Both DAC and DFF adjustments have increased in line with
sales volumes.
Other IFRS adjustments include the elimination of financial
reinsurance (at a higher level in 2011), which is not permitted
under IFRS. This line also includes the elimination from IFRS new
business strain of actuarial funding and sterling reserves on
investment business.
The net increase in IFRS new business strain of GBP8 million
mainly results from higher sales and the impact of lower interest
rates, which have increased reserving requirements.
In-force surplus
Reconciliation of in-force cash surplus to IFRS
2011 2010
Full year Full year
GBPm GBPm
------------------------ ----------- -----------
In-force cash surplus 79 106
DAC/DFF adjustments 1 7
Other IFRS adjustments 17 7
------------------------ ----------- -----------
IFRS in-force surplus 97 120
------------------------ ----------- -----------
In-force cash surplus has reduced by GBP27 million due to a
combination of adverse economic variances, experience variances,
and repayment of financial reinsurance, which have more than offset
the growth in the back book.
The DAC/DFF adjustments have decreased because of a higher DAC
run off due to the larger block of post acquisition business
compared to 2010. Other IFRS adjustments include the elimination of
financial reinsurance (at a higher level in 2011).
The net decrease in IFRS surplus of GBP23 million primarily
results from the falls in investment market levels leading to
higher reserving for return of premium guarantees on German
pensions largely resulting from lower interest rates, and the
higher DAC run-off on the larger post-acquisition book.
Principal reserving changes and one-off items
Adverse principal reserving changes and one-off items amount to
GBP12 million primarily comprise improved modelling of return of
premium guarantee on paid up policies in German pensions
business.
Operating expenses
2011 2010
Full year Full year
GBPm GBPm
------------- ----------- -----------
Acquisition 30 28
Maintenance 31 22
Development 7 6
Other - 1
------------- ----------- -----------
Total 68 57
------------- ----------- -----------
International operating expenses, which exclude commission
payments and non-recurring costs, have increased to GBP68 million
from GBP57 million, as follows:
-- acquisition costs reflect the marketing and proposition
support for the growth in sales volumes;
-- maintenance costs have increased as a result of increased
customer service costs to support the larger in-force book, and
strengthening the controls and governance infrastructure to meet
the needs of the growing business; and
-- development costs are higher due to the increased investment
in the business, including the development of the German business
and the commencement of a project to move to a significantly
improved administration platform for the business.
Lombard operating review
Lombard is the leading pan-European life assurance business
specialising in compliant estate planning solutions for high and
ultra-high net worth individuals ("HNWIs"). Based in Luxembourg the
business offers innovative solutions and superior service, through
a well-established distribution network of private banks, high-end
IFAs and independent specialist financial advisers to HNWIs across
Europe and selected markets in Latin America and Asia. Solutions
offered by Lombard are typically based on single premium, whole of
life, unit-linked life assurance structures with all but minimal
levels of life exposure reinsured. The business is well placed to
benefit from increasing demands for fully compliant financial
solutions for HNWIs.
2011 2010
GBPm (unless otherwise stated) Full year Full year
-------------------------------- ----------- -----------
IFRS based operating profit 38 33
New business cash strain (20) (6)
IRR(i) >25.0% >25.0%
APE 237 302
-------------------------------- ----------- -----------
(i) The 2011 Lombard IRR now takes account of the Luxembourg
regulatory regime in which DAC is an allowable asset.
IFRS based operating profit at GBP38 million is 15% above 2010,
benefiting from higher in-force fee income, in line with higher
levels of funds under management ("FUM") during the period whilst
global operating expense level have been controlled.
2011 sales volumes (APE) were GBP237 million, 22% below 2010,
results being affected by significantly adverse macroeconomic
conditions in Europe and the lack of strong external drivers to
generate new business compared to previous years. In the current
context, relative to most competitors, these results are strong.
The last quarter of the year saw higher sales than in the fourth
quarter of 2010 with fourth quarter 2011 APE of GBP100 million up
from GBP89 million in the same period of 2010.
Funds under management have continued to grow significantly in
2011, despite the material fall of equity markets. FUM at 31
December 2011 reached EUR20.9 billion (GBP17.4 billion), 4.5%
(EUR898 million) up on 2010 year end (EUR20.0 billion; GBP17.1
billion).
Market environment
2011, and especially the second half of the year, has been
characterised by significant adverse macroeconomic conditions in
Europe, with falls in most equity markets, a sovereign debt crisis
and uncertainties in respect of potential fiscal constraints in
some European countries.
While Lombard's performance is not directly linked to investment
markets this continued market uncertainty has led to clients
postponing actions to structure their investments and manage
intergenerational transfer of their wealth.
In contrast, 2010 was an exceptional period for the cross-border
life insurance market with this being particularly evident in the
first nine months of 2010, driven by significant external factors
and there were no other similar event drivers in 2011.
Despite the European economic environment Lombard has performed
relatively well in the year compared to its peers. New business
sales performance in the Luxembourg life insurance market is down
by 34% in 2011, significantly below levels achieved by Lombard. In
this context, Lombard's market share increased from 16% in 2010 to
19% in 2011.
The current external environment remains highly uncertain across
Europe, and there is no sign of short-term macroeconomic recovery.
In these exceptional circumstances, we expect 2012 sales to remain
affected. However, notwithstanding the challenging short-term
market conditions, the longer term drivers of the demand for
compliant "Privatbancassurance" solutions remain compelling.
Strategy implementation
There are three core elements of Lombard's strategy and these
have progressed in 2011:
-- Strengthening of sales force: strengthen Lombard sales force
in key markets with a 20% increase in sales consultants in place
during 2011. This action, together with training and development
initiatives and professionalisation of sales management, enhances
Lombard's presence in key geographical markets;
-- Investment in marketing and deepening partner relationships:
expand and enhance marketing and product development capability to
enable further valuable support to existing and potential partners.
Lombard is undertaking due diligence exercises with selected key
partners to continue the tailoring of its service offering to suit
their precise needs and those of their clients (thereby enhancing
Lombard's franchise and protecting margins); and
-- Operating model: consistent with the needs of Lombard's
partners and clients, this initiative is seeking to further improve
the maintenance and servicing of policies whilst streamlining
Lombard's operating model. This will contribute to enhancing
competiveness and improving profitability whilst reducing business
model risk.
It is envisaged that these initiatives will contribute to the
delivery of the financial outcomes (strong growth in profitable new
business and cash generation) with IRR above 20% by 2013 and GBP30
million dividend from 2014.
Financial performance
Performance during the year has been impacted by a number of
factors including:
-- the absence of strong policy drivers to generate new business
which Lombard experienced in the first half of 2010;
-- Northern Europe primarily impacted by the negative economic
environment and lower activity among IFAs especially in Belgium;
and
-- market uncertainties in respect of a number of potential
fiscal changes and significantly adverse macroeconomic conditions
in Europe, resulting in clients delaying decisions and affecting
investor confidence.
Despite these factors, five markets (Spain, Italy, Finland,
France and Asia) showed volumes significantly above 2010 business
levels in 2011. These improvements reflect the benefits from sales
force enhancement and continued deepening of relationships with
partners in these markets. The growth in these regions also
highlights the strength of Lombard's geographic diversification
compared with its competitors.
New business in Italy was supported by strong partnerships
developed at the time of the tax amnesty ("Scudo fiscale"),
combined with the increasing importance of life-assurance for
long-term estate planning.
2011 has been characterised by a stronger diversification
between markets and seasonality of new business is in line with
2010 with H1/H2 at 41%/59% (2010: 45%/55%).
Overall, business in 2011 is below 2010 levels, with sales
volumes of GBP237 million APE, 22% below 2010 although IRR at more
than 25% remains above the target level.
APE performance per region is as follows:
2011 2010
Full Full
year year Change
APE by region (actual exchange rates) GBPm GBPm %
------------------------------------------- ------ ------ -------
UK and Nordic 52 72 (28)
Northern Europe 42 119 (64)
Southern Europe 115 94 22
Rest of world 28 17 66
------------------------------------------- ------ ------ -------
Total including large cases 237 302 (22)
------------------------------------------- ------ ------ -------
Of which: large cases (greater than EUR10
million) 83 90 (8)
------------------------------------------- ------ ------ -------
Total excluding large cases 154 212 (27)
------------------------------------------- ------ ------ -------
APE seasonality since 2007 is as follows:
H1 APE H2 APE FY APE H1/ H2 split
GBPm GBPm GBPm (%)
------ ------- ------- ------- -------------
2007 65 134 199 33/67
2008 70 176 246 28/72
2009 47 226 273 17/83
2010 135 167 302 45/55
2011 97 140 237 41/59
------ ------- ------- ------- -------------
IFRS based operating profit
2011 2010
Full year Full year
GBPm GBPm
---------------------------------------- ----------- -----------
New business strain (33) (28)
In-force surplus 73 66
Investment return and other items (1) (4)
Development costs (1) (1)
---------------------------------------- ----------- -----------
IFRS based operating profit before tax 38 33
---------------------------------------- ----------- -----------
Lombard generated operating profit before tax of GBP38 million,
15% up on 2010 supported by increased income from the in-force
book. The in-force surplus has benefited from significant net fund
inflows in 2010 and 2011, more than offsetting negative investment
return in 2011, and compensating for increased new business
strain.
New business strain and in-force surplus
Reconciliation of new business strain to IFRS
2011 2010
Full year Full year
GBPm GBPm
-------------------------- ----------- -----------
New business cash strain (20) (6)
DAC/DFF adjustments (13) (21)
Other IFRS adjustments - (1)
-------------------------- ----------- -----------
IFRS new business strain (33) (28)
-------------------------- ----------- -----------
New business cash strain is higher than 2010 despite sales
volumes being down on the prior year. This has been driven by a
reduced benefit from year one annual management charges as lower
sales volumes were written in the first nine months of the year. In
addition the lower sales volumes in the year reduced the proportion
of acquisition expense capitalised within cash strain.
On an IFRS basis a lower proportion of acquisition costs can be
deferred. As cost deferral in 2011 new business cash strain is
lower than the prior year the corresponding reversal is also
reduced in arriving at the IFRS new business strain.
Reconciliation of in-force surplus to IFRS
2011 2010
Full year Full year
GBPm GBPm
----------------------- ----------- -----------
In-force cash surplus 41 30
DAC/DFF adjustments 32 36
IFRS in-force surplus 73 66
----------------------- ----------- -----------
In-force cash surplus is up 37% on 2010, benefiting from growth
in the in-force book. Average funds under management have increased
significantly between 2010 and 2011 despite negative market
performance in the second half of 2011. Continued positive net fund
inflows over the last two years have driven this growth with funds
under management growing from GBP14.4 billion at the start of 2010
to GBP17.4 billion at the end of 2011.
Lombard funds under management
GBPbn
-------------------------------- -------
31 December 2010 17.1
-------------------------------- -------
Inflows 2.4
Outflows (1.1)
Market movements (1.0)
-------------------------------- -------
31 December 2011 17.4
-------------------------------- -------
Operating expenses
2011 2010
Full year Full year
GBPm GBPm
------------- ----------- -----------
Acquisition 42 47
Maintenance 25 19
Development 1 1
Other - 2
------------- ----------- -----------
Total 68 69
------------- ----------- -----------
The operating expenses of Lombard, which exclude both commission
payments and non-recurring costs, are set out in the table
above.
Lombard has maintained tight control of expense levels which,
despite an increase in average funds under management of 13%, have
remained in line with 2010.
Acquisition expenses were lower than 2010 as a result of lower
sales volume which have translated into lower sales and partner
incentives costs.
Development costs consist of expenses related to new product and
market development.
Corporate operating review
The Group corporate segment includes the corporate holding and
principal service companies of the Group.
Financing and interest costs
The Group has a number of debt instruments and the operating
cost of financing these for the year ended 31 December 2011 are
presented below.
In April 2011, the Group issued a GBP500 million external lower
tier two ("LT2") debt instrument with a coupon of 8.25% and a
maturity of 2022; this is guaranteed on a subordinated basis by
FLL. From the proceeds of this debt, GBP400 million was used to
repay the internal LT2 debt issued to Resolution Holdings
(Guernsey) Limited ("RHG"). A further repayment of GBP100 million
was made in May 2011, leaving an outstanding value of GBP200
million as at 31 December 2011 year end.
Market value IFRS Finance
GBPm of debt(i) cost(ii)
----------------------------------------------- ------------- -------------
GBP200 million internal LT2 subordinated debt
2020 200 (33)
GBP162 million external LT2 subordinated debt
2021 182 (24)
GBP500 million external LT2 subordinated debt
2022 450 (29)
STICS 2003 142 (12)
STICS 2005 185 (14)
----------------------------------------------- ------------- -------------
Total (112)
----------------------------------------------- ------------- -------------
(i) Market value is based on listed offer price, at 31 December
2011, excluding accrued interest and before tax on market
valuation.
(ii) Finance cost is operating profit impact, before tax.
In so much as these debts have been raised to support the
ongoing growth and development of the life operating businesses the
cash raised has been loaned to the UK operating segment. The
external cost attributable to each segment is shown below.
