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TIDM35PG
RNS Number : 4091M
Friends Life Group plc
16 August 2011
FRIENDS LIFE GROUP plc
(formerly FRIENDS PROVIDENT HOLDINGS (UK) plc)
INTERIM MANAGEMENT REPORT AND RESULTS FOR THE HALF YEAR ENDED
30 JUNE 2011
Overview
The Friends Life Group ("the Group") has made solid progress in the first half of 2011. The acquisition of the AXA UK Life Business in 2010 and completion of the acquisition of Bupa Health Assurance Limited ("BHA") in January has increased the Group's scale and capabilities in its core markets. BHA was the third business acquired in the UK Life Project and forms an important part of the integrated business.
In February the results of the Group's strategic review were announced, setting out the Group's focus in the UK on three key business lines, being corporate benefits, individual protection and retirement income. The Group has particular strengths in each of these product areas and will consolidate new business flows onto selected platforms within the Group to improve new business profitability.
The integration of the UK businesses is on track and the Group remains confident of delivering the synergy target of GBP112 million, with GBP24 million of run-rate savings delivered by the half year. The integration activities are key to building an efficient and cost effective base for the combined business. In March 2011, the Group launched the 'Friends Life' brand which brings together all of the parts of our business in the UK and is a key step in the integration, both for our customers and for our people.
The International and Lombard businesses continue to perform well with International benefiting from the growth in the Asian markets and Lombard recording the second highest first half sales in its 20 year history. Lombard sales are however down compared to 2010 when they benefited from the stimulus provided by the European Savings Directive ("EUSD") and the Italian tax amnesty.
Andy Briggs was appointed as Friends Life's Chief Executive Officer in June 2011. Andy joined from Lloyds Banking Group, where he was CEO of General Insurance, having previously been CEO of Scottish Widows.
Under Andy Briggs' leadership, Friends Life will establish a new business unit to manage the requirements of customers with products that we are no longer actively marketing to new customers. This UK Heritage Business will be led by Evelyn Bourke who has been appointed Chief Commercial Officer. The Friends Life Chief Commercial Officer role includes responsibility for Friends Life strategy and capital. Risk will now report directly to the Chief Executive Officer. As a result of the strategy announced in February, and subsequent related decisions, a number of business lines are no longer being actively marketed. These lines will be managed in the UK Heritage Business alongside customers with legacy products that have previously been closed to new business. The creation of the UK Heritage Business to run alongside the corporate benefits, protection and retirement income business units will enable Friends Life to focus on the distinct value drivers for all of its products and ensure that the Group meets the needs of all customers.
Further information on Resolution Limited's results and strategy can be found in its preliminary announcement issued today, (www.resolution.gg).
Key financial highlights
Half year Half year Full year GBPm (unless otherwise stated) 2011 2010 2010 ------------------------------------ ---------- ---------- ---------- IFRS based operating profit before tax 406 159 290 IFRS profit after tax 61 86 848 APE 601 458 1,012 Estimated IGCA surplus capital (GBPbn) 2.0 1.0 2.3 Asset quality(i) for shareholder related assets 96% 97% 95% ------------------------------------ ---------- ---------- ----------
(i) Corporate debt and asset-backed securities at investment grade or above.
-- IFRS based operating profit before tax up from GBP159 million to GBP406 million reflecting the inclusion of the acquired businesses and a GBP221 million one-off benefit following the release of negative reserves in the acquired AXA UK Life Business and BHA.
-- IFRS profit after tax of GBP61 million reflects higher amortisation of intangible assets (arising from the acquisitions and an accelerated charge to offset the negative reserves release), negative goodwill on the acquisition of BHA and non-recurring costs.
-- Friends Life sales volumes totalled GBP601 million in the six month period and reflect the increased scale following the inclusion of the acquired UK businesses. Sales through the International business have shown strong growth in the period driven by strength in the Asian markets, whilst sales generated in Lombard, although solid, are down compared to a strong period of growth in 2010.
-- Estimated IGCA surplus capital of GBP2.0 billion as at 30 June 2011, down from GBP2.3 billion at the end of 2010 principally reflecting the GBP350 million dividend paid from the life businesses to Resolution Limited.
-- Continued high asset quality, with no significant shareholder exposure to the sovereign debt or corporate bonds of higher risk European economies.
Outlook
Friends Life is now on a clear path to creating a sustainable business that is focussed on profitable new business, cost synergies and cash generation. The implementation of the strategy will continue as the Group progresses the separation and integration of the acquired businesses.
The outlook for Friends Life's core product markets is good with the Group having existing advantages of scale as well as respected customer service. This along with appropriate capital allocation and clear financial discipline, that includes a focus on value over volume, should allow the Group to differentiate itself and generate returns for shareholders.
Journalists requiring further information should contact:
Peter Timberlake Friends Life +44 (0) 845 641 7834 Emma Wylie Friends Life +44 (0) 845 268 4909
Notes to the editors
1. Friends Life Group are the holders of a large number of industry awards, showing continued recognition of the quality of our products and service.
2. This announcement contains certain forward-looking statements with respect to the Friends Life Group and its outlook. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast.
3. For more information on the Friends Life Group including, photos, awards, fast facts, presentations, and media contacts please visit the media section at www.friendslife.com/media
4. For more information on Resolution Limited, including, photos, awards, fast facts, presentations, and media contacts please visit the media section at www.resolution.gg
Group summary
The Group's results for the half year reflect the enlarged group, including the results of the AXA UK Life Business and, from 31 January, BHA. The IFRS based operating profit before tax of GBP406 million (30 June 2010: GBP159 million) benefitted from the implementation of certain elements of PS06/14 as part of the capital synergies programme for the UK business.
The operating results of the Group are set out below and are discussed in more detail in the operating reviews that follow.
IFRS based operating profit analysis by segment
2011 2010 Half Half GBPm UK Int'l Lombard Corporate year year -------------------------- ----- ------ -------- ---------- ------ ----- New business strain (66) (20) (17) - (103) (60) In-force surplus 214 69 40 - 323 209 Long-term investment return 4 - (1) (17) (14) 17 Reserving changes and one-offs 222 (6) - - 216 6 Development costs (10) (3) (1) - (14) (11) Other income and charges - 1 - (3) (2) (2) -------------------------- ----- ------ -------- ---------- ------ ----- IFRS based operating profit before tax 364 41 21 (20) 406 159 -------------------------- ----- ------ -------- ---------- ------ -----
The strategic review, announced in February 2011, set a number of targets for improvement in the profitability of new business in the UK. A number of critical early steps have now been taken. The selection of the BHA protection platform and the Friends Provident corporate benefits platform, as the new business platforms for the future, ensures that future new business will benefit from the low unit cost associated with these platforms. The IRRs of the business written on these platforms are already close to or above the target returns announced in February with the target platform for corporate benefits business achieving an IRR of 8.8% in the period and the target platform for the individual protection business achieving an IRR of 26.4%. The UK business has commenced the development of its annuity proposition and has recruited a number of key individuals to lead the retirement income business. The objective of significantly growing the Group's market position in retirement income will be achieved through increasing the
capture of internal vestings, while maintaining overall profitability, as well as through the development of an open market proposition.
The UK life assurance sector continues to face regulatory uncertainty with the expected implementation of Solvency II, the introduction of auto-enrolment, and the Retail Distribution Review ("RDR").
The new capital regime under Solvency II is expected to present insurers with a changing capital framework. Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and it is expected that the implementation date looks likely to be delayed. Friends Life is supportive of the principle of having a risk-based capital framework.
The introduction of auto-enrolment in the second half of 2012, under which employees will automatically be enrolled into a qualifying scheme, will also impact the corporate pension landscape. Friends Life currently expects auto-enrolment to fuel market growth, with a good uplift in pension scheme membership. Friends Life will continue to develop its pension proposition, segment the customer base and optimise the development of profitable business. Friends Life believes that auto-enrolment represents a considerable opportunity for the business to generate a significant increase in new members from both new and existing schemes. It will be used as an opportunity to develop a market leading proposition for clients, supporting employers with the heavy compliance requirements imposed on them as a result of pensions reform.
The RDR will drive significant change in the distribution landscape, with many advisers expected to either retire or retrench to a much more limited panel-based advice proposition. Friend Life expects the individual wealth market, particularly single premium bond sales, to be adversely affected as this market has historically been driven by the higher levels of commission that can be paid as compared with mutual funds. Friends Life closed its IFA single premium bond proposition following the UK strategic review and therefore the Group does not expect a significant impact from this. Protection is outside the RDR regime and the Group's focus in the corporate pensions market is on the nil commission/funded commission market.
In summary, Friends Life is well placed to deal with the regulatory uncertainty facing the UK life sector which will contribute to the development of a sustainable business.