GBPm
---------------------- ------
Corporate segment (36)
UK operating segment (76)
---------------------- ------
(112)
---------------------- ------
Corporate IFRS based operating result
2011 2010
Full year Full year
GBPm GBPm
--------------------------------------------- ----------- -----------
Investment return and other items excluding
debt 91 47
Expected return on debt (112) (61)
Other (7) (11)
--------------------------------------------- ----------- -----------
IFRS based operating loss before tax (28) (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. The increase in the expected return on debt
reflects the additional GBP500 million external LT2 subordinated
debt raised in April 2011 (followed by GBP500 million partial
repayment of the internal LT2 subordinated debt with RHG as
described above). The increased investment return on other assets
reflects the higher level of assets at holding company level driven
by receipt of dividends from life companies in the year, partly
offset by payment of dividends to RHG.
Other corporate costs of GBP7 million, includes GBP2 million of
costs in relation to the FLG long-term incentive scheme. The
current year charge reflects key changes in the senior management
team during the year and other joiners and leavers to the scheme.
The additional net costs of GBP5 million relate primarily to
corporate overhead costs, being holding company and Group costs
incurred in supporting the non-covered business and future new
covered business.
Completion of AXA UK Life Business acquisition
The acquisition of WLUK was completed with an effective
acquisition date for accounting purposes of 7 November 2011. This
marks the completion of acquisition agreed with AXA UK, the first
phase of which initiated in September 2010 with the acquisition of
the AXA UK Life Business.
Due to the complex structure of the AXA UK Life Business the
assets acquired included certain portfolios of insurance business
(the GOF and TIP portfolios) which were to be retained by AXA UK.
The terms of this transfer were agreed as part of the transaction
and these portfolios were transferred back to AXA UK on 1 November
2011 via Part VII transfer for consideration, including interest,
of GBP285 million.
Similarly the shares of WLUK, initially retained by AXA UK, were
acquired by the Group for consideration of GBP248 million once the
business lines to be retained by AXA UK had been removed.
The net impact of these transactions on the IFRS balance sheet
was GBP2 million.
Net impact of WLUK and GOF/TIP transactions
GBPm
--------------------------------------------------------- ------
Consideration received for GOF/TIP (including interest) 285
Less: GOF/TIP net assets (including interest) (285)
Wrong pocket payments (i) (50)
--------------------------------------------------------- ------
(50)
Consideration paid for WLUK (248)
WLUK net assets 296
--------------------------------------------------------- ------
48
--------------------------------------------------------- ------
Net impact of transactions (ii) (2)
--------------------------------------------------------- ------
(i) Reflects net surplus emerging in the pre-transaction
companies, prior to completion of the respective acquisition and
disposal.
(ii) In IFRS, the GBP50 million wrong pocket payment is included
in administrative expenses and the gain on the WLUK acquisition is
included in other income.
WLUK IFRS acquisition balance sheet as at 7 November 2011 and
gain on acquisition
Assets GBPm Liabilities GBPm
---------------------------------- ------ ---------------------------------------------- ------
Intangible assets 268 Insurance and investment contract liabilities 7,322
Financial assets and cash 6,955 Other liabilities 92
Current assets 487
Total assets 7,710 Total liabilities 7,414
---------------------------------- ------ ---------------------------------------------- ------
Net identifiable assets acquired 296
---------------------------------- ------ ---------------------------------------------- ------
Fair value of net assets acquired - cash paid 248
Gain on the acquisition of WLUK (excluding transaction costs) 48
------------------------------------------------------------------------------------------ ------
In accordance with IFRS the Group ascribed fair values to the
acquired value of in-force business ("AVIF") and other intangible
assets as well as placing a fair value on the assets acquired and
liabilities assumed.
The AVIF and other intangibles of GBP239 million and GBP29
million, respectively, are presented gross of tax.
Cash and capital
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 150%
(formerly 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.
The Group's capital policy has been to maintain sufficient Group
capital resources to cover 160% of Group CRR. This coverage ratio
was put in place at the time of the AXA UK Life Business
acquisition and has now been reduced to 150%, reflecting the good
progress made towards integrating these businesses.
As part of the integration of the AXA UK Life Business, a number
of initiatives have been undertaken including fund mergers and the
optimisation of the corporate structure, to ensure capital
efficiency and to maximise the fungibility of capital resources.
Further activities are being implemented in 2012 in order to create
additional efficiencies in the Group's capital structure.
In 2010, the Group undertook the five yearly test of the FLC
re-attributed inherited estate ("RIE") with this resulting in a
transfer of GBP1,010 million to the shareholders' fund. As at 31
December 2011, a further GBP484 million has been transferred to the
shareholders' fund, in line with the results of the end 2010 test
and the surplus arising in the non profit fund over the period.
These assets will remain in the shareholders' fund to provide
capital support to the with-profits funds to the extent required by
the Scheme, and to support with-profits and non profit funds to the
extent required by FLC's capital policy.
Solvency II
The implementation of the EU Solvency II Directive, the proposed
new EU insurance regulatory requirements, continues to be a key
focus of attention for the Group. The aim of the new regulation is
to place the management of risk at the heart of running a
successful and sustainable insurance company. The Group has been
closely following the emerging regulations and monitoring their
potential impact on the Group balance sheet. There is still a lack
of clarity over certain key issues, particularly in respect of the
treatment of matching premium and contract boundaries, which could
have a material impact on future capital requirements. The Group
continues to be closely involved with the industry in lobbying on
key areas where uncertainty remains.
Friends Life has established a Solvency II programme to manage
the implementation of the new regulatory requirements. It is
progressing well and the Group is well placed for the
implementation of Solvency II. A key deliverable of the programme
is an integrated financial reporting platform across acquired
businesses.
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 The Group's capital policy is to maintain sufficient
Group capital resources to cover 150% of Group CRR (excluding
WPICC). This policy was changed at the end of 2011 from 160% of
Group CRR (excluding WPICC) reflecting progress on the integration
of the UK Life businesses.
The balance sheet remained strong at the Group level, with an
IGCA surplus of GBP2.1 billion at 31 December 2011, with Group
capital resources being 219% of Group CRR (excluding WPICC). Group
capital resources were GBP1.2 billion in excess of the amount
required to satisfy the Group capital policy of holding 150% of
Group CRR (excluding WPICC).
The IGCA surplus would reduce by around GBP0.2 billion for a 40%
fall in equity markets from 31 December 2011 levels and would
reduce by slightly less if interest rates were to fall by 200bps
across the yield curve. The IGCA surplus would reduce by
approximately GBP0.5 billion if credit spreads were to rise by
200bps.
The movement in IGCA surplus over the period largely reflects
the surplus emerging in the period of GBP403 million. This includes
a GBP103 million benefit from the 2011 capital optimisation project
("COP") and GBP157 million benefit (on an IGCA basis) of negative
reserves released for FLC and BHA business and is after adverse
economic variances of GBP316 million.
The acquisition of BHA and WLUK less the disposal of the GOF and
TIP portfolios has decreased the IGCA surplus by GBP154 million.
The acquisition of BHA reduced IGCA surplus by GBP132 million
(GBP169 million cost of investment offset by a GBP37 million IGCA
surplus at the respective acquisition date). The acquisition of
WLUK reduced IGCA surplus by GBP237 million (GBP248 million cost of
investment offset by a GBP11 million IGCA surplus at the respective
acquisition date) which is offset by GBP215 million increase from
the disposal of the GOF and TIP portfolios.
The surplus is also impacted by financing and dividend costs,
which include the GBP350 million of dividends paid to Resolution
holding companies in the year. GBP500 million of the LT2
subordinated debt issued to RHG has been repaid during the year,
following an external debt raising by FLG of GBP500 LT2
subordinated debt, with GBP4 million of associated costs.
Finance costs and other movements include GBP58 million of
interest costs on the external LT2 subordinated debt and GBP33
million of interest due on the internal LT2 debt with RHG,
partially offset by the reduction in restricted intangible assets
of GBP16 million and GBP2 million of other movements.
Management initiatives in the year to optimise the IGCA surplus
position delivered a benefit of GBP157 million. This relates to the
recognition of negative reserves in the acquired BHA and AXA UK
Life businesses. The Part VII transfers implemented in 2011 moved
business from some of the smaller life companies into FLL which has
reduced aggregate Pillar 1 capital requirements by GBP113 million,
thereby increasing excess capital over capital policies by around
GBP181 million. Further Part VII transfers are planned for
2012.
Movement in IGCA surplus GBPm
----------------------------------- ------
1 January 2011 2,317
----------------------------------- ------
Surplus emerging 143
COP 2011 103
PS06/14 157
BHA acquisition (132)
WLUK acquisition/GOF TIP disposal (22)
Dividend to RSL (350)
External LT2 subordinated debt 496
Repay RSL debt (500)
Finance costs and other movements (73)
----------------------------------- ------
31 December 2011 2,139
----------------------------------- ------
At 31 December 2011 the capital held to meet Group capital
policies was GBP902 million (1 January 2011: GBP1,085 million) and
the excess over the capital policies was GBP1,237 million (1
January 2011: GBP1,232 million). The change in Group capital policy
from 160% of Group CRR to 150% of Group CRR increased capital in
excess of capital policies by GBP172 million.
The IGCA surplus is a prudent measure and excludes surplus
capital not immediately available to shareholders, such as surplus
capital held in long-term funds to the extent that this is not
needed to cover the capital resource requirements of the long-term
fund concerned. Following actions taken in 2011 to transfer surplus
long-term fund assets to shareholders, there are no remaining
restriction to the IGCA surplus in respect of surpluses in the
non-profit funds (2010: GBP39 million restriction). The IGCA
surplus excludes GBP385 million of UK with-profits funds surpluses.
As the calculation is prepared to include the subsidiaries of the
highest EEA parent company, the net assets of the Resolution
holding companies are excluded.
Management of the with-profits funds
Friends Life Limited
Asset allocation within the with-profits fund is actively
managed. For the first half of 2011 the strategic proportion of
equities and property backing asset shares (equity backing ratio or
"EBR") for the whole fund was set at 50%. Management actions
allowed for within the risk management framework were revised and
with effect from 30 June 2011 the strategic EBR was increased to
55% for the post-demutualisation business and was maintained at 50%
for the pre-demutualisation business.
At 31 December 2011, the EBR was 48% for pre-demutualisation
business (31 December 2010: 49%) and 53% for post-demutualisation
business (31 December 2010: 49%).
There are no Market Value Reductions ("MVRs") currently in place
for the fund.
The risk appetite and risk management framework of the
with-profits fund are in line with FLL's commitment to fair
treatment of all its customers and the published Principles and
Practices of Financial Management underlying the Fund.
Non-profit business in the FLL with-profits fund, the majority
of which is annuities, is backed by a mix of gilts and corporate
bonds.
Friends Life Company Limited
Asset allocation within the with-profits fund is actively
managed. During 2011 the Group was able to continue to reduce MVRs
on single premium bonds, and in early 2012 these were removed.
At 31 December 2011 the EBR was close to 66% (31 December 2010:
68%).
There have been no recent changes to investment policy. The fund
maintains a stable asset allocation with a target EBR of 65% for
assets other than those backing the realistic cost of guarantees,
options and non-profit business. Guarantees and options remain
backed by a combination of bonds and hedging derivatives (equity
put options, interest rate swaps and swaptions). Cash is allocated
to back current liabilities.
Non-profit business in the with-profits fund is backed by a mix
of gilts and corporate bonds (some with credit default swap
protection to hedge the default risk).
Friends Life Assurance Society Limited
Asset allocation within the with-profits fund is actively
managed. During 2011 the Group was able to continue to reduce MVRs
on single premium bonds, and in early 2012 these were removed.
At 31 December 2011 the EBR was close to 52% (31 December 2010:
54%).
The investment policy of FLAS was reviewed in 2010. The strategy
now is to target a stable EBR of 50% for assets backing policy
asset shares. The allocation for assets backing guarantees and
options comprises gilts and hedging derivatives (equity put
options, sold equity futures, interest rate swaps and swaptions).
The target allocation for assets backing the realistic with-profits
estate is gilts only, although currently some property and
corporate bond holdings still remain.
Non-profit business in the with-profits fund, the majority of
which is annuities, is backed by a mix of gilts and corporate bonds
(some with credit default swap protection to hedge the default
risk).
Winterthur Life UK Limited
Asset allocation within the with-profits fund is actively
managed. MVRs may apply to certain products on a case by case
basis.
At 31 December 2011 the EBR was close to 50%.
The investment policy of WLUK is to target a stable EBR of 50%
for assets backing policy asset shares. The allocation for assets
backing guarantees and options comprises gilts, corporate bonds and
hedging derivatives (equity put and call options, sold equity
futures, interest rate swaps and swaptions). The target allocation
for assets backing the realistic with-profits estate is gilts
only.
Non-profit business in the with-profits fund, the majority of
which is annuities, is backed by a mix of gilts and corporate
bonds.
Certain of the with-profit deferred annuity business in the Fund
is backed by gilts and corporate bonds only.
Asset quality and exposure
The Group's financial assets as at 31 December 2011, excluding
cash, are summarised as follows:
31 December 31 December
2011 2010
Unit-linked With-profit Non-profit Shareholder Total Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
-------------------------- ------------ ------------ ----------- ------------ ------------ ------------
Shares, unit trusts
and OEICs 53.4 7.1 0.1 - 60.6 60.4
Government securities 8.5 8.5 2.2 0.3 19.5 16.1
Corporate bonds and
asset backed securities 5.7 9.0 7.2 0.3 22.2 21.5
Derivatives - 0.8 0.1 - 0.9 0.4
Deposits 0.4 - - - 0.4 0.4
Loans - - - - - 0.7
-------------------------- ------------ ------------ ----------- ------------ ------------ ------------
Total 31 December
2011 68.0 25.4 9.6 0.6 103.6 -
-------------------------- ------------ ------------ ----------- ------------ ------------ ------------
Total 31 December
2010 65.5 24.3 8.3 1.4 - 99.5
-------------------------- ------------ ------------ ----------- ------------ ------------ ------------
The vast majority of the Group's exposure to sovereign debt
holdings is to UK gilts. The Group has GBP6 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 GBP370 million (31 December 2010:
GBP444 million). The Group's shareholder exposure to Greek
corporate securities is less than GBP1 million. 64% 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, 44% 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.