International is making good progress with its strategy as it seeks deeper penetration in the markets in which it has established positions. It has benefitted from strong growth in the Asian markets serviced through the Hong Kong and Singapore branches and is on track to deliver the financial targets by 2013.
Lombard continues to perform well with new business in the first half of 2011 the second highest first half sales Lombard has seen in its 20 year history. Sales are reduced compared to the first half of 2010 which benefitted from the impact of the EUSD and the final phase of the Italian tax amnesty.
Profitable new business
The following table shows the IRR performance of the key business lines compared with the targets set for 2013.
Full Half Half year Half Full Target year year baseline year year 2013 2011 2011 (i) 2010 2010 2010 All target IRR (%) platforms platforms ------------------------ ------ --------- --------- -------- ----- ----- UK corporate benefits 10+ 5.3 8.8 4.2 8.2 6.2 UK individual protection 20 5.0 26.4 3.3 2.1 2.7 UK retirement income 15+ 23.8 16.5 n/a 20.0 ------------------------ ------ --------- --------- -------- ----- ----- International 20+ 13.5 15.4 18.3 15.4 Lombard(ii) 20+ 19.0 26.7 23.1 26.7 ------------------------ ------ --------- --------- -------- ----- ----- Blended group new business IRR(ii) 15+ 9.6 8.6 15.1 11.2 ------------------------ ------ --------- --------- -------- ----- ----- New business cash strain (GBPm) 192 161 392 110 238 ------------------------ ------ --------- --------- -------- ----- -----
(i) 2010 full year baseline includes an estimate of 12 months BHA and AXA UK Life Business results.
(ii) The 2011 Lombard IRR (and therefore the blended group IRR) now takes account of the Luxembourg regulatory regime in which DAC is an allowable asset.
Cost synergies
The UK Life Project has brought together the Friends Provident operations, the AXA UK Life Business and BHA through a series of acquisitions from November 2009 to January 2011. There is a unified executive team responsible for the day to day management of the business and this has overseen the development and roll out of a single set of corporate values, an integrated staff grading structure, a streamlined pay and reward system and the alignment of performance management processes across the acquired businesses. The Friends Life brand was launched in March 2011, supported by significant brand activity including sponsorship of the Friends Life t20 cricket tournament.
The separation and integration programme remains on track. This includes the separation of the former AXA UK Life Business and BHA and the creation of a fully integrated Friends Life business.
Joint separation plans have been agreed with AXA and exits from transitional service agreements are in line with expectations (25% exited to date). Significant expenditure has been committed with the Group's external partners to deliver the separation of IT infrastructure from AXA Technology Services and to migrate certain blocks of policies onto strategic IT platforms.
The separation of BHA remains on plan with IT infrastructure changes due to be delivered ahead of the 12-month deadline ending January 2012, and all Finance and HR-related service agreements terminated ahead of schedule (including payroll and general ledger migrations).
The integration of these three businesses is expected to deliver synergy benefits of GBP112 million by the end of 2013, of which GBP39 million is expected to be realised by the end of 2011 on a run-rate basis. To date, a total of GBP24 million run-rate cost savings have been delivered through:
-- creating an integrated and streamlined sales capability for a targeted and rationalised individual protection proposition;
-- integrating the sales and marketing model for corporate benefits;
-- rationalising the combined brand budgets;
-- improving contractual negotiations with strategic sourcing suppliers; and
-- restructuring the senior management team and central functions.
The platform acquired with BHA has been chosen to provide a cost-effective solution for the individual and group protection businesses, both for targeted IFA and controlled distribution. The restructure of the combined sales force, marketing capability and customer service functions are well advanced.
The Group has announced the planned closure of the Coventry site by the middle of 2012. Further closures of the Loudwater, Manchester, Basingstoke and the BHA London offices, in line with the Group's target operating model are planned during 2011 and 2012.
Cash delivery
The Group has committed to deliver both distributable cash and a capital efficient business. The group is confident that through the delivery of the targeted cost savings, the move to selected new business platforms and implementation of PS06/14 that the targeted reduction of new business strain by GBP200 million will be achieved by 2013.
UK operating segment
The Group's strategy focuses on products and distribution channels in the UK market where Friends Life has a significant existing presence and the prospect of generating attractive returns. The key product lines in the UK are corporate benefits, protection and retirement income. Full implementation plans are being executed and tracked to ensure delivery on the 2013 targets.
Management structures have been reorganised to bring individual protection and group protection under a single executive, consistent with the plan to write all new group protection and individual protection business on the existing BHA platforms.
In UK product lines where Friends Life will not be able to generate satisfactory returns (principally individual pensions and investment bonds), steps have been taken to exit or scale back to reduce new business strain.
GBPm (unless 2011 Half year 2010 2010 otherwise Corporate Individual Group Retirement Half Full stated) benefits protection protection income Other Total year year ----------- ---------- ----------- ----------- ----------- ------ ------ ----- ------ New business cash strain (39) (41) (4) 7 (21) (98) (38) (149) IRR (%) 5.3 5.0 7.0 23.8 8.9 7.0 10.8 7.1 APE 242 44 12 19 55 372 203 472 IFRS based operating profit before tax 364 99 187 ----------- ---------- ----------- ----------- ----------- ------ ------ ----- ------
IFRS based operating profit before tax in the first half of 2011 was GBP364 million (30 June 2010: GBP99 million) reflecting the enlarged scale of the UK business following the acquisitions, as well as the one-off benefit following the implementation of negative reserves.
New business profitability is not comparable year on year due to the inclusion of the acquired AXA UK Life Business and BHA. The profitability of new business will improve significantly as the remainder of the synergies and implementation actions are delivered. The profitability of the selected platforms is already close to or above target returns with the target corporate benefits platform at 8.8% (target: 10%) and the target individual protection platform at 26.4% (target: 20%). As such, Friends Life remains confident of meeting the targeted product metrics by the end of 2013. The relevant sections below contain a detailed commentary on the results for each proposition.
Corporate benefits
The Friends Life corporate benefit business has continued to deliver against a difficult economic back drop. The market has seen membership declining in recent years as a result of employers implementing recruitment freezes, and rationalising their workforces. There has also been an increasing trend in employers opting for pay freezes, this coupled with increasing pressure on disposable income means there have been limited opportunities to grow existing pension arrangements. Despite this pressure, Friends Life has been able to drive significant volume growth from the existing in-force schemes.
Financial performance
2011 2011 2013 Half Half 2010 Full year year Full 2010 GBPm (unless otherwise year all target year Half stated) target platforms platforms baseline(i) year ------------------------ New business cash strain (75) (39) (23) (80) (25) IRR 10%+ 5.3% 8.8% 4.2% 8.2% APE n/a 242 176 399 152 ------------------------ ------- ---------- --------- ------------ -----
(i) 2010 full year baseline includes an estimate of 12 months AXA UK Life Business results.
Strong incremental new business, combined with cost synergies has led to the significant improvement in profitability in the period, although at 5.3% this is clearly not satisfactory. Overall returns are impacted by the less profitable new business on the acquired AXA UK Life Business platforms, however the profitability of business written on the target Friends Provident NGP platform has been better, delivering an IRR of 8.8%. This platform is expected to achieve the 10% target return during 2012 as the cost synergies and migration of business onto NGP takes effect.
New scheme wins in the first half of 2011 (40 scheme wins) were restricted as a result of both market caution around the AXA UK Life Business acquisition and a significant restructure of the new business sales force in January, in order to drive out cost savings. The outlook for the second half of 2011 is promising with a strong pipeline of new business skewed towards single premium business, and a significant step-change in the quality of schemes being secured (average APE per scheme is significantly higher in 2011 compared to 2010).
Over the first half of 2011 group pensions assets have grown by approximately GBP1 billion and now stand at GBP18 billion.
The business is confident of achieving the 2013 financial targets as a result of:
-- Expected business growth, benefiting from the combination of Friends Life's highly regarded proposition and a significant growth in customer premium flows driven by Auto-Enrolment ("AE"). This will increase revenues on a primarily fixed cost base.
-- Ongoing separation and integration, in particular the migration of the AXA-owned platform Embassy, onto the more efficient NGP platform with reducing operational complexity and cost; and
-- Continuing realisation of cost synergies as part of the wider programme to reduce the overall cost base of the business.
Protection
Individual protection
In March, the Group announced the decision to consolidate the individual protection business onto the acquired BHA platform. It is a low cost operating platform which will deliver the required functionality to support the business going forward. The proposition will be further enhanced by improving the functionality available on the platform, drawing upon the best features across the three former propositions.
The enhanced proposition is expected to be delivered in October 2011, with focused activity in train with each distribution partner to ensure the transition of all targeted IFA new business to the new platform by the end of 2011. The Group will also work with existing controlled distribution partners on a case by case basis throughout 2011 and 2012 to achieve the same outcome.
Financial performance
2011 2011 2013 Half Half 2010 Full year year Full 2010 year all target year Half GBPm (unless otherwise stated) target platforms platforms baseline(i) year ------------------------- ------- ---------- --------- ------------ ----- New business cash strain (30) (41) (2) (193) (18) IRR 20% 5.0% 26.4% 3.3% 2.1% APE n/a 44 10 106 18 ------------------------- ------- ---------- --------- ------------ -----
(i) 2010 full year baseline includes 12 months BHA and AXA UK Life Business results.
The individual protection market has held up well in a difficult economic climate, including a depressed housing market. Friends Life envisages this continuing in the lead up to the RDR implementation. As protection is excluded from the main impacts of the RDR there is an expectation of an increased focus on protection sales by intermediaries in the short term.
The growth in sales volumes reflects the acquisitions of the AXA UK Life Business and BHA in 2010 and 2011. However, as the strategy is delivered the volumes will reduce from the 2010 baseline as there is more selective market participation through greater pricing discipline and increased focus on profitable product lines. This change, combined with the transition to the target BHA platform and emerging cost synergies, is expected to result in a reduction in the 2011 full year new business strain of some GBP100 million.
The IRR of individual protection business has improved to 5.0% in the period with the lower new business strain benefiting the half year result. The improvement is expected to continue through to 2013 as the strategy is delivered, with further efficiencies achieved as new business is migrated to the BHA platform and an increased proportion of the higher margin critical illness and income protection business is written. The current returns on the BHA platform are significantly higher than those being delivered through the Friends Provident and AXA UK Life Business with the IRR for the half year at 26.4% already in excess of the 20% target. As more business is migrated to the BHA platform and the mix of business changes, returns in excess of the target IRR are expected to be maintained although it is likely that there will be some fluctuation in the level of return achieved from period to period.
Group protection
2011 2010 GBPm (unless otherwise stated) Half year Half year New business cash strain (4) (2) IRR 7.0% 4.0% APE 12 2 -------------------------------- ---------- ----------
The BHA proposition has made a significant difference to the scale of the Friends Life group protection proposition with sales in the period of GBP12 million APE significantly higher than that recorded in the first half of 2010. BHA contributed GBP7 million APE in the period with the Friends Provident proposition also performing well, recording GBP5 million APE (30 June 2010: GBP2 million).
New business profitability with an IRR of 7.0% is expected to improve as business is consolidated onto the BHA platform and volumes of income protection and critical illness are increased.
Retirement income
The Group has started to implement the annuity strategy which will focus on building the enhanced range of capabilities needed to retain vesting pensions and provide optionality for entry into the open market. The developments will include sophisticated mortality analysis to inform a highly targeted pricing approach, new customer management systems to support improved engagement with customers and distributors in the run up to retirement and the development of more sophisticated capability for the selection and management of investments such as credit. The developments are expected to deliver enhanced capabilities over a 12-18 month timeframe which will drive increased volumes and profitability during 2013. A good start has been made in building the team with the appointment of David Still, as Managing Director of Retirement Income, and Richard Willets, as Director of Longevity.
Financial performance
2013 Full 2010 year 2011 Full year 2010 GBPm (unless otherwise baseline stated) target Half year (i) Half year New business cash strain n/a 7 26 11 IRR 15%+ 23.8% 16.5% n/a APE n/a 19 39 14 -------------------------- ------- ---------- ---------- ----------
(i) 2010 full year baseline includes an estimate of 12 months AXA UK Life Business results.
Half year sales volumes of GBP19 million represent a 40% increase on the 2010 half year comparative, reflecting the acquisition of the AXA UK Life Business in the second half of 2010. Annuity sales in the first half of 2010 were boosted by the change to early retirement rules in April last year, which resulted in a spike of retirements from 50-55 year olds who might otherwise not have been able to take their benefits for up to a further five years.
The key financials remain attractive for the retirement income proposition with high revenue margin and IRR (23.8%) for annuity new business. Annuity business also continues to be cash generative before allowance for capital requirements. A significant portion of sales continues to be driven by internal vestings with a guaranteed annuity option where margins are lower.
Retention rates as a percentage of vesting funds have fallen marginally compared to 2010, reflecting the general move towards open market options seen in the market more widely. The benefits of the strategy to improve the value retained from maturing pensions business are not expected to be reflected in improvements to this retention rate until later in 2012.
UK: Other products and Sesame Bankhall Group
Other products
2011 2010 GBPm (unless otherwise stated) Half year Half year -------------------------------- ---------- ---------- New business cash strain (21) (3) IRR 8.9% n/a APE 55 17 -------------------------------- ---------- ----------
Other products include the combined individual pensions and investment propositions of Friends Provident and the AXA UK Life Business. The Group does not expect to be able to generate the minimum target returns required from these product lines and as a result sales are being limited.
Other sales in the period principally relate to the onshore bond proposition acquired with the AXA UK Life Business. The decision was made to close to IFA new business applications on 31 March 2011 in line with the UK new business strategy announced in February. New business continues to be written through the Group's inherited tied bancassurance relationships with GBP14 million APE being written in the period.
Sesame Bankhall Group
Sesame Bankhall Group ("SBG") is the UK's largest distributor of retail financial advice and operates three market leading brands. Sesame is the leading appointed representative network, Bankhall is the largest support service provider for directly regulated IFAs and PMS is the biggest mortgage club for intermediaries. SBG traded profitably in line with expectations in the first six months, whilst making significant investments in its technology infrastructure and in new services for its customers, and has commenced a number of implementation activities ahead of the requirements of the RDR.
The operating result for the first six months of the year (GBPnil) reflects this program of investment (30 June 2010: GBP2 million).
UK operating segment - IFRS based operating profit
UK IFRS based operating profit
2011 (i) 2010 (ii) 2010 (iii) Half year Half year Full year GBPm GBPm GBPm ------------------------------------- ---------- -------------- ----------- New business strain (66) (27) (89) In-force surplus 214 113 280 Investment return and other items 4 16 35 Principal reserving changes and one-off items 222 5 (15) Development costs (10) (8) (21) Other - - (3) ------------------------------------- ---------- -------------- ----------- IFRS based operating profit before tax 364 99 187 ------------------------------------- ---------- -------------- -----------
(i) 2011 half year results comprise six months results for Friends Provident; six months for the AXA UK Life Business; and five months for BHA.
(ii) 2010 half year results comprise six months results for Friends Provident.
(iii) 2010 full year results include 12 months for Friends Provident and four months for the AXA UK Life Business.
In the period to 30 June 2011 the UK segment delivered IFRS based operating profit before tax of GBP364 million (30 June 2010: GBP99 million), representing an increase of GBP265 million on the prior period. The increase reflects a number of significant changes to the UK segment including the acquisition of the AXA UK Life Business and BHA, and the subsequent implementation of negative reserves on both of these businesses.
Principal reserving changes reflects the implementation of negative reserves on protection business which accelerates the recognition of surplus. This earlier recognition of surplus has a one-off positive impact on the overall UK result of GBP221 million. This one-off benefit is offset by reduced ongoing in-force surplus (due to the accelerated recognition referred to above) of GBP20 million in the first six months, with a further estimated GBP20 million expected in the second six months. There is also an impact on the first half year through a reduction in new business strain of GBP5 million.
Reconciliation of new business strain to IFRS
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ---------------------------- ---------- ---------- ---------- Total UK new business cash strain (98) (38) (149) DAC / DFF adjustments 33 11 59 Other IFRS adjustments (1) - 1 ---------------------------- ---------- ---------- ---------- Total UK IFRS new business strain (66) (27) (89) ---------------------------- ---------- ---------- ----------
IFRS new business strain of GBP66 million includes GBP31 million in respect of the AXA UK Life Business and BHA; this explains the majority of the increase from the half year ended 30 June 2010. In addition, the strengthened annuitant mortality assumptions, effective at the end of 2010, have increased new business strain compared to 2010.
The implementation of PS06/14 reserving changes and the recognition of negative reserves across the UK protection portfolio means that DAC is no longer recognised on this business. This change in treatment offsets the reserving benefits which are apparent in cash strain and as a consequence there is no significant reduction in protection IFRS new business strain. DAC continues to be recognised on pensions and investments business and has moved in line with expectations given the current product mix and levels of new business.
In-force surplus
In-force surplus of GBP214 million is GBP101 million higher than that recorded in the first half of 2010 due to the inclusion of the AXA UK Life Business and BHA results. These account for GBP96 million of this income. IFRS surplus generated by the Friends Provident UK business increased marginally to GBP118 million (30 June 2010: GBP113 million).