Total Spain Portugal Italy Ireland Greece
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------ ------ --------- ------ -------- -------
Sovereign debt 6 - - 6 - -
Corporate exposure
- Domestic banks 65 29 - 33 3 -
- Domestic non-bank financials 26 - - 13 13 -
- Non-domestic banks 40 40 - - - -
- Domestic non-financials 205 64 10 108 23 -
- Non-domestic non-financials 34 34 - - - -
Total 31 December 2011 376 167 10 160 39 -
-------------------------------- ------ ------ --------- ------ -------- -------
Total 31 December 2010(i) 451 159 14 228 50 -
-------------------------------- ------ ------ --------- ------ -------- -------
(i) Restated to include two non-domestic financials totalling GBP39 million.
The Group's shareholder exposure to bank debt securities across
the various geographic regions is shown below.
GBPm Shareholder
Seniority Rating UK Euro USA France PIIGS(i) ROW Total
-------------- --------------- ------ ----- ---- ------- --------- ---- ------------
Senior AAA 28 561 18 17 - 6 630
AA 19 57 - - - 29 105
A 129 5 268 7 21 22 452
BBB - - 14 - 3 - 17
Below BBB/NR - 3 - - - - 3
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Senior Total 176 626 300 24 24 57 1,207
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Secured AAA 270 - - 35 24 - 329
AA 3 - - - - - 3
A 5 - 10 - - - 15
BBB 1 - 8 - - - 9
Below BBB/NR - - - - - 2 2
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Secured Total 279 - 18 35 24 2 358
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Subordinated AA - 9 - - - - 9
A 194 30 33 16 36 84 393
BBB 191 1 29 23 21 43 308
Below BBB/NR 69 - - - - - 69
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Subordinated
Total 454 40 62 39 57 127 779
------------------------------ ------ ----- ---- ------- --------- ---- ------------
Cash Cash Total 669 267 324 235 39 207 1,741
-------------- --------------- ------ ----- ---- ------- --------- ---- ------------
Grand Total 1,578 933 704 333 144 393 4,085
------------------------------- ------ ----- ---- ------- --------- ---- ------------
(i) Portugal, Ireland, Italy, Greece, Spain.
Shareholder exposure to corporate bonds and asset backed
securities is analysed by fund and credit rating as follows:
Unit-linked With-profit Non-profit Shareholder 31-Dec-11 31-Dec-10
GBPbn funds funds funds funds Total Total
Corporate bonds and
asset-backed securities 5.7 9.0 7.2 0.3 22.2 21.5
less: policyholder
exposure 5.7 7.9 - - 13.6 13.3
-------------------------- ------------ ------------ ----------- ------------ ---------- ----------
Shareholder exposure - 1.1 7.2 0.3 8.6 8.2
-------------------------- ------------ ------------ ----------- ------------ ---------- ----------
AAA - 0.2 0.8 0.1 1.1 1.3
AA - 0.2 2.8 - 3.0 2.8
A - 0.4 2.5 0.1 3.0 2.7
BBB - 0.2 1.0 0.1 1.3 1.0
Sub-BBB or rating not
available - 0.1 0.1 - 0.2 0.4
-------------------------- ------------ ------------ ----------- ------------ ---------- ----------
% Investment Grade 96.9% 95.1%
-------------------------- ------------ ------------ ----------- ------------ ---------- ----------
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.
There has been one default in the period, Titan ABS, with a
market value loss of GBP1.7 million in 2011. No other defaults have
been experienced in the year. The Group holds default reserves to
cover the risk of defaults and credit rating downgrades on
corporate bonds that back all annuity business within Friends Life
group. The reserves reflect assumed defaults over the outstanding
terms to maturity of the bonds. The shareholder share of default
reserves at 31 December 2011 was GBP0.6 billion (31 December 2010:
GBP0.4 billion). This represents a haircut of 35% of the overall
corporate bond spreads over gilts of equivalent term (31 December
2010: 46%).
Liquidity
The liquidity of the Group remains strong.
The Group 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 the Group for a further two
years.
Financial strength ratings
A number of the Group's life businesses are attributed financial
strength ratings.
Standard
Fitch Moody's & Poor's
--------------------------------------- ------------ ------------ -----------
Friends Life Limited A+ (strong) A3 (strong) A-(strong)
Friends Life Company Limited A+ (strong) A2 (strong) A-(strong)
Friends Life Assurance Society Limited 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.
Consolidated income statement
For the year ended 31 December 2011
2011 2010
Notes GBPm GBPm
---------------------------------------------------------- ------ -------- -------
Revenue
Gross earned premiums 3 2,128 1,288
Premiums ceded to reinsurers 3 (599) (241)
----------------------------------------------------------- ------ -------- -------
Net earned premiums 3 1,529 1,047
Fee and commission income and income from service
activities 3 771 751
Investment return 1,803 8,424
Total revenue 4,103 10,222
----------------------------------------------------------- ------ -------- -------
Other income 3 134 891
----------------------------------------------------------- ------ -------- -------
Claims, benefits and expenses
Gross claims and benefits paid 3,859 2,004
Amounts receivable from reinsurers (643) (322)
Net claims and benefits paid 3,216 1,682
----------------------------------------------------------- ------ -------- -------
Change in insurance contracts liabilities (216) 891
Change in investment contracts liabilities (495) 5,863
Transfer (from)/to unallocated surplus (484) 4
Movement in net asset value attributable to unit-holders (48) 139
Movement in policyholder liabilities (1,243) 6,897
----------------------------------------------------------- ------ -------- -------
Acquisition expenses 591 392
Administrative and other expenses 1,741 1,028
Finance costs 158 129
Total claims, benefits and expenses 4,463 10,128
----------------------------------------------------------- ------ -------- -------
Share of loss of associates and joint venture (1) -
----------------------------------------------------------- ------ -------- -------
(Loss)/profit before tax from continuing operations (227) 985
Policyholder tax 5 (220) (244)
(Loss)/profit before shareholder tax from continuing
operations (447) 741
----------------------------------------------------------- ------ -------- -------
Total tax credit/(charge) 5 237 (137)
Policyholder tax 5 220 244
Shareholder tax 5 457 107
----------------------------------------------------------- ------ -------- -------
Profit for the year 10 848
----------------------------------------------------------- ------ -------- -------
Attributable to:
Equity holders of the Company(i) (21) 794
Step-up Tier one Insurance Capital Securities
("STICS") holders(ii) 31 1
----------------------------------------------------------- ------ -------- -------
10 795
Non-controlling interests
Equity attributable to STICS holders(ii) - 30
Other - 23
Profit for the year 10 848
----------------------------------------------------------- ------ -------- -------
(i) All profit attributable to equity holders of the Company 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 Life FPG Limited ("FPG") (formerly Friends
Provident Group Limited) to the Company.
The consolidated income statement includes the results of
Friends Life BHA Limited ("BHA") from the date of acquisition on 31
January 2011 and the results of Winterthur Life UK Limited ("WLUK")
from the date of acquisition of 7 November 2011. The consolidated
income statement for the year ended 31 December 2010 includes the
results of the acquired AXA UK Life Business from 3 September
2010.
Consolidated statement of comprehensive income
For the year ended 31 December 2011
Equity holders
of the Company
--------------------
Ordinary STICS
share holders
holders (iii) Total
GBPm GBPm GBPm
--- ---------------------------------- ---------
(Loss)/profit for the period (21) 31 10
--------------------------------------- --------- --------- --------- --------- ------
Actuarial loss on defined benefit
schemes (34) - (34)
Foreign exchange adjustments(i) (10) - (10)
Shadow accounting(ii) (1) - (1)
Aggregate tax effect of above
items 2 - 2
--------------------------------------- ---------
Other comprehensive loss, net
of tax (43) - (43)
--------------------------------------- --------- --------- --------- --------- ------
Total comprehensive (loss)/income,
net of tax (64) 31 (33)
--------------------------------------- --------- --------- --------- --------- ------
For the year ended 31 December 2010
---------
Equity holders Non-controlling
of the Company interests
-------------------- --------------------
Ordinary STICS STICS
share holders holders
holders (iii) (iii) Other Total
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 includes GBP(3) million (2010: GBPnil) in
respect of the revaluation of owner occupied properties and GBP2
million (2010: GBP(3) million) in respect of foreign exchange
adjustments on translation of overseas subsidiaries held by the
with-profits fund of Friends Life Limited ("FLL") (formerly Friends
Provident Life and Pensions Limited).
(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.
Consolidated statement of IFRS based operating profit
For the year ended 31 December 2011
2011 2010
Notes GBPm GBPm
-------------------------------------------------------- ------ ------ ------
(Loss)/profit before tax from continuing operations (227) 985
Policyholder tax (220) (244)
Returns on Group-controlled funds attributable to
third parties - (23)
--------------------------------------------------------- ------ ------ ------
(Loss)/profit before tax excluding returns generated
within policyholder funds (447) 718
Non-recurring items 3(b) 180 (801)
Amortisation and impairment of acquired present value
of in-force business 7 675 364
Amortisation of intangible assets 7 84 64
Interest payable on Step-up Tier one Insurance Capital
Securities ("STICS") (31) (31)
Short-term fluctuations in investment return 261 (24)
--------------------------------------------------------- ------ ------ ------
IFRS based operating profit before tax 722 290
Tax on operating profit 38 16
--------------------------------------------------------- ------ ------ ------
IFRS based operating profit after tax attributable
to ordinary shareholders from continuing operations 760 306
--------------------------------------------------------- ------ ------ ------
IFRS based operating profit excludes: (a) investment variances
from expected investment return for non-linked business which is
calculated on a long-term rate of return; (b) returns attributable
to non-controlling interests in policyholder funds; (c) significant
non-recurring items; and (d) amortisation and impairment of present
value of acquired in-force business and other intangible assets and
is stated after policyholder tax and the deduction of interest
payable on STICS. Given the long-term nature of the Group's
operations, IFRS based operating profit is considered to be a
better measure of the performance of the Group and this measure of
profit is used internally to monitor the Group's IFRS results.
Consolidated statement of financial position
As at 31 December 2011
2011 2010
Notes GBPm GBPm
------------------------------------------------------ ------ -------- --------
Assets
Pension scheme surplus 20 22
Intangible assets 7 4,847 5,140
Property and equipment 58 46
Investment properties 3,015 3,189
Investments in associates and joint venture 37 32
Deferred tax assets - 4
Financial assets 8 103,643 99,465
Deferred acquisition costs 643 358
Reinsurance assets 3,213 2,637
Current tax assets 6 22
Insurance and other receivables 1,140 976
Cash and cash equivalents 8,690 9,057
Assets of operations classified as held for sale - 1,206
Total assets 125,312 122,154
------------------------------------------------------ ------ -------- --------
Liabilities
Insurance contracts 37,264 35,081
Unallocated surplus 652 1,098
Financial liabilities
Investment contracts 75,191 72,411
Loans and borrowings 9 972 1,012
Amounts due to reinsurers 1,800 1,666
Net asset value attributable to unit-holders 1,173 1,173
Provisions 228 221
Deferred tax liabilities 872 1,115
Current tax liabilities 20 11
Insurance payables, other payables and deferred
income 992 893
Liabilities of operations classified as held for
sale - 925
Total liabilities 119,164 115,606
------------------------------------------------------ ------ -------- --------
Equity attributable to equity holders of the Company
Share capital 515 515
Other reserves 5,310 5,711
------------------------------------------------------ ------ -------- --------
5,825 6,226
STICS holders 318 318
------------------------------------------------------ ------ -------- --------
6,143 6,544
Attributable to non-controlling interests 5 4
--------
Total equity 6,148 6,548
------------------------------------------------------ ------ -------- --------
Total equity and liabilities 125,312 122,154
------------------------------------------------------ ------ -------- --------
The financial statements were approved by the Board of directors
on 26 March 2012.
Consolidated statement of changes in equity
For the year ended 31 December Attributable to equity holders
2011 of the Company
---------------------------------------- ----------------
STICS
Share Other holders Non-controlling
capital reserves Total (i) interest Total
-------------------------------- --------- ---------- ------ --------- ---------------- ------
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- --------- ---------- ------ --------- ---------------- ------
At 1 January 2011 515 5,711 6,226 318 4 6,548
-------------------------------- --------- ---------- ------ --------- ---------------- ------
(Loss)/profit for
the year - (21) (21) 31 - 10
Other comprehensive
loss - (43) (43) - - (43)
-------------------------------- --------- ---------- ------ --------- ---------------- ------
Total comprehensive
(loss)/income - (64) (64) 31 - (33)
-------------------------------- --------- ---------- ------ --------- ---------------- ------
Dividends on equity
shares - (350) (350) - - (350)
Interest paid on
STICS - - - (31) - (31)
-------------------------------- --------- ---------- ------ --------- ---------------- ------
Appropriations
of profit - (350) (350) (31) - (381)
Tax relief on STICS
interest - 7 7 - - 7
Issued during the
year - - - - 1 1
Share-based payments - 6 6 - - 6
-------------------------------- --------- ---------- ------ --------- ---------------- ------
At 31 December
2011 515 5,310 5,825 318 5 6,148
-------------------------------- --------- ---------- ------ --------- ---------------- ------
For the year ended 31 December Attributable to equity holders Non-controlling
2010 of the Company interest
---------------------------------------- ------------------
Share Other Total STICS STICS Other Total
capital reserves holders holders
(i) (i)
-------------------------------- --------- ---------- ------ --------- ---------- ------ ------
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
to the Company - - - 318 (318) - -
-------------------------------- --------- ---------- ------ --------- ---------- ------ ------
At 31 December 2010 515 5,711 6,226 318 - 4 6,548
-------------------------------- --------- ---------- ------ --------- ---------- ------ ------
(i) 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.