Investment return and other items
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------------------------- ---------- ---------- ---------- Longer-term return on life and pension shareholder funds - excluding debt 35 37 76 Longer-term return on life and pension shareholder funds - debt (31) (23) (46) Distribution businesses - 2 5 ------------------------------- ---------- ---------- ---------- Total 4 16 35 ------------------------------- ---------- ---------- ----------
Longer-term investment return on shareholder funds, net of debt, was lower at GBP4 million (30 June 2010: GBP14 million) reflecting a lower expected return on shareholder assets due to a decrease in expected rates and a change in asset mix from bonds to cash. This change has more than offset the effect of the higher asset base from the inclusion of the AXA UK Life Business shareholder assets. There was also an GBP8 million interest charge associated with the GBP500 million debt issued by Friends Life in April 2011.
Distribution businesses relate to Sesame Bankhall Group, which generated operating profits of GBPnil in the first six months of 2011 (30 June 2010: GBP2 million) and, for the period prior to its disposal, in March 2010, of Pantheon Financial Limited.
Principal reserving changes and one-off items
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ----------------------------------- ---------- ---------- ---------- Negative reserving (PS06/14) changes 221 - - Annuitant longevity strengthening - - (39) Modelling and methodology changes 1 5 14 Scheme expense release - - 10 ----------------------------------- ---------- ---------- ---------- Total 222 5 (15) ----------------------------------- ---------- ---------- ----------
The implementation of the PS06/14 reserving change to the AXA UK Life Business and BHA has resulted in a one-off GBP221 million release of reserves including a DAC write-off of GBP22 million in the protection proposition.
UK operating expenses
2010 2011 Full year 2010 2010 baseline Half year (i) Half year Full year GBPm GBPm GBPm GBPm ------------- ---------- ---------- ---------- ---------- Acquisition 89 220 46 130 Maintenance 130 256 37 140 ------------- ---------- ---------- ---------- ---------- 219 476 83 270 Development 10 23 8 21 ------------- ---------- ---------- ---------- ---------- Total 229 499 91 291 ------------- ---------- ---------- ---------- ----------
(i) 2010 full year baseline includes an estimate of 12 months AXA UK Life Business, BHA and WLUK operating expenses
UK operating expenses, which exclude commission payments and non-recurring costs, were GBP229 million compared to GBP91 million in the first half of 2010 reflecting the increased scale of the business. Operating expenses remain a key focus with the delivery of the GBP112 million targeted synergies critical to driving a step change in UK business performance.
Acquisition and maintenance costs total GBP219 million in the six month period compared to the full year 2010 baseline of GBP476 million. The 2010 baseline includes GBP31 million of Winterthur UK Life Limited ("WLUK") operating costs, which the Group is due to acquire by the end of 2011. After adjusting for the inclusion of WLUK, costs are slightly below baseline on a run-rate basis and reflect a number of the early synergies, which include the reorganisation of sales, marketing and new business processing functions. These are however partially offset by temporary increases for VAT on transitional services from AXA UK, and increases in finance and governance, to support business as usual activities during a period of significant change.
To date in 2011, development costs of GBP10 million include GBP5 million expenditure on the development of the corporate platform, refinement and progression of the Group's retirement income strategy and a number of other projects spanning the UK Life business.
International operating segment
The majority of the International business' core markets appear to have recovered well from the recession, in particular in Asia where demand is strong, although Europe remains a difficult environment and is expected to remain so over the course of 2011.
In this climate the International business has delivered strong new business flows, with APE growing to GBP132 million in the first half of 2011. The operating result reflects the growing book of business which generates an increasing return on the in-force book, offset by a number of one-off items that are explained further below.
The Friends Life strategy is to grow the value of the International business and its component parts, improving overall growth prospects and returns. As the business grows, the level of cash generation is expected to improve to deliver the targeted sustainable cash generation of at least GBP20 million per annum by 2013 whilst increasing new business IRR to at least 20%.
The business has continued to invest in building capability, developing propositions and platforms, and revising product structures to improve profitability and persistency. New business profitability will be enhanced by the development and rollout over the next 18 months of an improved Friends Provident International Limited ("FPIL") regular premium product.
International new business sales ("APE") increased by 10% compared with the first half of 2010, with a 14% increase for FPIL partially offset by a 7% reduction for Overseas Life Assurance Business ("OLAB"). The results were driven by strong sales in Asia and the UK, offset by weaker European sales, where market conditions remain challenging.
Funds under management as at 30 June 2011 total GBP5.9 billion and have increased by 3% in the six months. Fund flows are largely driven by the growth of the FPIL business with net in-flows in the period of GBP0.3 billion.
IFRS based operating profit
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------------------------------ ---------- ---------- ---------- New business strain (20) (11) (28) In-force surplus 69 58 120 Investment return and other items - 1 3 Principal reserving changes and one-off items (6) 2 2 Development costs (3) (2) (6) Other 1 (1) 4 ------------------------------------ ---------- ---------- ---------- IFRS based operating profit before tax 41 47 95 ------------------------------------ ---------- ---------- ----------
International generated IFRS based operating profits of GBP41 million in the six month period to 30 June 2011 compared to GBP47 million in the first six months of 2010.
Reconciliation of new business strain to IFRS
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm -------------------------- ---------- ---------- ---------- New business cash strain (52) (57) (83) DAC / DFF adjustments 105 97 210 Other IFRS adjustments (73) (51) (155) -------------------------- ---------- ---------- ---------- IFRS new business strain (20) (11) (28) -------------------------- ---------- ---------- ----------
New business cash strain has reduced by GBP5 million to GBP52 million period on period, principally as a result of the increased benefit from financial reinsurance. Higher acquisition costs as sales volumes increased have partly offset this benefit.
IFRS new business strain has increased to GBP20 million from GBP11 million at half year 2010, largely due to modelling improvements as well as increased new business volumes. Other IFRS adjustments include the elimination of financial reinsurance from IFRS new business strain as well as the elimination of actuarial funding and sterling reserves which are a feature of the products sold by the International business.
In-force surplus
In-force surplus on the IFRS basis increased from GBP58 million in the first half of 2010 to GBP69 million at half year 2011, benefitting from the growth of the back book although this growth has been restricted by adverse economic variances.
Principal reserving changes and one-off items
Adverse principal reserving changes and one-off items of GBP6 million comprise a number of small adjustments principally relating to FPIL.
Operating expenses
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------ --------- --------- --------- Acquisition 15 13 28 Maintenance 13 10 22 Development 3 2 6 Other - - 1 ------------ --------- --------- --------- Total 31 25 57 ------------ --------- --------- ---------
International operating expenses, which exclude commission payments and non-recurring costs, have increased to GBP31 million from GBP25 million in the first six months of 2010. Expense increases across the business reflect the higher new business volumes and improvements to propositions and distribution capabilities as well as the costs of strengthening the governance and controls to meet the needs of a growing, complex business. Development costs relate to the German business and the development of the International business' platform.
Lombard operating segment
2010 was an exceptional period for the cross-border life insurance market with this being particularly evident in the first six months of the year. Total Luxembourg life insurance market premiums were estimated at around EUR22 billion with Lombard accounting for 16% of the market, underpinning its market leading position.
Market activity has been markedly lower in the first half of 2011 as the EUSD and the Italian tax amnesty, which drove volume in the first half of 2010, were not prominent and there were no other similar event drivers. Additionally, whilst Lombard's performance is not directly linked to investment markets the continued market uncertainty and pervasive risk arising from the ongoing uncertainty in sovereign debt and general market-related volatility has led to clients postponing actions to structure their investments and manage intergenerational transfer of their wealth.
Notwithstanding the challenging short-term market conditions, the longer term drivers of the demand for compliant "Privatbancassurance" solutions remain compelling.
There are three core elements of Lombard's strategy including strengthening the sales force, investment in marketing and deepening partner relationships, and improving the maintenance and servicing of policies whilst streamlining the business' operating model. It is envisaged that these initiatives will contribute to the delivery of the financial outcomes by 2013 (IRR above 20% and GBP30 million dividend).
Financial performance
Overall, business in the first half of 2011 is below 2010 levels, with sales volumes of GBP97 million APE 28% below the same period in 2010. The lower volumes have directly affected the IRR of 19.0% which has reduced on that generated last year. Historically, the IRR has increased in the second half of the year and accordingly the current levels should not be extrapolated for the full year. Compound annual growth rate ("CAGR") for
sales in the first half of the year is 11% between 2007 and 2011.
Performance in the period has been impacted by a number of factors including the strong drivers of the 2010 comparatives referred to above. Other factors include lower IFA activity in Northern Europe and UK as well as a general increase in the time it takes to close large client deals due to market uncertainties in certain European countries.
Despite the above factors several markets have performed strongly including Finland, France, Italy, Sweden and Asia, which are significantly above 2010 business levels. These improvements reflect the benefits from sales force enhancement, and continued deepening of relationships with partners in these markets. The growth in these regions is encouraging and highlights the valuable market diversity of Lombard's business.
Whilst the external environment is challenging, it is anticipated that activity will be significantly higher in the second half of 2011. This reflects the natural switch in the focus of the sales force from developing leads and client opportunities to closing business. The second half of the year also traditionally benefits from the December fiscal year end in operation within most markets. It is anticipated that Lombard will continue to attract a significant share of its target high and ultra-high net worth market segment.
Albeit below 2010 levels, the pipeline of new business remains high and large case prospects in development are encouraging.
IFRS based operating profit
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------------------------------ ---------- ---------- ---------- New business strain (17) (22) (28) In-force surplus 40 38 66 Investment return and other items (1) (1) (4) Principal reserving changes and one-off items - (1) - Development costs (1) (1) (1) ------------------------------------ ---------- ---------- ---------- IFRS based operating profit before tax 21 13 33 ------------------------------------ ---------- ---------- ----------
Lombard generated operating profit before tax of GBP21 million in the six month period to 30 June 2011, up 62% on 2010.
Reconciliation of new business strain to IFRS
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm -------------------------- ---------- ---------- ---------- New business cash strain (11) (15) (6) DAC / DFF adjustments (6) (7) (21) Other IFRS adjustments - - (1) -------------------------- ---------- ---------- ---------- IFRS new business strain (17) (22) (28) -------------------------- ---------- ---------- ----------
Period on period, levels of new business strain have remained higher than the 2010 full year, despite the lower sales volumes to date. This is due to local rules on deferral of acquisition costs which meant that DAC has been indirectly restricted by the lower level of new business to date. This proportion is expected to return to consistent levels in the second half of the year. Excluding the impact of deferred acquisition costs, actual new business strain cash flows have improved significantly compared to the first half of 2010.
Surplus generated has benefitted principally from the growth in the existing book of business with the increase in charges generated reflecting the growing scale of the managed asset base.
Average funds under management have increased significantly from GBP14.5 billion in the first half of 2010 to GBP17.7 billion in 2011 as a result of both investment market growth in 2010 and the significant sales volumes brought onto the book in the second half of 2010. The business has delivered net business inflows of GBP0.6 billion through the first half of 2011.
Operating expenses
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------ -------------------- --------- --------- Acquisition 20 19 47 Maintenance 12 9 19 Development 1 1 1 Other - - 2 ------------ -------------------- --------- --------- Total 33 29 69 ------------ -------------------- --------- ---------
The operating expenses of Lombard, which exclude both commission payments and non-recurring costs, are set out in the table above. Notwithstanding the growth in the in-force book, Lombard has maintained tight control of expense levels which, on a constant currency basis, and excluding an accrual for the management long term incentive plan, are 5% higher than 2010, while average funds under management increased by 17%.
Development costs consist of expenses related to new product and market development.
FLG corporate segment
The FLG corporate segment includes the corporate holding and principal service companies of the Friends Life Group.
FLG corporate IFRS based operating profit
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ----------------------------- ---------- ---------- ---------- Investment return and other items, excluding debt 40 23 47 Expected return on debt (57) (22) (61) Other (3) (1) (11) ----------------------------- ---------- ---------- ---------- IFRS based operating profit before tax (20) - (25) ----------------------------- ---------- ---------- ----------
The corporate result is primarily driven by the expected return on the debt held in the Group, offset by the investment return on shareholder assets. Corporate costs of GBP3 million primarily relate to the FLG long term incentive scheme.
Group IFRS profit
The Group's IFRS results are set out below, including a reconciliation from operating profit to IFRS based profit before tax. The Group uses the operating profit measure as the Board considers that this better represents the underlying performance of the business and the way in which it is managed.
Half year Half year Full year GBPm 2011 (i) 2010 (ii) 2010 (iii) ----------------------------------------- ---------- ---------- ----------- UK 364 99 187 International 41 47 95 Lombard 21 13 33 Corporate (20) - (25) IFRS based operating profit before tax 406 159 290 Short-term fluctuations in investment return (2) 64 24 Returns on F&C Commercial Property Trust - 23 23 Acquisition accounting adjustments: Amortisation and impairment of acquired in-force business (453) (142) (364) Amortisation of other acquired intangible assets (41) (25) (64) Non-recurring items: Gain on acquisition of businesses 68 - 883 Costs associated with the business acquisitions (1) - (14) Other non-recurring items (79) (3) (68) STICS interest adjustment to reflect IFRS accounting for STICS as equity 16 16 31 ----------------------------------------- IFRS (loss)/ profit before shareholder tax (86) 92 741 Shareholder tax 147 (6) 107 ----------------------------------------- ---------- ---------- ----------- IFRS profit after tax 61 86 848 ----------------------------------------- ---------- ---------- -----------
i) 2011 half year results comprise six months results for Friends Provident; six months for the AXA UK Life Business; and five months for BHA.
ii) 2010 half year results comprise six months results for Friends Provident.
iii) 2010 full year results include 12 months for Friends Provident and four months for the AXA UK Life Business.
IFRS based operating profit for 2011 was GBP406 million comprising the operating profit for the life business of GBP426 million and GBP20 million of corporate costs. A detailed review of the operating profit of each segment has been provided in the relevant segmental review section of this business review.
Non-operating items
Short-term fluctuations in investment return of GBP2 million includes a GBP9 million benefit from the unwind of the credit default allowance in excess of actual defaults within the non-profit fund. This is partially offset by a GBP7 million variance on expected investment return.
In April 2010, the Friends Provident UK business reduced its holdings in F&C Commercial Property Trust ("F&C CPT") from 50.3% to 34.16% in order to manage the property exposure of the life funds. As a result, the Group is no longer required to consolidate the assets, liabilities and results of this investment trust and so the result for 2011 is nil. The GBP23 million return on F&C CPT in 2010 reflects the market return attributable to third parties for the period up to April 2010.
Acquisition accounting adjustments, totalling GBP494 million, represent the amortisation and impairment of the intangible assets recognised on the acquisitions. These charges include GBP252 million of amortisation of acquired in-force business, and GBP41 million of amortisation of other intangible assets. Following the implementation of negative reserves within the AXA UK Life business and BHA, an acceleration of AVIF amortisation amounting to GBP201 million has been recognised to reflect the earlier recognition of surplus within operating profit.
Non-recurring items include the gain on acquisition of BHA of GBP68 million and GBP1 million costs associated with this. Other non-recurring costs totalling GBP79 million include Solvency II and other finance transformation costs of GBP24 million, separation and integration programme costs of GBP41 million, capital optimisation programme costs of GBP8 million and other non-recurring costs of GBP6 million.
Interest payable on the Friends Provident STICS of GBP16 million is included as a GBP13 million deduction to corporate long term investment return in the operating profit analysis, and GBP3 million adverse investment fluctuation. As the STICS are accounted for as equity in IFRS (with interest being recorded as a reserve movement), GBP16 million is added back to the non-operating result to reflect the requirements of IFRS.
A shareholder tax credit of GBP147 million is recognised in the period and is significantly higher than the loss before tax of GBP86 million would imply. The principal differences between the implied and the actual shareholder tax credit relate to:
-- a GBP48 million one-off shareholder tax credit triggered by the change in pricing basis on certain unit-linked funds to reflect the fact that these funds were contracting. The discounted tax provision previously included in the pricing (and thus reflected in policyholder liabilities) has been replaced by an undiscounted provision for asset gains. This facilitated the release of a shareholder tax provision which was previously established, as IFRS does not permit the discounting of tax provisions;
-- a GBP30 million shareholder tax credit relating to the reduction in rate of UK corporation tax; and
-- the GBP68 million accounting gain on the acquisition of BHA, which is non-taxable.
Summary IFRS balance sheet
GBPm 30 Jun 2011 31 Dec 2010 ------------------------------------- ------------ ------------ Acquired value of in-force business 4,439 4,685 Other intangible assets 431 455 Financial assets 101,089 99,465 Cash and cash equivalents 8,532 9,057 Other assets 9,032 8,492 ------------------------------------- ------------ ------------ Total assets 123,523 122,154 ------------------------------------- ------------ ------------ Insurance and investment contracts 108,608 107,492 Loans and borrowings 1,007 1,012 Other liabilities 7,668 7,102 ------------------------------------- ------------ ------------ Total liabilities 117,283 115,606 ------------------------------------- ------------ ------------ IFRS net assets 6,240 6,548 ------------------------------------- ------------ ------------ Equity attributable to equity holders of the parent 5,926 6,226 STICS 310 318 Attributable to non-controlling interests 4 4 ------------------------------------- ------------ ------------ Total equity 6,240 6,548 ------------------------------------- ------------ ------------
At 30 June 2011, IFRS total equity was GBP6,240 million (31 December 2010: GBP6,548 million), with equity attributable to equity holders of the parent of GBP5,926 million (31 December 2010: GBP6,226 million).