Consolidated statement of cash flows
For the year ended 31 December 2011
2011 2010
GBPm GBPm
--------------------------------------------------------- --------- ---------
Operating activities
Profit for the period 10 848
Adjusted for:
Other income (gain on acquisition) (116) (883)
Net realised and unrealised losses/(gains) on assets
at fair value 1,595 (6,379)
Finance costs 158 129
Amortisation and impairment of intangible assets 759 428
Depreciation of property and equipment 4 4
Movement in deferred acquisition costs (285) (312)
Total tax (credit)/charge (237) 137
Purchase of shares and other variable yield securities (22,585) (21,985)
Sale of shares and other variable yield securities 22,705 19,029
Purchase of loans, debt securities and other fixed
income securities (33,973) (33,869)
Sale of loans, debt securities and other fixed income
securities 34,380 34,880
Purchase of investment properties (43) (67)
Sale of investment properties 305 81
(Decrease)/increase in insurance contract liabilities (101) 925
(Decrease)/increase in investment contract liabilities (2,057) 7,372
(Decrease)/increase in unallocated surplus (484) 2
Decrease in provisions (1) (5)
Net movement in receivables and payables (59) 668
Pre-tax cash (outflow)/inflow from operating activities (25) 1,003
Tax received (25) 15
--------------------------------------------------------- --------- ---------
Net cash (outflow)/inflow from operating activities (50) 1,018
Investing activities
Acquisition of subsidiaries, net of cash acquired 12 969
Disposal of held for sale assets 285 -
Investment in associate (6) -
Additions to internally generated intangible assets (4) (4)
Purchase of property and equipment (net) (16) (1)
--------------------------------------------------------- --------- ---------
Net cash inflow from investing activities 271 964
Financing activities
Proceeds from issue of ordinary share capital - 1,665
Proceeds from issue of long-term debt 496 729
Repayment of long-term debt (500) (123)
Finance costs (131) (126)
STICS interest (31) (31)
Net movement in other borrowings, net of expenses (36) 15
Dividends paid to equity holders of the parent (350) (65)
Proceeds from increase in non-controlling interests 1 -
Dividends paid to non-controlling interests - (7)
--------------------------------------------------------- --------- ---------
Net cash (outflow)/inflow from financing activities (551) 2,057
(Decrease)/increase in cash and cash equivalents (330) 4,039
--------------------------------------------------------- --------- ---------
Balance at beginning of year 9,057 5,073
Exchange adjustments on the translation of foreign
operations (37) (55)
Balance at end of year 8,690 9,057
--------------------------------------------------------- --------- ---------
Notes to the consolidated accounts
1. Accounting policies
1.1 Basis of preparation
On 1 July 2011 the Company, formerly known as Friends Provident
Holdings (UK) plc changed its name to Friends Life Group plc
("FLG") ("the Company" or "Friends Life"). The financial statements
of the Company as at and for the year ended 31 December 2011
comprise the consolidated financial statements of the Company and
its subsidiaries (together referred to as "the Group") and the
Group's interests in associates and jointly controlled
entities.
The consolidated financial statements as at and for the year
ended 31 December 2011 have been prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union ("IFRS"). The results in this announcement have been
prepared in accordance with IFRS applicable at 31 December 2011 and
have been taken from the Group's Annual Report and Accounts which
will be available on the Company's website shortly.
The annual report and accounts complies with the Disclosure and
Transparency Rules ("DTR") of the United Kingdom's Financial
Services Authority in respect of the requirement to produce an
annual report. The announcement is the responsibility of, and has
been approved by, the directors.
This announcement does not constitute the Company's statutory
financial statements for 2011 or 2010 but is derived from those
financial statements. Statutory accounts for 2010 have been filed
with the Registrar of Companies. The auditor has reported on the
2011 and 2010 financial statements and the reports were unqualified
and did not contain a statement under section 498(2) or 498(3) of
the Companies Act 2006. The auditor for 2011 is Ernst & Young
LLP (also acted as auditor for 2010).
The principal activity of the Company is that of a holding
company for acquisitions in the life assurance and pensions
sector.
On 31 January 2011 the Group, through its subsidiary Friends
Life Limited ("FLL") (formerly Friends Provident Life and Pensions
Limited), acquired all of the share capital of Bupa Health
Assurance Limited (subsequently renamed Friends Life BHA Limited,
("BHA")). The consolidated income statement therefore includes the
results of BHA from that date.
On 7 November 2011, the Group acquired control of Winterthur
Life UK Limited ("WLUK"). This is the date at which the last
substantive condition to legal completion was satisfied. The
consolidated income statement therefore includes the results of
WLUK from that date. The acquisition of WLUK was agreed with AXA UK
in 2010 at the same time as the acquisition of Friends ASLH Limited
("FASLH") was negotiated. However, the share capital of WLUK was
not legally acquired by the Group until 2011 as the purchase was
contingent upon a transfer under Part VII of the Financial Services
and Markets Act 2000 of AXA's retained business out of WLUK and FSA
approval for change of control being received. These substantive
preconditions for the acquisition were fulfilled in November 2011
enabling the Group to acquire WLUK's share capital.
Under the terms of the 2010 FASLH acquisition certain portfolios
of business legally owned by the Group as a result of the
acquisition were transferred back to AXA UK under the provisions of
Part VII of the Financial Services and Markets Act 2000. These
portfolios were therefore classified as held for sale for the year
ended 31 December 2010. In October 2011 the Part VII transfers were
successfully completed.
The 2010 comparatives include the results of the acquired AXA UK
Life Business from 3 September 2010.
During November 2011 all of the business of Friends Provident
Life Assurance Limited ("FPLA"), BHA and certain portfolios of the
business of Friends Life and Pensions Limited ("FLPL") (formerly
Friends Provident Pensions Limited) were transferred into FLL,
their immediate parent company, under the provisions of Part VII of
the Financial Services and Markets Act 2000. The purpose of this
internal group reorganisation was to realise capital and operating
synergies for the Group.
Prior to the Part VII transfers, the with-profit liabilities of
FPLA which were less than GBP500 million were reported in the
consolidated financial statements of the Group on a non-realistic
basis. Subsequent to the transfer these with-profit liabilities
have become liabilities of FLL and are required to be reported on a
realistic basis. This change does not impact equity attributable to
equity holders of the parent in the consolidated financial
statements of the Group but does impact the split of the
with-profit liabilities between insurance contracts, investment
contracts and unallocated surplus. Aside from this change the Part
VII transfers have not generated any other significant impacts on
the consolidated 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).
These financial statements have been prepared on a going concern
basis. The directors have undertaken a going concern assessment in
accordance with "Going Concern and Liquidity Risk: Guidance for UK
Directors of UK Companies 2009", published by the Financial
Reporting Council in October 2009. As result of this assessment,
the directors are satisfied that the Group and the Company have
adequate resources to continue to operate as a going concern for
the foreseeable future and have prepared the financial statements
on that basis.
The Group has applied all applicable IFRS standards and
interpretations adopted by the EU and effective for accounting
periods beginning on or after 1 January 2011. Those new standards,
changes to existing standards and interpretations adopted by the
Group during the year are:
IFRIC 19: Extinguishing Financial Liabilities with Equity
Instruments. This interpretation does not have a material impact on
the Group.
IAS 24 (revised): Related Party Disclosures. The revised
standard clarifies and simplifies the definition of a related party
and does not have a material impact on the Group; and
Annual improvements to IFRSs (May 2010). In accordance with the
improvement to IFRS 7: Financial Instruments: Disclosures, the
Group has disclosed details of collateral held by the Group to
mitigate credit risk.
The International Accounting Standards Board (IASB) has issued
the following change to IFRS 7 which is effective for accounting
periods beginning on or after 1 July 2011 and has been early
adopted by the Group:
IFRS 7: Financial Instruments: Disclosures. The amendment
enhances the disclosure requirements in relation to transferred
financial assets to require information as to any residual risks
that remain from an entity's continuing involvement with such
assets. Adoption of this amendment has not had a material impact on
the Group.
Below is a list of new standards and changes to existing
standards that have been issued by the IASB with effective dates
for accounting periods beginning after 1 January 2012 or later, but
where earlier adoption is permitted. They have not been early
adopted by the Group in 2011 as they are yet to be endorsed by the
European Union ("EU"). The impact of these new requirements is
currently being assessed by the Group.
New standards:
IFRS 9: Financial Instruments: Classification and Measurement.
This standard reflects the first phase of the IASB's work on the
replacement of IAS 39: Financial Instruments: Recognition and
Measurement, and relates to the classification and measurement of
financial assets as defined in IAS 39. The adoption of IFRS 9 will
have a material impact on the classification and measurement of the
Group's financial assets;
IFRS 10: Consolidated Financial Statements. This standard
provides a single consolidation model that identifies control as
the basis for consolidation for all types of entities. It replaces
the requirements in IAS 27: Consolidated and Separate Financial
Statements and SIC 12: Consolidation -Special Purpose Entities.
IFRS 10 is effective for annual periods beginning on or after 1
January 2013;
IFRS 11: Joint Arrangements. This IFRS establishes principles
for the financial reporting by parties to a joint arrangement. It
supersedes the requirements in IAS 31: Interests in Joint Ventures
and SIC 13: Jointly Controlled Entities- Non-Monetary Contributions
by Venturers. IFRS 11 is effective for annual periods beginning on
or after 1 January 2013;
IFRS 12: Disclosure of Interests in Other Entities. This IFRS
combines, enhances and replaces disclosure requirements for
subsidiaries, joint arrangements, associates and unconsolidated
structured entities. IFRS 12 is effective for annual periods
beginning on or after 1 January 2013; and
IFRS 13: Fair Value Measurement. This IFRS defines fair value
and sets out in a single IFRS, a framework for measuring fair value
and requires disclosures about fair value measurements. IFRS 13 is
effective for annual periods beginning on or after 1 January
2013.
Amendments to existing standards:
IAS 1: Presentation of Financial Statements. The amendments
require companies to group together items within other
comprehensive income that may be reclassified to the profit or loss
section of the income statement and reaffirm existing requirements
that items in other comprehensive income and profit or loss should
be presented as either a single statement or two consecutive
statements. Amendments are effective for annual periods beginning
on or after 1 July 2012;
IAS 12: Deferred Tax. This amendment introduces a rebuttable
assumption that where certain assets (including investment property
and intangible assets) are measured at either fair value or under a
revaluation model, deferred tax should be calculated on the
assumption that the asset will be sold at its carrying amount. This
amendment is effective for annual accounting periods beginning on
or after 1 January 2012; and
IAS 19: Employee Benefits. Eliminates the option to defer the
recognition of gains and losses, known as the "corridor method".
This is effective for accounting periods beginning on or after 1
January 2013.
The financial statements comply with the Statement of
Recommended Practice issued by the Association of British Insurers
in December 2005 (as amended in December 2006) insofar as these
requirements do not contradict the requirements of IFRS.
The Group presents its balance sheet in order of liquidity.
Where applicable, for each asset and liability line item that
combines amounts expected to be recovered or settled both within
and beyond 12 months after the balance sheet date, disclosure of
the amount due beyond 12 months is made in the respective note.
Financial assets and financial liabilities are not offset unless
there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis or to
realise the assets and settle the liability simultaneously. Income
and expenses are not offset in the income statement unless required
or permitted by an accounting standard or interpretation, as
specifically disclosed in the accounting policies of the Group.
1.2 Changes in accounting policy
1.2.1 Disclosure of collateral held
Adoption of annual improvements to IFRS results in the
requirement to disclose details of collateral held by the Group to
mitigate credit risk.
1.3 Use of judgements, estimates and assumptions
The Group makes judgements in the application of critical
accounting policies that affect the reported amounts of assets and
liabilities. The Group also makes key assumptions about the future
and other sources of uncertainty. These are continually evaluated
and based on historical experience and other factors, including
expectations of future events that are considered to be reasonable
under the circumstances.
2. Responsibility statement
Each of the directors confirms that to the best of their
knowledge:
-- The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS);
-- The financial statements give a true and fair view of the
assets, liabilities, financial position and results of the Company
and of the Group taken as a whole; and
-- The announcement includes a fair review of the development
and performance of the business and the position of the Company and
the Group taken as a whole, together with a description of the
principal risks and uncertainties they face.