Financial assets are predominantly invested in listed shares, other variable yield securities and corporate bonds and asset backed securities where 96% are at investment grade or above.
Included in the assets that were acquired within the AXA UK Life Business are certain portfolios of insurance business (the Guaranteed over Fifty, "GOF", and Trustee Investment Plan, "TIP" portfolios) that are expected to be transferred back to AXA UK via Part VII transfers as part of the separation process agreed between FLG and AXA UK. In line with the agreed timetable for the finalisation of the AXA UK Life Business transaction, this transfer is anticipated to take place in the final quarter of 2011. Other assets and other liabilities shown above include GBP284 million of net assets in respect of the GOF and TIP portfolios which are treated as "held for sale" in the Group's accounts.
In addition, the shares of WLUK are to be acquired by the Group once the businesses to be retained by AXA UK have been removed from WLUK. This acquisition is also on track to take place in the final quarter of 2011. WLUK will only be included in the Group's accounts once the acquisition has taken place in 2011 and is not therefore included within these financial statements.
Group capital management
The Friends Life Group manages its capital on both regulatory and economic capital bases, focusing primarily on capital efficiency and the ease with which cash and capital resources can be transferred between entities. In managing capital, the Friends Life Group considers the following:
-- establishing targets for the main UK life companies at the greater of 150% of Pillar 1 CRR (excluding WPICC) and 125% of Pillar 2 CRR including ICG - the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year period;
-- at the FLG level, to hold sufficient capital to meet 160% of the Group CRR (excluding WPICC);
-- maintaining financial strength within companies sufficient to support new business growth targets, including rating agency requirements;
-- the need to have strong liquidity to cover expected and unexpected events, which includes access to an undrawn facility with a consortium of banks;
-- managing, in particular, the with-profits business of the Group in accordance with agreed risk appetites and all regulatory requirements; and
-- transfers from long-term business funds and dividends from entities that support the cash generation requirements of the Group, balanced with the need to maintain appropriate capital within the businesses for the reasons outlined above.
As part of the integration of the AXA UK Life Business, a number of initiatives are being implemented including fund mergers and the optimisation of the corporate structure, to ensure capital efficiency and maximise the fungibility of capital resources.
Solvency II
The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group. The Group has been closely following the emerging regulations and monitoring their potential impact on the Group balance sheet. Friends Life Group is closely involved with the industry in lobbying on key areas where uncertainty remains.
During the first half of the year, Friends Life Group participated in the EIOPA stress test exercise, an EU wide set of stress tests performed by the large insurance companies assessing companies' ability to meet their Solvency II Minimum Capital Requirements ("MCR") under a set of specified stress tests. Friends Life Group also continues to be closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II.
The development and streamlining of some financial systems and tools are included within the Solvency II implementation programme and the overall implementation programme is on track against its plans and budget.
FLG is committed to applying for internal model approval pursuant to the Solvency II Directive and is planning accordingly. The Group has been accepted into the FSA's pre-application process.
The Group assesses strategic developments and opportunities on a Solvency II basis.
The Solvency II requirements are not completely specified, but if the industry is successful in achieving a satisfactory outcome to the key outstanding policy decisions, the Group believes that it will have a favourable capital impact on the Friends Life Group relative to current Pillar 1 solvency requirements.
Insurance Groups Capital Adequacy
In addition to individual company requirements FLG, as the ultimate European Economic Area ("EEA") parent insurance undertaking, is required to meet the IGCA requirements of the Insurance Groups Directive. The Group's capital policy is to maintain sufficient group capital resources to cover 160% of group CRR (excluding WPICC). This policy was increased from 150% following the acquisition of the AXA UK Life Business.
The balance sheet remained strong at the Friends Life group level, with an IGCA surplus of GBP2.0 billion at 30 June 2011, with Group Capital Resources being 209% of Group CRR (excluding WPICC). Group Capital Resources were GBP0.9 billion in excess of the amount required to satisfy the FLG group capital policy of holding 160% of Group CRR (excluding WPICC).
The IGCA surplus would reduce by around GBP0.1 billion for a 40% fall in equity markets from 30 June 2011 levels and would reduce by slightly less if interest rates were to rise by 100bps across the yield curve.
The movement in IGCA surplus over the period largely reflects the expected surplus emerging in the period after financing costs and less amounts retained in the long term funds, non-recurring and non-operating costs of GBP62 million (including integration costs), offset by the GBP132 million impact of acquiring BHA (GBP169 million cost of investment offset by a GBP37 million IGCA surplus at the acquisition date) and the GBP157 million benefit (on an IGCA basis) of negative reserves released in Friends Life Company Limited ("FLC") and BHA businesses. Additional surplus of GBP46 million relating to surplus generated in Friends Provident Life and Pensions Limited ("FPLP") during the year is not available in IGCA until it is transferred to shareholder funds after the full year actuarial valuation. The surplus is also impacted by financing and dividend costs, which include the GBP350 million of dividends paid to the Resolution holding companies in the period as well as interest costs at Friends Life Group.
Asset quality and exposure
The vast majority of the Group's exposure to sovereign debt holdings is to UK gilts. The Group has GBP8 million shareholder exposure (including shareholder fund exposure to non-profit and with-profit funds) to the higher risk government debts of Spain, Portugal, Italy, Ireland and Greece (31 December 2010: GBP7 million).
In addition the Group's shareholder exposure to various corporate securities issued by companies domiciled in Spain, Portugal, Italy, and Ireland is GBP439 million (31 December 2010: GBP444 million). The Group's shareholder exposure to Greek corporate securities and sovereign debt is less than GBP1 million. 56% by value of these corporate securities are issued by non-financial companies, which are in many cases less exposed to their domicile economy than to other countries. Where the Group holds securities issued by financial companies, 23% of these are not linked to the institution's domestic economy. In all cases the company's financial strength and the ability of the domicile government to provide financial support in the event of stress has been considered.
Over 96% of the corporate bond and asset backed securities, to which the shareholder funds are exposed, are investment grade. The Group controls its exposures to corporate issuers by rating, type of instrument and type of issuer. The sub-investment grade bonds held in investment portfolios are monitored closely in order to maximise exit values. Where asset backed securities and other complex securities are held, the Group monitors closely its exposures to ensure that the relevant structure, liquidity and tail credit risks are well understood and controlled.
No defaults have been experienced in the year.
Liquidity
The liquidity of the Group remains strong.
FLG has an undrawn GBP500 million funding facility with a consortium of banks. This facility is due to run until June 2013 but can be extended at the option of FLG for a further two years.
Financial strength ratings
A number of the Group's life businesses are attributed financial strength ratings.
Fitch Moody's Standard & Poor's ----- ------------ ------------ ---------------------- FPLP A+ (strong) A3 (strong) A-(strong) FLC A+ (strong) A2 (strong) A-(strong) FLAS A+ (strong) A2 (strong) NR ----- ------------ ------------ ----------------------
The Group targets financial strength ratings in the single A range and expects them to remain there for the foreseeable future.
Principal risks and uncertainties
The Group included details of the principal risks and uncertainties related to its business on pages 15-18 of its 2010 Annual Report and Accounts. These were published under the following headings:
1) Economic conditions
2) Acquisition of target companies
3) Integration and restructuring
4) Regulatory change and compliance
5) Mortality and other assumption uncertainties
6) Counterparty and third party risks
7) Reputation and contagion risks
All of these remain relevant and applicable for the remainder of 2011.
As stated in Note 1 to the condensed consolidated financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.
Statement of directors' responsibilities
Each of the directors confirm that to the best of their knowledge:
-- The condensed consolidated IFRS interim financial information has been prepared in accordance with IAS 34: Interim Financial Reporting, as adopted by the European Union ("EU").
-- The interim report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7, namely important events that have occurred during the period and their impact on the condensed set of financial statements, as well as a description of the principal risks and uncertainties faced by the Company and the undertakings included in the condensed consolidated financial statements taken as a whole for the remaining six months of the financial year; and
-- The interim report includes a fair review of material related party transactions that have taken place in the first six months of the current financial year and any material changes in related party transactions described in the last annual report as required by Disclosure and Transparency Rules 4.2.8.
By order of the Board
Andy Parsons
Executive Director Finance
INDEPENDENT REVIEW REPORT TO FRIENDS LIFE GROUP plc
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half yearly financial report for the six months ended 30 June 2011 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of IFRS based operating profit, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and the related notes 1 to 11. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
Ernst & Young LLP
London
15 August 2011
Condensed consolidated income statement
For the half year ended 30 June 2011
2011 2010 2010 Half year Half year Full year Notes GBPm GBPm GBPm ---------------------------------- ------ ---------- ---------- ---------- Revenue Gross earned premiums 2 1,069 426 1,288 Premiums ceded to reinsurers 2 (296) (50) (241) ---------------------------------- ------ ---------- ---------- ---------- Net earned premiums 2 773 376 1,047 Fee and commission income and income from service activities 410 323 751 Investment return 2,579 1,182 8,424 ---------------------------------- ------ ---------- ---------- ---------- Total revenue 3,762 1,881 10,222 ---------------------------------- ------ ---------- ---------- ---------- Other income 2 78 - 891 ---------------------------------- ------ ---------- ---------- ---------- Claims, benefits and expenses Gross claims and benefits paid 1,824 676 2,004 Amounts receivable from reinsurers (318) (88) (322) ---------------------------------- ------ ---------- ---------- ---------- Net claims and benefits paid 1,506 588 1,682 ---------------------------------- ------ ---------- ---------- ---------- Change in insurance contracts liabilities (69) 86 891 Change in investment contracts liabilities 928 473 5,863 Transfer to unallocated surplus 49 1 4 Movement in net assets attributable to unit-holders 30 (2) 139 ---------------------------------- ------ ---------- ---------- ---------- Movement in policyholder liabilities 938 558 6,897 ---------------------------------- ------ ---------- ---------- ---------- Acquisition expenses 300 166 392 Administrative and other expenses 940 349 1,028 Finance costs 78 66 129 ---------------------------------- ------ ---------- ---------- ---------- Total claims, benefits and expenses 3,762 1,727 10,128 ---------------------------------- ------ ---------- ---------- ---------- Share of profit/(loss) of associate and joint venture 1 (1) - ---------------------------------- ------ ---------- ---------- ---------- Profit before tax from continuing operations 79 153 985 Policyholder tax 4 (165) (61) (244) ---------------------------------- ------ ---------- ---------- ---------- (Loss)/profit before shareholder tax from continuing operations (86) 92 741 ---------------------------------- ------ ---------- ---------- ---------- Total tax charge 4 (18) (67) (137) Policyholder tax 4 165 61 244 ---------------------------------- ------ ---------- ---------- ---------- Shareholder tax 4 147 (6) 107 ---------------------------------- ------ ---------- ---------- ---------- Profit for the period 61 86 848 ---------------------------------- ------ ---------- ---------- ---------- Attributable to: Ordinary shareholders (i) 45 47 794 STICS holders (ii) 16 - 1 ---------------------------------- ------ ---------- ---------- ---------- 61 47 795 Non-controlling interests Equity attributable to STICS holders (ii) - 16 30 Other - 23 23 ---------------------------------- ------ ---------- ---------- ---------- Profit for the period 61 86 848 ---------------------------------- ------ ---------- ---------- ----------
(i) All profit attributable to ordinary shareholders is from continuing operations.
(ii) On 15 December 2010, the STICS ceased to be non-controlling interests following an intra-group transfer of these equity instruments from Friends Provident Group plc ("FPG") to the Company.
The consolidated income statement includes the results of BHA from the date of acquisition on 31 January 2011. The results for the year ended 31 December 2010, include the results of the acquired AXA UK Life Business from 3 September 2010.
Condensed consolidated statement of comprehensive income
For the half year ended 30 June 2011
Equity holders ------------------------- Ordinary Non- share STICS controlling holders holders (iii) interests Total GBPm GBPm GBPm GBPm ----------------------------- --------- -------------- ------------ ------ Profit for the period 45 16 - 61 ----------------------------- --------- -------------- ------------ ------ Actuarial losses on defined benefit schemes (25) - - (25) Foreign exchange adjustments (i) 20 - - 20 Shadow accounting (ii) 2 - - 2 Aggregate tax effect of above items 1 - - 1 ----------------------------- --------- -------------- ------------ ------ Other comprehensive loss, net of tax (2) - - (2) ----------------------------- --------- -------------- ------------ ------ Total comprehensive income, net of tax 43 16 - 59 ----------------------------- --------- -------------- ------------ ------
For the half year ended 30 June 2010
Equity Non-controlling holders interests --------- ---------------------- Ordinary share STICS holders holders (iii) Other Total GBPm GBPm GBPm GBPm ------------------------------ --------- -------------- ------ ------ Profit for the period 47 16 23 86 ------------------------------ --------- -------------- ------ ------ Actuarial losses on defined benefit schemes (78) - - (78) Foreign exchange adjustments (i) (46) - - (46) Shadow accounting (ii) (8) - - (8) Aggregate tax effect of above items 40 - - 40 ------------------------------ --------- -------------- ------ ------ Other comprehensive loss, net of tax (92) - - (92) ------------------------------ --------- -------------- ------ ------ Total comprehensive income, net of tax (45) 16 23 (6) ------------------------------ --------- -------------- ------ ------
For the year ended 31 December 2010
Non-controlling ------------------- Equity holders interests ------------------- ------------------ Ordinary share STICS STICS holders holders holders Other Total (iii) (iii) GBPm GBPm GBPm GBPm GBPm ----------------------------- --------- -------- ---------- ------ ------ Profit for the period 794 1 30 23 848 ----------------------------- --------- -------- ---------- ------ ------ Actuarial losses on defined benefit schemes (46) - - - (46) Foreign exchange adjustments (i) (6) - - - (6) Shadow accounting (ii) (3) - - - (3) Aggregate tax effect of above items 25 - - - 25 ----------------------------- --------- -------- ---------- ------ ------ Other comprehensive loss, net of tax (30) - - - (30) ----------------------------- --------- -------- ---------- ------ ------ Total comprehensive income, net of tax 764 1 30 23 818 ----------------------------- --------- -------- ---------- ------ ------
(i) Foreign exchange adjustments relate to the translation of overseas subsidiaries.
(ii) Shadow accounting relates to a gain of GBP2 million (30 June 2010: loss of GBP8 million; 31 December 2010: loss of GBP3 million) in respect of foreign exchange adjustments on translation of overseas subsidiaries held by the with-profits fund of FPLP.
(iii) On 15 December 2010, the STICS ceased to be non-controlling interests following an intra-group transfer of these equity instruments from FPG to the Company.
Condensed consolidated statement of IFRS based operating profit
For the half year ended 30 June 2011
2011 2010 2010 Half year Half year Full year Notes GBPm GBPm GBPm ---------------------------------- ------ ---------- ---------- ---------- Profit before tax from continuing operations 79 153 985 Policyholder tax (165) (61) (244) Returns on Group-controlled funds attributable to third parties - (23) (23) ---------------------------------- ------ ---------- ---------- ---------- (Loss)/profit before tax excluding returns generated within policyholder funds (86) 69 718 Non-recurring items 12 3 (801) Amortisation and impairment of acquired present value of in-force business 5 453 142 364 Amortisation of other intangible assets 5 41 25 64 Interest payable on STICS (16) (16) (31) Short-term fluctuations in investment return 2 (64) (24) ---------------------------------- ------ ---------- ---------- ---------- IFRS based operating profit before tax 406 159 290 Tax on operating profit (57) (25) 16 IFRS based operating profit after tax attributable to ordinary shareholders from continuing operations 349 134 306 ---------------------------------- ------ ---------- ---------- ----------
Condensed consolidated statement of financial position
At 30 June 2011
30 June 30 June 31 December 2011 2010 2010 Notes GBPm GBPm GBPm ------------------------------------ ------ -------- -------- ------------ Assets Pension scheme surplus 3 - 22 Intangible assets 5 4,870 3,021 5,140 Property and equipment 58 45 46 Investment properties 3,128 857 3,189 Investments in associate and joint venture 33 33 32 Deferred tax assets - 8 4 Financial assets 6 101,089 49,053 99,465 Deferred acquisition costs 490 180 358 Reinsurance assets 2,614 1,926 2,637 Current tax assets 27 4 22 Insurance and other receivables 1,411 646 976 Cash and cash equivalents 8,532 4,955 9,057 Assets of operations classified as held for sale 1,268 - 1,206 ------------------------------------ ------ -------- -------- ------------ Total assets 123,523 60,728 122,154 ------------------------------------ ------ -------- -------- ------------ Liabilities Insurance contracts 35,071 12,146 35,081 Unallocated surplus 1,148 275 1,098 Financial liabilities Investment contracts 73,537 40,877 72,411 Loans and borrowings 7 1,007 282 1,012 Amounts due to reinsurers 1,650 1,713 1,666 Net asset value attributable to unit-holders 1,199 697 1,173 Provisions 227 56 221 Pension scheme deficit - 35 - Deferred tax liabilities 1,126 514 1,115 Current tax liabilities 29 19 11 Insurance payables, other payables and deferred income 1,305 555 893 Liabilities of operations classified as held for sale 984 - 925 ------------------------------------ ------ -------- -------- ------------ Total liabilities 117,283 57,169 115,606 ------------------------------------ ------ -------- -------- ------------ Equity attributable to equity holders of the parent Attributable to ordinary shareholders: Share capital 515 250 515 Other reserves 5,411 2,995 5,711 ------------------------------------ ------ -------- -------- ------------ 5,926 3,245 6,226 STICS holders 310 - 318 ------------------------------------ ------ -------- -------- ------------ 6,236 3,245 6,544 Attributable to non-controlling interests STICS holders - 310 - Other 4 4 4 ------------------------------------ ------ -------- -------- ------------ Total equity 6,240 3,559 6,548 ------------------------------------ ------ -------- -------- ------------ Total equity and liabilities 123,523 60,728 122,154 ------------------------------------ ------ -------- -------- ------------
The financial statements were approved by the Board of directors on 15 August 2011.