On behalf of the Board
Andy Parsons
Executive Director - Finance
26 March 2012
3. Segmental Information
(a) Summary
Segmental information is presented on the same basis as internal
financial information used by the Group to evaluate operating
performance. Segmental information relating to revenue, net income,
products and services for the year ended 31 December 2011 includes
BHA from 31 January and WLUK from 7 November. 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 Group's management and internal reporting structure is based
on the following operating segments which all meet the definition
of a reportable segment under IFRS 8:
-- UK - comprising the former Friends Provident UK life and
pensions business, the acquired AXA UK Life Business (including
WLUK), BHA, Sesame Bankhall and, for the period prior to 19 March
2010 when it was disposed, Pantheon Financial Limited;
-- International - comprising Friends Provident International
Limited ("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) IFRS based operating profit
For the year ended 31 December 2011
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
----- ------ -------- ----------
Life result 706 49 40 - 795
Longer term shareholder investment
return (5) 1 (1) (21) (26)
Other expense (1) (3) - (7) (11)
Development costs (28) (7) (1) - (36)
--------------------------------------------- ----- ------ -------- ---------- ------
IFRS based operating profit/(loss)
before tax 672 40 38 (28) 722
Tax on operating profit 38
----- ------ -------- ----------
IFRS based operating profit after
tax attributable to ordinary shareholders
from continuing operations 760
--------------------------------------------- ----- ------ -------- ---------- ------
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------------------
Life result 176 94 38 - 308
Longer term shareholder investment
return 30 1 (4) (14) 13
Other income/(expense) 2 6 - (11) (3)
Development costs (21) (6) (1) - (28)
--------------------------------------------- --------- ------ -------- ---------------- ------
IFRS based operating profit/(loss)
before tax 187 95 33 (25) 290
Tax on operating profit 16
--------------------------------------------- --------- ------ -------- ---------------- ------
IFRS based operating profit after
tax attributable to ordinary shareholders
from continuing operations 306
--------------------------------------------- --------- ------ -------- ---------------- ------
(ii) Reconciliation of IFRS based operating profit before tax to
profit before tax from continuing operations
For the year ended 31 December 2011
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
---------------- ---------- ---------- ------------- ----------
IFRS based operating profit/(loss)
before tax 672 40 38 (28) 722
Non-recurring items(i) (178) (1) (1) - (180)
Amortisation and impairment of acquired
present value of in-force business (483) (126) (66) - (675)
Amortisation and impairment of acquired
intangible assets (45) (8) (30) (1) (84)
Interest payable on STICS 31 - - - 31
Short-term fluctuations in investment
return(iii) (247) (10) (1) (3) (261)
---------------------------------------------------- ---------- ---------- ------------- ---------- ------
Loss before tax excluding profit
generated within policyholder funds (250) (105) (60) (32) (447)
Policyholder tax 220 - - - 220
Loss before tax from continuing operations (30) (105) (60) (32) (227)
---------------------------------------------------- ---------- ---------- ------------- ---------- ------
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total
GBPm GBPm GBPm GBPm GBPm
IFRS based operating profit/(loss)
before tax 187 95 33 (25) 290
Non-recurring items(ii) (121) (6) - 928 801
Amortisation of acquired present value
of in-force business (169) (123) (72) - (364)
Amortisation of acquired intangible
assets (27) (8) (28) (1) (64)
Interest payable on STICS 31 - - - 31
Short-term fluctuations in investment
return(iii) 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) UK non-recurring items for 2011 include GBP68 million (GBP67
million net of stamp duty expenses) in respect of the gain on
acquisition of BHA and GBP48 million (GBP46 million net of stamp
duty expenses) in respect of the gain on acquisition of WLUK.
Further details are set out in note 11. This is offset by GBP293
million of non-recurring costs comprising GBP128 million of
separation and integration costs in respect of the UK Life project,
GBP55 million in respect of Solvency II and finance system
developments, GBP84 million of reserve impacts in respect of the
outsourcing arrangement with Diligenta and GBP26 million of other
costs.
(ii) Corporate non-recurring items for 2010 include GBP883
million (GBP869 million net of stamp duty expenses) in respect of
the gain on acquisition of the AXA UK Life Business. Further
details are set out in note 11. 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) Includes shareholder investment return short-term
fluctuations and investment variances arising from the mismatching
of fixed interest assets and liabilities they are backing as well
as the impact of credit default assumptions. This latter variance
reflects profits or losses in excess of the expected investment
return on the assets and the impact of the corresponding economic
assumption changes on the liabilities.
(iii) Revenue and expenses
For the year ended 31 December
2011
Elimination
of inter
segment
UK Int'l Lombard Corporate amounts(ii) Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross earned premiums on
insurance and investment
contracts 5,270 1,260 2,373 - - 8,903
Investment contract premiums(i) (3,225) (1,177) (2,373) - - (6,775)
------------------------------------- -------- -------- -------- ---------- ------------- --------
Gross earned premiums 2,045 83 - - - 2,128
Premiums ceded to reinsurers (598) (1) - - - (599)
Net earned premiums 1,447 82 - - - 1,529
Fee and commission income 546 114 110 1 - 771
Investment return 2,657 (400) (461) 57 (50) 1,803
------------------------------------- -------- -------- -------- ---------- ------------- --------
Total revenue 4,650 (204) (351) 58 (50) 4,103
------------------------------------- -------- -------- -------- ---------- ------------- --------
Intersegment revenue 2 1 - 47 (50) -
Total external revenue 4,648 (205) (351) 11 - 4,103
------------------------------------- -------- -------- -------- ---------- ------------- --------
Other income(iii) 134 - - - - 134
------------------------------------- -------- -------- -------- ---------- ------------- --------
Net claims and benefits paid 3,209 7 - - - 3,216
Movement in insurance and
investment contract liabilities 183 (346) (548) - - (711)
Transfer to unallocated surplus (490) 6 - - - (484)
Movement in net assets attributable
to unit-holders (48) - - - - (48)
Acquisition expenses 497 47 47 - - 591
Administrative and other
expenses 1,348 177 208 8 - 1,741
Finance costs 115 9 2 82 (50) 158
------------------------------------- -------- -------- -------- ---------- ------------- --------
Total claims, benefits and
expenses 4,814 (100) (291) 90 (50) 4,463
------------------------------------- -------- -------- -------- ---------- ------------- --------
Intersegment expenses 47 3 - - (50) -
Total external claims, benefits
and expenses 4,767 (103) (291) 90 - 4,463
Share of loss of associates
and joint venture - (1) - - - (1)
------------------------------------- -------- -------- -------- ---------- ------------- --------
Loss before tax from continuing
operations (30) (105) (60) (32) - (227)
-------- -------- -------- ---------- -------------
Policyholder tax (220) - - - - (220)
Shareholder tax 437 (4) 29 (5) - 457
------------------------------------- -------- -------- -------- ---------- ------------- --------
Segmental result after tax 187 (109) (31) (37) - 10
------------------------------------- -------- -------- -------- ---------- ------------- --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include intersegment fee income and loan
interest. Intersegment transactions are undertaken on an
arms-length basis.
(iii) Includes gains on acquisitions of BHA (GBP68 million) and
WLUK (GBP48 million).
For the year ended 31 December 2010
Elimination
of inter
segment
UK Int'l Lombard Corporate amounts(ii) Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross earned premiums on
insurance and investment
contracts 3,457 1,063 3,021 - - 7,541
Investment contract premiums(i) (2,181) (1,051) (3,021) - - (6,253)
---------------------------------- -------- -------- -------- -------------
Gross earned premiums 1,276 12 - - - 1,288
Premiums ceded to reinsurers (240) (1) - - - (241)
Net earned premiums 1,036 11 - - - 1,047
Fee and commission income 373 266 111 1 - 751
Investment return 6,477 569 1,374 22 (18) 8,424
Total revenue 7,886 846 1,485 23 (18) 10,222
Intersegment revenue 3 1 - 14 (18) -
Total external revenue 7,883 845 1,485 9 - 10,222
Other income(iii) 8 - - 883 - 891
--------
Net claims and benefits
paid 1,678 4 - - - 1,682
Movement in insurance and
investment contract liabilities 4,768 694 1,292 - - 6,754
Transfer to unallocated
surplus 2 2 - - - 4
Movement in net assets
attributable to unit-holders 139 - - - - 139
Acquisition expenses 329 15 48 - - 392
Administrative and other
expenses 669 169 208 (18) - 1,028
Finance costs 109 6 3 29 (18) 129
Total claims, benefits
and expenses 7,694 890 1,551 11 (18) 10,128
Intersegment expenses 3 1 - 14 (18) -
Total external claims,
benefits and expenses 7,691 889 1,551 (3) - 10,128
Share of (loss)/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 intersegment fee income and loan
interest. Intersegment transactions are undertaken on an
arms-length basis.
(iii) Includes gain on acquisition of the AXA UK Life Business
of GBP883 million.
(iv) Products and Services
For the year ended 31 December 2011
Individual Other
Protection Investment Annuities Pensions Group Pensions (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross earned premiums 1,109 491 407 63 58 - 2,128
Net earned premiums 876 489 46 61 57 - 1,529
Fee and commission
income 3 294 - 246 19 209 771
Total external revenue 879 783 46 307 76 209 2,300
For the year ended 31 December 2010
Individual Other
Protection Investment Annuities Pensions Group Pensions (i) Total
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
As at 31 December 2011
Elimination
of intersegment
UK Int'l Lombard Corporate amounts (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
---------
Segment assets 99,262 7,450 18,190 1,725 (1,352) 125,275
Investment in associates
and joint venture 5 32 - - - 37
Total assets 99,267 7,482 18,190 1,725 (1,352) 125,312
Total liabilities 94,551 7,189 17,773 1,003 (1,352) 119,164
---------
Other segment information:
Capital expenditure 7 - 4 9 - 20
Depreciation 1 - 1 2 - 4
Amortisation 458 134 95 1 - 688
Impairment 71 - - - - 71
---------
As at 31 December 2010
Elimination
of intersegment
amounts
UK Int'l Lombard Corporate (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
Segment assets 96,551 7,184 17,930 1,325 (868) 122,122
Investment in associate and
joint venture 5 27 - - - 32
Total assets 96,556 7,211 17,930 1,325 (868) 122,154
Total liabilities 91,237 6,814 17,487 936 (868) 115,606
Other segment information:
Capital expenditure 1 - 4 1 - 6
Depreciation 1 - 1 2 - 4
Amortisation 196 131 100 1 - 428
(i) Eliminations mainly comprise intercompany loans
(c) Geographical segmental information
In presenting geographical segment information, segment revenue
is based on the geographical location of customers. The Group has
defined two geographical areas: UK and the rest of the world.
For the year ended 31 December 2011
Rest of
UK the World Total
GBPm GBPm GBPm
Gross earned premiums 2,042 86 2,128
Fee and commission income 566 205 771
Revenue from external customers 2,608 291 2,899
Investment return 1,803
Premiums ceded to reinsurers (599)
Total revenue 4,103
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
4. Staff pension schemes
(a) Introduction
The Group operates a defined benefit scheme: the Friends
Provident Pension Scheme ("FPPS"), to which a proportion of the
Group's UK Life and Pensions employees belong. In addition, defined
contribution schemes are operated by Friends Provident Management
Services Limited ("FPMS"), FPI and Sesame Bankhall Group. Lombard
does not operate a pension scheme.
On an IAS 19 basis, a gross surplus of GBP52 million has been
recognised in respect of the FPPS at 31 December 2011 (GBP66
million at 31 December 2010). The latest funding arrangement was
entered into in June 2010. This agreement was based on an actuarial
valuation as at 30 September 2008, which showed a deficit on a
funding basis of GBP65 million. Deficit reduction contributions of
GBP20 million per annum for the next four years were subsequently
agreed with the Trustee, and commenced in July 2010. An updated
triennial valuation has been carried out as at 30 September 2011
and the results of this are currently being considered by the
Trustee. The valuation, once approved, will serve to assist the
Trustee and the Group in determining future levels of funding.
Under IFRIC 14: The Limit on a Defined Benefit Asset, Minimum
Funding Requirement, deficit reduction contributions are considered
to be a minimum funding requirement and, to the extent that the
contributions payable will not be available after they are paid
into the scheme, a liability is recognised when the obligation
arises. An additional liability of GBP32 million has been
recognised (GBP44 million at 31 December 2010), reflecting the 35%
tax that would arise on any notional refund in respect of the
resultant IAS 19 surplus of GBP92 million (GBP40 million deficit
reduction contributions plus the current surplus of GBP52 million).
A deferred tax asset of GBP10 million (2010: GBP16 million) has
also been recognised to reflect tax relief at a rate of 25% (2010:
27%) that is expected to be available on the deficit reduction
contributions, once paid into the Scheme.
Employees of the acquired AXA UK Life Business (including WLUK)
and BHA have been placed into new defined contribution arrangements
for service accruing after the acquisition date. The pension
obligations for service accruing up to the date of the acquisition
are not borne by the Group, as these obligations have remained with
AXA UK plc and Bupa Finance plc respectively.
(b) FPPS defined benefit scheme overview
The FPPS is a UK defined benefit scheme to which some of the UK
Life and Pensions employees from the acquired Friends Provident
business belong. The Scheme's assets, which are administered by
three external investment managers, are held under the control of
the Trustee and used to secure benefits for the members of the
Scheme and their dependants in accordance with the Trust Deed and
Rules.
The Trustee board consists of a chairman who is appointed by the
employer and six additional directors of which three are
employer-appointed directors, two member-selected directors and one
pensioner-selected director.
An analysis of the amounts recognised in the financial
statements in respect of the FPPS is set out below.
2011 2010
GBPm GBPm
Amounts recognised in the consolidated statement of financial
position
IAS 19 pension surplus (excluding deficit reduction contribution) 52 66
Authorised payments surplus charge (penal tax) at 35% of
available surplus following deficit reduction contributions (32) (44)
Net pension surplus (excluding deficit reduction contribution) 20 22
Movement in IAS 19 pension surplus
2011 2010
GBPm GBPm
Pension surplus at 1 January 66 59
Current service cost(i) (7) (13)
Interest cost(i) (57) (55)
Expected return on pension assets(i)(ii) 63 60
Augmentations and termination benefits(i) - (3)
Employer contributions 33 41
Actuarial losses (46) (23)
Pension surplus at 31 December (excluding authorised payments
surplus charge) 52 66
Deficit reduction contributions 40 60
Available surplus subject to authorised payments surplus
charge 92 126
(i) Recognised in the consolidated income statement. The total
loss recognised in the income statement for the year ended 31
December 2011 is GBP1 million (2010: loss of GBP11 million).
(ii) The actual return on plan assets was GBP185 million (2010:
GBP104 million).
Analysis of pension surplus and related deferred tax asset
As at 31 December 2011
Pension Deferred
surplus tax
GBPm GBPm
Gross IAS 19 pension surplus and related deferred tax
liability 52 (13)
Irrecoverable element of deficit reduction contributions
(authorised payments surplus charge on available surplus) (32) -
Restriction of liability due to authorised payments surplus
charge - 13
Tax relief available on deficit reduction contributions -- 10
Net pension surplus and related deferred tax asset 20 10
As at 31 December 2010
Pension Deferred
surplus tax
GBPm GBPm
Gross IAS 19 pension surplus and related deferred tax
liability 66 (18)
Irrecoverable element of deficit reduction contributions
(authorised payments surplus charge on available surplus) (44) -
Restriction of liability due to authorised payments surplus
charge - 18
Tax relief available on deficit reduction contributions - 16
Net pension surplus and related deferred tax asset 22 16
Amounts recognised in the consolidated income statement
2011 2010
GBPm GBPm
Interest cost (57) (55)
Current service costs (7) (13)
Augmentations and termination benefits - (3)
Expected return on plan assets 63 60
Total amounts recognised in the income statement (1) (11)
Actual return on plan assets 185 104
Amounts recognised in the consolidated statement of
comprehensive income
2011 2010
GBPm GBPm
Actuarial losses (46) (23)
Reverse authorised payments surplus charge on opening
surplus 44 21
Irrecoverable element of deficit reduction contributions
(authorised payments surplus charge on available surplus) (32) (44)
Actuarial losses on defined benefit schemes (34) (46)
Taxation 2 25
Actuarial losses on defined benefit schemes after tax (32) (21)
A tax charge of GBP6 million (2010: GBP16 million credit) in
respect of deficit reduction contributions and credits of GBP8
million (2010: GBP9 million) in respect of other movements in the
pension scheme are included in the aggregate tax line of the
consolidated statement of comprehensive income.
5. Taxation
(a) Tax charged to the income statement
2011 2010
GBPm GBPm
Current tax
UK corporation tax at 26.5% (2010: 28%) 52 16
Adjustments in respect of prior periods (11) (15)
Overseas taxation 18 7
Total current tax charge 59 8
Deferred tax
Origination and reversal of temporary differences (322) 121
Adjustments in respect of prior periods 26 8
Total deferred tax (credit)/charge (296) 129
Total tax (credit)/charge (237) 137
Analysis:
Policyholder tax 220 244
Shareholder tax (457) (107)
Total tax (credit)/charge (237) 137
Policyholder tax is tax on the income and investment returns
charged to policyholders of linked and with-profits funds.
Shareholders' tax is tax charged to shareholders on the profits of
the Group. During the year legislation was enacted to bring in a
phased decrease in the rate of corporation tax to 26% on 1 April
2011 and 25% on 1 April 2012. Under IFRS deferred tax is calculated
using rates substantively enacted by the balance sheet date and as
such the reduction to a 25% rate has been taken into account in
deferred tax balances. Further incremental rate reductions have
been announced but not substantively enacted by the balance sheet
date. For further information please refer to note 13.
(b) Factors affecting tax charge for period
2011 2010
GBPm GBPm
(Loss)/profit before tax from continuing operations (227) 985
(Loss)/profit before tax from continuing operations multiplied
by the standard rate of corporation tax in the UK of 26.5%
(2010: 28%) (60) 275
Effects of:
Non-taxable income (232) (115)
Deductions not allowable for tax purposes 22 46
Tax on reserving adjustments 41 7
Overseas tax (6) -
Utilisation of excess expenses brought forward - (8)
Valuation of tax losses (123) (42)
With-profits minority interest(i) - (8)
Adjustments in respect of prior periods (8) (7)
Non taxable gain on acquisition (31) (247)
Reduction in corporation tax rate from 27% to 25% (2010:
28% to 27%) (60) (8)
Policyholder tax 220 244
Total tax (credit)/charge (237) 137
(i) The effect of with-profits minority interest in 2010 related
to tax on F&C Commercial Property Trust prior to
deconsolidation.
6. Appropriations of profit
(a) Dividends paid on ordinary shares
Dividends paid during the year and recognised in reserves:
2011 2010
GBPm GBPm
Interim dividend in respect of prior year 350 65
The distributable reserves of the Company at 31 December 2011
are GBP3,696 million (2010: GBP3,478 million).
As required by IAS 10: Events After the Balance Sheet Date,
dividends declared after the balance sheet date are not accrued in
these accounts. The directors are recommending an interim dividend
of GBP250 million to be paid on or before 31 March 2012.
(b) STICS interest
Interest on the 2003 STICS is paid in equal instalments in May
and November each year at a rate of 6.875%. During the year ended
31 December 2011, interest of GBP14 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 year ended 31 December 2011, interest of GBP17
million (31 December 2010: GBP17 million) was paid to the 2005
STICS holders.
These interest payments are shown as movement in reserves in
these financial statements together with the related tax
relief.
7. Intangible assets
Movements in intangible assets are as follows:
For the year ended 31 December 2011
AVIF Other Total
Cost GBPm GBPm GBPm
----------
At 1 January 2011 5,107 528 5,635
Acquisition of subsidiaries(i) 411 37 448
Other additions - 4 4
Disposals - (5) (5)
Foreign exchange adjustments 3 (4) (1)
----------
At 31 December 2011 5,521 560 6,081
----------
Amortisation and impairment
----------
At 1 January 2011 422 73 495
Amortisation charge for the period(ii) 604 84 688
Impairment charge(ii) 71 - 71
Disposals - (5) (5)
Foreign exchange adjustments (13) (2) (15)
At 31 December 2011 1,084 150 1,234
----------
Carrying amounts as at December 2011 4,437 410 4,847
For the year ended 31 December 2010
AVIF Other Total
Cost GBPm GBPm GBPm
At 1 January 2010 2,938 382 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 5,107 528 5,635
Amortisation
At 1 January 2010 59 10 69
Amortisation charge for the period(ii) 364 64 428
Foreign exchange adjustments (1) (1) (2)
At 31 December 2010 422 73 495
Carrying amounts at 31 December 2010 4,685 455 5,140
(i) Acquisitions in 2011 related to BHA and WLUK, see note 11.
(ii) Amortisation and impairment charges are included within
administrative and other expenses in the consolidated income
statement.
A detailed exercise was undertaken to identify intangible assets
as part of the acquisition of BHA on 31 January 2011 and WLUK on 7
November 2011. As a result of the BHA review it was decided that
the acquired business represented an additional cash generating
unit ("CGU"). Intangible assets identified within BHA related to
the acquired value of in-force business ("AVIF") and software
totalling GBP180 million. Intangible assets identified within WLUK
related to AVIF and distribution channels and customer
relationships totalling GBP268 million and are included in the UK -
AXA UK Life Business CGU.
In determining the fair value of identified intangible assets,
appropriate approaches to valuation were applied, given the nature
of the intangible assets acquired.
Intangible assets relating to customer relationships and
distribution channels have been valued using an income approach
method, specifically the Multi-period Excess Earnings Method
("MEEM"). The principle behind the MEEM is that the value of an
intangible asset is equal to the present value of the after-tax
cash flows attributable only to that intangible asset. Other
intangibles include in-house developed IT systems and databases
which have been valued using a replacement cost approach which
assesses the cost of reproducing the equivalent technology in its
current form.
For each type of asset, the useful economic life was determined,
being the period over which the asset is expected to contribute
directly or indirectly to future cash flows. The value of the
assets will be amortised over the respective useful economic
lives.
The "AXA" and "Bupa" brands and associated brands that existed
within the acquired businesses have been retained by AXA and Bupa
respectively and as such no value has been attributed to them.
The "Friends" brand has been retained by the Group and during
the course of the year, a rebranding exercise was carried out to
change all inherited brands to "Friends Life".
On acquisition of a portfolio of insurance contracts and/or
investment contracts, either directly or through the acquisition of
a subsidiary undertaking, the net present value of the Group's
interest in the expected pre-tax cash flows of the in-force
business is capitalised in the balance sheet as the AVIF. AVIF is
shown gross of policyholder and shareholder tax of GBP995 million
(2010: GBP1,076 million), with the offsetting balance included in
deferred taxation. The AVIF is based on the value of in-force
business calculated on a market consistent embedded value
basis.
(a) AVIF
AVIF is allocated to CGUs, which represent the lowest level
within the Group at which AVIF is monitored for internal management
purposes. An analysis of AVIF by CGU is set out below:
Net book
Cost Impairment Amortisation value
As at 31 December 2011 GBPm GBPm GBPm GBPm
UK - Friends Provident (Life and
Pensions including Sesame Bankhall) 1,304 - (202) 1,102
UK - AXA UK Life Business (including
WLUK) 2,431 - (394) 2,037
UK - BHA 172 (71) (12) 89
International 1,014 - (250) 764
Lombard 600 - (155) 445
Total 5,521 (71) (1,013) 4,437
Net book
Cost Amortisation value
As at 31 December 2010 GBPm GBPm GBPm
UK - Friends Provident (Life and Pensions
including Sesame Bankhall) 1,304 (116) 1,188
UK - AXA UK Life Business 2,192 (80) 2,112
International 995 (132) 863
Lombard 616 (94) 522
Total 5,107 (422) 4,685
(b) Other intangibles
Other intangible assets are made up of the following:
Net book
Cost Amortisation value
As at 31 December 2011 GBPm GBPm GBPm
Distribution channels and customer relationships 444 (112) 332
Brand 49 (19) 30
Software 54 (19) 35
Goodwill 13 - 13
Total 560 (150) 410
Net book
Cost Amortisation value
As at 31 December 2010 GBPm GBPm GBPm
Distribution channels and customer relationships 419 (54) 365
Brand 49 (10) 39
Software 47 (9) 38
Goodwill 13 - 13
Total 528 (73) 455
(c) 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 31 December 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
During the period, Friends Life Company Limited ("FLC") and the
acquired BHA business revised their reserving methodology by
allowing for negative reserves on protection business as allowed
for in the FSA Policy Statement 06/14. This resulted in:
-- a reduction in policyholder liabilities of GBP243 million and
a write-off of DAC on protection business of GBP22 million in FLC
resulting in a one-off benefit to IFRS based operating profit of
GBP221 million;
-- an acceleration of AVIF amortisation of GBP130 million in FLC
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 GBP28 million.
The net impact on profit before tax was a loss of GBP8
million.
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 3).
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.
8. Financial assets
The Group's financial assets are summarised by measurement
categories as follows:
2011 2010
GBPm GBPm
-------------------------------------- ------- ------
Fair value through profit or loss:
Designated on initial recognition 102,763 98,332
Held for trading 875 456
Loans at amortised cost 5 677
Total financial assets 103,643 99,465
-------------------------------------- ------- ------
Derivative financial instruments are classified as held for
trading in accordance with IAS 39. All other financial assets
recognised at fair value through profit or loss are designated as
such on initial recognition.
(a) Analysis of financial assets at fair value through profit or
loss
As at 31 December 2011
With- Unit- Non-
profits linked Annuities linked Share-holder Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- --------- -------- ---------- -------- ------------- --------
Shares and other variable
yield securities 7,107 53,493 - 108 9 60,717
Debt securities and other
fixed- income securities:
Government securities:
Loaned government securities(i) - - - 198 - 198
Other government securities 8,469 8,507 1,069 993 274 19,312
Corporate bonds 9,020 5,665 5,969 1,214 287 22,155
Derivative financial instruments 762 7 97 9 - 875
Deposits with credit institutions - 381 - - - 381
Total financial assets held
at fair value 25,358 68,053 7,135 2,522 570 103,638
----------------------------------- --------- -------- ---------- -------- ------------- --------
(i) On 11 May 2011, the Group provided a GBP200 million
collateralised loan to Barclays Bank plc which matures on 31 July
2012. UK government securities were loaned and the assets remain on
balance sheet as substantially all the risks and rewards of
ownership are retained by the Group. The Group holds collateral in
respect of these arrangements.
As at 31 December 2010
With- Unit- Annuities Non- Share-holder Total
profits linked linked
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 held at
fair value 24,332 65,479 6,332 1,884 761 98,788
As at 31 December 2011, the fair value of the collateral
received from the counterparties was GBP850 million (2010: GBP306
million). No collateral received from the counterparties has been
sold or re-pledged. The fair value of loans is considered to be the
same as their carrying value.
The above unit-linked column and with-profits column include
GBP1,129 million (2010: GBP964 million) of financial assets (GBP818
million of shares, GBP219 million of government securities and
GBP92 million of corporate bonds) relating to the minority
interests in the OEICs that have been consolidated as the Group
holding is 50% or more.
For unit-linked funds, the policyholders bear the investment
risk and any change in asset values is matched by a broadly
equivalent change in the liability.
The majority of financial assets held are readily realisable,
however, amounts of GBP93,863 million (2010: GBP87,707 million) are
not expected to be realised until more than 12 months after the
balance sheet date in line with the expected maturity of
insurance/investment contract liabilities.
Asset backed securities ("ABS") (excluding those held by the
linked funds) amount to GBP3,060 million (2010: GBP2,505 million)
and 94% (2010: 92%) of these are at investment grade.
(b) Determination of fair value hierarchy
In accordance with the requirements of IFRS 7, financial assets
at fair value have been classified into three categories as set out
below. Financial assets at fair value include shares and other
variable yield securities, government securities, corporate bonds
(including ABS), derivative financial instruments and deposits with
credit institutions.
Level 1 - quoted prices (unadjusted) in active markets for
identical assets. An active market is one in which transactions
occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. Examples include listed equities
and bonds in active markets and quoted unit trusts/OEICs.
Level 2 - inputs other than quoted prices included within Level
1 that are observable for the asset, either directly (i.e. as
prices) or indirectly (i.e. derived from prices). This category
generally includes assets that are priced based on models using
market observable inputs. Examples include certain corporate bonds,
certificates of deposit and derivatives.
Level 3 - inputs for the asset that are not based on observable
market data. Assets with single price feeds and/or limited trading
activity are included in this category. Examples include unlisted
equities and private equity investments.
The majority of the Group's assets held at fair value are valued
based on quoted market information or market observable data.
Approximately 4% (5% excluding unit-linked assets) are based on
valuation techniques where significant observable market data is
not available or the price is not observable from current market
transactions. However, the fair value measurement objective of
these assets remains the same, that is, an exit price from the
perspective of the Group.
The fair values of these assets are generally provided by
external parties. During the year, the Group has performed
independent reviews of pricing models to ensure that appropriate
methodologies have been applied. The approach taken for each class
of specific unlisted investment is as follows:
The valuation of the holdings in private equity limited
partnerships and companies is based on the most recent underlying
valuations available at the reporting date as adjusted for
contributions, distributions and known diminutions in value of
individual underlying investments in the period since valuations
were performed. The valuation technique is not supported by
observable market values. Valuation of private equity holdings are
prepared in accordance with International Private Equity and
Venture Capital Board ("IPEV") guidelines.
The fair value of the investments in property limited
partnerships is taken as the Group's appropriate share of the net
asset value of the partnerships. The net asset value is based on
the latest external market valuation of the underlying property
investments, which is updated at least every six months. The
valuation would be adjusted in the event of a significant market
movement in the period between the last market valuation and the
reporting date.
Private loans are valued using discounted cash flows, which are
carried out by investment managers and reviewed by management. The
interest rate used when calculating the present value is derived
from the UK Gilts Curve, adjusting the spread by the movement in
the most appropriate IBoxx GBP Corp Curve associated with the loan
rating, where available. All spreads are reviewed on a quarterly
basis and any spreads that appear inappropriate taking into
consideration loan details (loan sector, maturity and rating),
available market proxies, comparable instruments and underlying
securities are recalibrated accordingly.
The Group has invested in a mortgage loan issued by AXA
Equitable in the US. The mortgage loan is secured against the
property. The loan is valued by external real estate advisors using
discounted cash flows. The discount rate used in the calculation is
determined by adding an appropriate spread (based on property type,
prevailing interest rates and current mortgage spread over US
treasuries) to the yield of an appropriate US Treasury Bond with
the maturity closest to the maturity of the loan. The loan is
denominated in US dollars.
IFRS 7 also requires financial liabilities at fair value to be
categorised into the above Level 1, 2 or 3 hierarchies. Financial
liabilities at fair value include unit-linked contracts, amounts
due to reinsurers, net asset value attributable to unit-holders
(minority interest in the OEICs that are consolidated) and
derivative financial instruments. The classifications take into
account the types of inputs used to determine the fair value
measurements. For unit-linked funds this has been undertaken on a
fund-by-fund basis. For the net asset value attributable to unit
holders, this has been analysed in the same proportion as the
underlying consolidated investments categorisation.
The Group has financial liabilities which contain a
discretionary participation feature of GBP9,426 million (2010:
GBP9,123 million) that form part of its with-profits funds.
Products giving rise to these liabilities are mainly investment or
pension contracts with a unitised with-profits element. The Group
is unable to measure the fair value of these financial liabilities
reliably due to the lack of a robust basis to measure the
supplemental discretionary returns arising on with-profits
contracts and because there is not an active market for such
instruments. These liabilities have therefore been excluded from
the fair value hierarchy analysis below.
An analysis of financial assets and liabilities held at fair
value in accordance with the fair value hierarchy is set out below.
The table shows both the total financial assets and liabilities and
the total excluding unit-linked assets and liabilities, as
shareholders have no direct exposure to profits or losses on
unit-linked assets (other than through investment management
fees).
As at 31 December Including unit-linked Excluding unit-linked
2011
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------ ------ ----- ------- ------ ----- ----- ------
Financial assets
held at fair
value
Shares and
other variable
yield securities 47,808 9,699 3,210 60,717 5,828 272 1,124 7,224
Debt securities
and other fixed
income securities:
Government
securities 19,220 285 5 19,510 10,913 85 5 11,003
Corporate bonds 11,952 8,944 1,259 22,155 9,420 6,560 510 16,490
Derivative
financial instruments 67 808 - 875 60 808 - 868
Deposits with
credit institutions 366 15 - 381 - - - -
----------------------- ------ ------ ----- ------- ------ ----- ----- ------
Total financial
assets held
at fair value 79,413 19,751 4,474 103,638 26,221 7,725 1,639 35,585
----------------------- ------ ------ ----- ------- ------ ----- ----- ------
Financial liabilities
held at fair
value
Unit-linked
investment
contracts - 65,259 - 65,259 - - - -
Amounts due
to reinsurers - 1,800 - 1,800 - 1,800 - 1,800
Net asset value
attributable
to unit-holders 1,173 - - 1,173 36 - - 36
Derivative
financial instruments 44 243 - 287 26 239 - 265
----------------------- ------ ------ ----- ------- ------ ----- ----- ------
Total financial
liabilities
held at fair
value 1,217 67,302 - 68,519 62 2,039 - 2,101
----------------------- ------ ------ ----- ------- ------ ----- ----- ------
As at 31 December Including unit-linked Excluding unit-linked
2010
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------ ------ ----- ------ ------ ----- ----- ------
Financial assets held at
fair value
Shares and other
variable yield securities 48,139 8,892 3,349 60,380 7,109 271 983 8,363
Debt securities
and other fixed
income securities:
Government securities 16,094 51 - 16,145 8,500 1 - 8,501
Corporate bonds 12,317 8,035 1,103 21,455 9,601 6,051 358 16,010
Derivative financial
instruments 54 402 - 456 51 381 - 432
Deposits with credit
institutions 351 1 - 352 3 - - 3
---------------------------- ------ ------ ----- ------ ------ ----- ----- ------
Total financial
assets held at fair
value 76,955 17,381 4,452 98,788 25,264 6,704 1,341 33,309
---------------------------- ------ ------ ----- ------ ------ ----- ----- ------
Financial liabilities held
at fair value
Unit-linked investment
contracts - 62,492 - 62,492 - - - -
Amounts due to reinsurers - 1,666 - 1,666 - 1,666 - 1,666
Net asset value
attributable to
unit-holders 1,173 - - 1,173 11 - - 11
Derivative financial
instruments 27 138 - 165 27 127 - 154
---------------------------- ------ ------ ----- ------ ------ ----- ----- ------
Total financial
liabilities held
at fair value 1,200 64,296 - 65,496 38 1,793 - 1,831
---------------------------- ------ ------ ----- ------ ------ ----- ----- ------
(c) Transfers between Level 1 and Level 2
During the year, GBP452 million (2010: GBP958 million) of shares
and other variable yield securities were transferred from Level 1
to Level 2 and GBP1,413 million (2010: GBP735 million) of corporate
bonds, shares and other variable yield securities were transferred
from Level 2 to Level 1. These movements arose from changes in the
availability of current quoted prices and market activity. There
were no significant transfers between Level 1 and Level 2 for other
financial assets.
(d) Financial instruments
The following table shows a reconciliation of Level 3 financial
assets which are recorded at fair value.
As at 31 December 2011
Shares
and other Total financial
variable Government Corporate assets held
yield securities bonds bonds (including at fair
GBPm GBPm ABS) GBPm value GBPm
At 1 January 2011 3,349 - 1,103 4,452
Acquisition through business combinations 3 - 26 29
Total (losses)/gains in income statement (82) - 11 (71)
Purchases 557 4 120 681
Sales (582) - (86) (668)
Net transfer (to)/from Level 1 and Level
2 (4) 1 104 101
Foreign exchange adjustments (31) - (19) (50)
At 31 December 2011 3,210 5 1,259 4,474
Total (losses)/gains for the year included
in profit or loss for assets held at
31 December 2011 (158) - 11 (147)
Transfers out of Level 3 arise due to availability of prices in
an active market.
As at 31 December 2010
Shares and Corporate Total financial
other variable bonds (including assets held
yield securities ABS) at fair value
GBPm GBPm GBPm
At 1 January 2010 4,720 688 5,408
Acquisition through business combinations 529 213 742
Total gains in income statement 394 180 574
Purchases 1,100 216 1,316
Sales (889) (99) (988)
Net transfers to Level 1 and Level 2 (2,477) (58) (2,535)
Foreign exchange adjustments (28) (37) (65)
At 31 December 2010 3,349 1,103 4,452
Total gains for the period included in
profit or loss for assets held at 31 December
2010 184 139 323
Transfers out of Level 3 arise due to availability of prices in
an active market and the refinement of methodology that took place
during the year.
(e) Level 3 sensitivity analysis
2011 2010
Effect of Effect of
reasonably reasonably
possible possible
Carrying alternative Carrying alternative
amount assumptions amount assumptions
GBPm GBPm GBPm GBPm
Unit-linked investments 2,835 - 3,111 -
Shares and other variable yield securities 1,124 224 983 196
Government bonds 5 1 - -
Corporate bonds (including ABS) 510 51 358 36
4,474 276 4,452 232
For unit-linked funds, the policyholders bear the investment
risk and any change in asset values is matched by a broadly
equivalent change in the liability. Shareholder profits from annual
management charges levied on such funds will, however, vary
according to the change in asset values leading to some limited
investment risk.
For shares and other variable yield securities, where there is
no active market, the price at year end could reasonably be
expected to be higher or lower by approximately 20%.
For government bonds and corporate bonds, it could reasonably be
expected that the current prices could be higher or lower by
approximately 10% to reflect changes in the credit ratings of the
underlying bonds.
(f) Loans
2011 2010
GBPm GBPm
Mortgage loans 2 61
Other loans 3 616
Total loans 5 677
Loan assets of GBP600 million which were held at 31 December
2010 were repaid in March 2011.
(g) Assets backing unit-linked liabilities
The net assets backing unit-linked liabilities are included
within the relevant balances in the consolidated statement of
financial position and are analysed as follows:
2011 2010
GBPm GBPm
Shares and other variable yield securities 53,493 52,017
Debt securities and other fixed-income securities 14,172 13,089
Derivative financial instruments 7 24
Deposits with credit institutions 381 349
Total financial assets held at fair value 68,053 65,479
Investment properties 1,688 1,831
Insurance and other receivables 875 268
Cash and cash equivalents 4,779 4,991
Total assets 75,395 72,569
Other payables (124) (194)
Net asset value attributable to unit-holders (1,137) (1,097)
Total unit-linked net assets 74,134 71,278
9. Loans and borrowings
The Group's loans and borrowings are as follows:
Coupon % 2011 2010
GBPm GBPm
Subordinated liabilities:
Lombard undated subordinated loans Various 2 3
Friends Life Group plc subordinated debt due
2021(i) 12.000 183 186
Friends Life Group plc subordinated debt due
2022(ii) 8.250 496 -
Reinsurance:
Lombard financial reinsurance treaties Various 8 15
Friends Provident International financial
reinsurance treaties(iii) Various 64 29
Other:
Fixed rate unsecured notes(iv) 9.000 200 700
Amount owed to credit institutions (overdrafts)(v) 19 79
Total loans and borrowings 972 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 FLL. This debt is
carried at amortised cost based on the fair value at the date of
acquisition of Friends Provident by the Company. The fair value of
this subordinated debt is GBP182 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 FLL. This
debt is carried at amortised cost being GBP500 million principal
less capitalised issue costs of GBP4 million. The fair value of
this subordinated debt is GBP450 million.
(iii) FLL 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 31
December 2011 was GBP40 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 31 December 2011 was GBP24 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 plus interest due to RHG.
(v) Amounts owed to credit institutions (overdrafts) includes
GBP7 million relating to overdrafts held within the OEICs that have
been consolidated as the Group's holding is 50% or more. Such
overdrafts are fully repayable out of the assets of the OEICs.
(vi) The Group benefits from a GBP500 million (2010: GBP500
million) multi-currency revolving credit facility with Barclays
Bank plc, Royal Bank of Canada, HSBC Bank plc and The Royal Bank of
Scotland plc, with Barclays Bank plc as agent, entered into on 24
June 2010. The facility is guaranteed by FLL. If a third party, who
does not presently have control of the Group, acquires such
control, the Group must notify the agent immediately. In this
circumstance, the lenders are not obliged to fund utilisation and
may notify the agent to cancel their commitments under the
facility. This would have the effect of rendering all of their
loans repayable within 10 business days from the date of notice. As
at the date of this report, the facility remains undrawn.
Total interest-bearing loans and borrowings are repayable as
follows:
2011 2010
GBPm GBPm
Within one year or on demand 63 123
Between one and two years 19 -
Between two and three years 7 3
Between three and four years 3 -
In more than five years 880 886
Total loans and borrowings 972 1,012
Included in the carrying amount above, GBP909 million (2010:
GBP889 million) is expected to be settled more than 12 months after
the balance sheet date.
Total interest expense for financial liabilities not measured at
fair value through profit or loss, which arises solely from
interest bearing loans and borrowings is GBP98 million (2010: GBP61
million).
10. Contingent liabilities and commitments
(a) Contingent liabilities
In the normal course of its business, the Group is subject to
matters of litigation or dispute. While there can be no assurances
at this time, based on the information currently available to them,
the Directors believe that it is not probable that the ultimate
outcome of any of these matters will have a material adverse effect
on the financial condition of the Group.
(b) Commitments
Operating leases where the Group is lessee
The Group leases a number of properties under operating leases.
These leases typically run for a period of 50 years, with an option
of renewal at the end of the lease. Lease terms include annual
escalation clauses to reflect current market conditions.
The future minimum rentals payable under non-cancellable leases
are as follows:
2011 2010
Land Land
and buildings Other Total and buildings Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Within one year 6 1 7 7 1 8
Between one and five years 15 1 16 17 1 18
In more than five years 19 - 19 26 - 26
Total operating lease payables 40 2 42 50 2 52
Other commitments
The Group has investment property commitments of GBP20 million
(2010: GBP24 million) relating to ongoing construction, renovation
costs and costs of acquiring existing properties.
The Group has potential commitments of GBP335 million (2010:
GBP517 million) to venture capital vehicles (partnerships and
similar vehicles) that allow exposure to private equity investments
in UK, US and European markets. All investments are held under
agreements between the private equity managers and the Group which
have committed the Group to providing an agreed maximum level of
funding to the managers to invest. As at 31 December 2011 there are
still funds that have yet to be utilised that, under the
agreements, are still available to the private equity managers and
hence classify as potential commitments.
The Group has entered into a number of outsourcing arrangements
which have resulted in financial commitments amounting to GBP1,798
million as at 31 December 2011 (31 December 2010: GBP510 million).
The average weighted years remaining on these outsourcing contracts
is 15 years as at 31 December 2011 (31 December 2010: 15 years).
Included within these amounts is the GBP1.3 billion outsourcing
arrangement with Diligenta announced in November 2011.
11. Business combinations
Business combinations in 2011 and 2010 are set out in the note
below. These acquisitions are 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.
(a) Acquisition of BHA
In January 2011, the Group through its subsidiary, FLL, acquired
100% of the shares in Bupa Health Assurance Limited (subsequently
renamed Friends Life BHA Limited), a life insurance company, from
Bupa Investment Limited and its parent Bupa Finance plc. The Group
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.
In the period from the acquisition to 31 December 2011, BHA
contributed revenue of GBP96 million and made a loss after tax of
GBP11 million. If the acquisition had occurred on 1 January 2011,
management estimate that consolidated revenue would have been
GBP104 million, and the consolidated loss after tax for the year
would have been GBP12 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 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
Reinsurance assets 83
Cash and cash equivalents 90
Other current assets 30
Total identifiable assets 466
Insurance liabilities 157
Deferred tax liabilities 48
Other liabilities 25
Total identifiable liabilities 230
Net identifiable assets acquired and liabilities assumed 236
Attributable to equity holders of the parent 236
(b) Acquisition of WLUK
In November 2011, the Company acquired 100% of the shares in
WLUK, a life insurance company, from AXA UK. The acquisition of
WLUK was agreed with AXA UK in 2010 at the same time as the
acquisition of FASLH was negotiated. However, the share capital of
WLUK was not legally acquired by the Group until 2011 as the
purchase was contingent upon a transfer under Part VII of the
Financial Services and Markets Act 2000 of AXA's retained business
out of WLUK and FSA approval for change of control being received.
The Group acquired control of WLUK on 7 November 2011, the date at
which the last substantive condition to legal completion was
satisfied, and has consolidated it from that point.
In the period from the acquisition to 31 December 2011, the
impact of WLUK on revenue was GBP(1) million (reflecting a negative
investment return of GBP22 million) and it made a loss after tax of
GBP1 million. If the acquisition had occurred on 1 January 2011,
management estimate that the impact on revenue would have been
GBP(32) million, and the loss after tax for the year would have
been GBP7 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 248
Fair value of purchase consideration 248
Fair value of net assets acquired (296)
Excess of the interest in the fair value of assets acquired
over costs (48)
The consolidated income statement includes GBP2 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 239
Distribution and customer relationships 29
Property and equipment 3
Investment properties 43
Financial assets 6,617
Reinsurance assets 402
Current tax assets 1
Insurance and other receivables 38
Cash and cash equivalents 338
Total identifiable assets 7,710
Insurance liabilities 2,127
Investment contracts 5,195
Unallocated surplus 38
Provision for other risks and charges 8
Deferred tax liabilities 23
Insurance payables, other payables and deferred income 23
Total identifiable liabilities 7,414
Net identifiable assets acquired and liabilities assumed 296
Attributable to equity holders of the parent 296
For both acquisitions during the year, the values of assets
acquired and liabilities assumed, recognised on acquisition are
their estimated fair values. No contingent liabilities have been
recognised on acquisition.
In determining the fair value of AVIF, the Group applied pre-tax
discount rates to the associated cash flows for each acquired
business of 6.7% for BHA and 9.0% for WLUK.
In determining the fair value of distribution and customer
relationships acquired, the Group applied pre-tax discount rates to
the associated cash flows for each intangible asset of 6.7% for BHA
and 10.0% for WLUK.
The gains of GBP116 million recognised as a result of these
acquisitions are 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 WLUK and BHA. The
gains are reported within other income in the consolidated income
statement.
(c) Acquisition of Friends ASLH Limited ("FASLH") in 2010
On 3 September 2010, the FSA approved the change of control to
the Group of FASLH, the AXA UK Life Business. As the sale and
purchase agreement in relation to FASLH became unconditional upon
obtaining the FSA approval, the Group acquired control of FASLH on
3 September 2010 and has consolidated it from that point. On 15
September 2010, the Group legally completed the purchase of 100% of
the shares and voting rights of FASLH.
In the period from the acquisition to 31 December 2010, FASLH
contributed revenue of GBP3,339 million and a profit after tax of
GBP1 million. If the acquisition had occurred on 1 January 2010,
management estimate that consolidated revenue would have been
GBP6,670 million, and consolidated profit after tax for the year
ending 31 December 2010 would have been GBP109 million. In
determining these amounts, management has assumed that the fair
value adjustments which arose on the date of acquisition would have
been the same if the acquisition had occurred on 1 January
2010.
The following summarises the major classes of consideration
transferred, and the recognised amounts of assets acquired and
liabilities assumed at the acquisition date:
GBPm
Cash paid 2,224
Share capital issued at par value 500
Fair value of purchase consideration 2,724
Fair value of net assets acquired (3,607)
Excess of the interest in the fair value of assets acquired
over cost (883)
The gain of GBP883 million recognised as a result of the
acquisition is attributable to the purchase price being at a
discount to the fair value of the net assets acquired which is
based on the market consistent embedded value of the AXA UK Life
plus the value of customer and distribution intangibles relating to
future business with existing customers and distribution
channels.
(d) Disposal of GOF and TIP portfolios
The assets and liabilities held for sale at 31 December 2010
related to the Guaranteed Over Fifties ("GOF") and Trustee
Investment Plan ("TIP") portfolios of business.
GBPm
Intangible assets - AVIF 269
Deferred tax assets 20
Financial assets - shares and other variable yield securities 904
Cash and cash equivalents 13
Assets of operations classified as held for sale 1,206
Insurance contracts 21
Investment contracts 904
Liabilities of operations classified as held for sale 925
Net assets of operations classified as held for sale 281
These were disposed of on 1 November 2011. Disposal proceeds
received relating to this transaction were GBP285 million.
The difference between the proceeds received and the net assets
classified as held for sale at 31 December 2010 was GBP4 million,
and has been recognised in income in the consolidated income
statement for the year. It can be summarised as follows:
GBPm
Net assets classified as held for sale at 31 December 2010 281
Accrued interest received on disposal proceeds 4
Proceeds received as per above 285
The income statement of the GOF/TIP portfolios has been
consolidated on a line by line basis up to the date of disposal in
the financial statements. The table below shows the income
statement of the held for sale business:
2011 2010
GBPm GBPm
Gross earned premiums 71 29
Gross claims and benefits paid (15) (5)
Change in insurance contracts liabilities 2 7
Acquisition expenses - (19)
Administrative and other expenses (51) (15)
Profit before tax from continuing operations 7 (3)
12. Related parties
In the ordinary course of business, the Group and its
subsidiaries carry out transactions with related parties, as
defined by IAS 24. Material transactions for the year are set out
below.
(a) Key management personnel compensation
Key management personnel consists of directors of FLG, and
members of the Group's leadership team.
In aggregate the compensation paid to key management is as set
out below:
2011 2010
Number Number
of employees GBPm of employees GBPm
Salary and other short-term employee benefits(i) 27 9.9 22 5.6
Post-employment benefits (excluding defined
benefit scheme) 12 0.1 9 0.1
Termination benefits 1 0.8 1 0.3
Total key management personnel compensation
charged to the income statement 10.8 6.0
Post employment benefits - defined benefit
schemes 1 0.3 2 -
Total key management personnel compensation 11.1 6.0
(i) Includes GBP0.8 million (2010: GBP0.4 million) to be paid in
deferred shares as part of 2011 (2010) bonus entitlement.
Post-employment benefits - defined benefit schemes comprises the
change in value of key management personnel accrued pension
benefits from the beginning of the relevant financial year to the
end of that year. This is consistent with the amounts disclosed as
'increase in transfer value during the year' in the Remuneration
Report of the Board in the Report and Accounts of Resolution
Limited. Details of pension schemes and share schemes operated by
the Group, and in which key management personnel participate are
given in note 4.
There were GBPnil balances outstanding at the year end with key
management (2010: GBPnil).
A number of key management personnel, and their close families,
have long term insurance policies with the Group. Such policies are
on normal commercial terms which are also available to other
members of staff. The Board has considered the financial effect of
such insurance policies and concluded that they are not
material.
All these transactions were completed on terms that were no
better than those available to other members of staff.
(b) Other related parties
Details of the Group's pension schemes, whose assets are managed
by three external investment managers, are provided in note 4.
Transactions made between the Group and related parties were
made in the normal course of business. Loans from related parties
are made on normal arm's length commercial terms.
Services provided by related parties
2011 2010
Income Receivable Income Receivable
earned at year earned at year
in year end in year end
GBPm GBPm GBPm GBPm
Joint venture 4.3 - 6.0 -
Total 4.3 - 6.0 -
13. Post balance sheet events
(a) Changes in the rate of corporation tax
The Chancellor delivered his Budget on 21 March 2012, which
announced a further 1% reduction in the rate of corporation tax,
effective from 1 April 2012, in addition to the incremental 1% rate
reductions previously announced which will take effect on 1 April
2013 and 1 April 2014. The corporation tax rate is therefore
expected to be 24% from 1 April 2012, 23% from 1 April 2013 and 22%
from 1 April 2014. The benefit to the Group's net assets from the
further 3% decrease in the rate is estimated to be approximately
GBP94 million in total and will be recognised when the legislation
is substantively enacted.
(b) New UK tax regime applicable to life insurance business
HMRC have stated that draft legislation in respect of the new UK
tax regime applicable to life insurance business is to be published
in the Finance Bill on 29 March 2012. This follows the significant
announcements previously made in the 2011 Budget and initial draft
legislation published for consultation on 6 December 2011. The
legislation is expected to take effect from 1 January 2013.
The Group has made a preliminary analysis of the impact of the
new legislation on the deferred tax assets and liabilities as at 31
December 2011. The net overall impact is an additional deferred tax
asset of GBP10 million. Under the new tax regime, losses in respect
of the Group's pension business will be measured at the full
corporation tax rate (currently measured at the basic rate of
income tax). The tax value of losses would increase by GBP34
million (based on the latest substantively enacted corporation tax
rate of 25%). This is offset by the loss of the deferred tax asset
of GBP7 million in respect of life assurance trade losses to the
extent that these do not exceed pension business losses in the same
entity.
Application of the draft transitional provisions would result in
a further deferred tax liability of GBP17 million, which would
unwind over 10 years, in accordance with the transitional
provisions. This relates to the with-profits fund deficit in FLL
which arose in 2002.
Other deferred tax assets and liabilities of the Group as at 31
December 2011 are not expected to be materially affected by the new
legislation.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LFFILVTIRFIF
Aviva 6.875% (LSE:35PG)
Historical Stock Chart
From May 2024 to Jun 2024
Aviva 6.875% (LSE:35PG)
Historical Stock Chart
From Jun 2023 to Jun 2024