Condensed consolidated statement of changes in equity
For the half year ended 30 June 2011
Attributable to Other ordinary equity shareholders holders Non- Share Other STICS controlling capital reserves Total holders interests Total GBPm GBPm GBPm GBPm GBPm GBPm ----------------- -------- --------- ------ -------- ------------ ------ At 1 January 2011 515 5,711 6,226 318 4 6,548 Profit for the period - 45 45 16 - 61 Other comprehensive loss - (2) (2) - - (2) Total comprehensive income - 43 43 16 - 59 ----------------- -------- --------- ------ -------- ------------ ------ Dividends on equity shares - (350) (350) - - (350) Interest paid on STICS - - - (24) - (24) ----------------- -------- --------- ------ -------- ------------ ------ Appropriations of profit - (350) (350) (24) - (374) Tax relief on STICS interest - 4 4 - - 4 Share based payments - 3 3 - - 3 ----------------- -------- --------- ------ -------- ------------ ------ At 30 June 2011 515 5,411 5,926 310 4 6,240 ----------------- -------- --------- ------ -------- ------------ ------
For the half year ended 30 June 2010
Attributable to ordinary Non-controlling shareholders interests Share Other STICS capital reserves Total holders Other Total GBPm GBPm GBPm GBPm GBPm GBPm --------------------- -------- --------- ------ ---------- ------ ------ At 1 January 2010 250 3,099 3,349 318 297 3,964 Profit for the period - 47 47 16 23 86 Other comprehensive loss - (92) (92) - - (92) Total comprehensive income - (45) (45) 16 23 (6) Dividends on equity shares - (65) (65) - (7) (72) Interest paid on STICS - - - (24) - (24) --------------------- -------- --------- ------ ---------- ------ ------ Appropriations of profit - (65) (65) (24) (7) (96) Tax relief on STICS interest - 5 5 - - 5 Disposals of businesses - - - - (309) (309) Share based payments - 1 1 - - 1 --------------------- -------- --------- ------ ---------- ------ ------ At 30 June 2010 250 2,995 3,245 310 4 3,559 --------------------- -------- --------- ------ ---------- ------ ------
For the year ended 31 December 2010
Attributable to Other Non- ordinary equity controlling shareholders holders interests Share Other STICS STICS capital reserves Total holders holders Other Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm ---------------- -------- --------- ------ -------- -------- ------ ------ At 1 January 2010 250 3,099 3,349 - 318 297 3,964 ---------------- -------- --------- ------ -------- -------- ------ ------ Profit for the year - 794 794 1 30 23 848 Other comprehensive loss - (30) (30) - - - (30) Total comprehensive income - 764 764 1 30 23 818 Dividends on equity shares - (65) (65) - - (7) (72) Interest paid on STICS - - - (1) (30) - (31) ---------------- -------- --------- ------ -------- -------- ------ ------ Appropriations of profit - (65) (65) (1) (30) (7) (103) Tax relief on STICS interest - 9 9 - - - 9 Disposals of businesses - - - - - (309) (309) Issue of share capital 2,165 - 2,165 - - - 2,165 Capital reduction (1,900) 1,900 - - - - - Share based payments - 4 4 - - - 4 Transfer of STICS - - - 318 (318) - - ---------------- -------- --------- ------ -------- -------- ------ ------ At 31 December 2010 515 5,711 6,226 318 - 4 6,548 ---------------- -------- --------- ------ -------- -------- ------ ------
Condensed consolidated cash flow statement
For the half year ended 30 June 2011
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------------------------------------ ---------- ---------- ---------- Operating activities Profit for the period 61 86 848 Adjusted for: Other income (gain on acquisition) (68) - (883) Net realised and unrealised gains on assets at fair value (1,041) (133) (6,379) Finance costs 78 65 129 Amortisation and impairment of intangible assets 494 172 428 Depreciation of property and equipment 2 3 4 Movement in deferred acquisition costs (130) (136) (312) Total tax charge 18 67 137 Net (purchase)/sale of shares and other variable yield securities (325) 552 (2,956) Net sale of loans, debt securities and other fixed income securities 359 170 1,011 Net sale/(purchase) of investment properties 98 (34) 14 (Decrease)/increase in insurance contracts liabilities (167) 40 925 Increase/(decrease) in investment contracts liabilities 501 (7) 7,372 Increase in unallocated surplus 50 2 2 Increase/(decrease) in provisions 5 21 (5) Net movement in receivables and payables 58 (661) 668 ------------------------------------------ ---------- ---------- ---------- Pre-tax cash (outflow)/inflow from operating activities (7) 207 1,003 Tax (paid)/received (33) - 15 ------------------------------------------ ---------- ---------- ---------- Net cash (outflow)/inflow from operating activities (40) 207 1,018 ------------------------------------------ ---------- ---------- ---------- Investing activities Acquisition of subsidiaries, net of cash acquired (78) - 969 Additions to internally generated intangible assets (2) (2) (4) Net additions of property and equipment (14) (1) (1) ------------------------------------------ ---------- ---------- ---------- Net cash (outflow)/inflow from investing activities (94) (3) 964 ------------------------------------------ ---------- ---------- ---------- Financing activities Proceeds from issue of ordinary share capital - - 1,665 Proceeds from issue of long-term debt 497 - 729 Repayment of long-term debt (500) (128) (123) Finance costs (69) (63) (126) STICS interest (24) (25) (31) Net movement in other borrowings, net of expenses (4) 47 15 Dividends paid to equity holders of the parent (350) (65) (65) Dividends paid to non-controlling interests - (7) (7) ------------------------------------------ ---------- ---------- ---------- Net cash (outflow)/inflow from financing activities (450) (241) 2,057 ------------------------------------------ ---------- ---------- ---------- (Decrease)/increase in cash and cash equivalents (584) (37) 4,039 ------------------------------------------ ---------- ---------- ---------- Balance at beginning of period 9,057 5,073 5,073 Exchange adjustments on the translation of foreign operations 59 (81) (55) ------------------------------------------ ---------- ---------- ---------- Balance at end of period 8,532 4,955 9,057 ------------------------------------------ ---------- ---------- ----------
Notes to the condensed consolidated financial statements
1. Basis of preparation
The financial statements of the Company as at and for the half year ended 30 June 2011 comprise the condensed consolidated financial statements of the Company and its subsidiaries ("the Group") and the Group's interests in associates and jointly controlled entities.
On 31 January 2011, the Group through its subsidiary, FPLP, acquired all of the share capital of BHA. The consolidated income statement therefore includes the result of this business from that date.
Under the terms of the acquisition of the AXA UK Life Business it was agreed that certain portfolios owned by the Group as a result of the acquisition are to be transferred back to AXA UK. In particular, it is intended that the assets and liabilities of two portfolios of insurance contracts, the GOF and TIP business, will be transferred under the provisions of Part VII of the Financial Services and Markets Act 2000 back to AXA UK and they are therefore classified as held for sale assets and liabilities.
Insurance payables, other payables and deferred income includes a liability for an amount of GBP34 million payable from the Company to AXA UK on completion of the Part VII transfer of the GOF and TIP portfolios of insurance business. The amount is part of the wrong-pocket adjustment which will be made from the Company to AXA UK to reflect the surpluses which have arisen in WLUK and FLC respectively in respect of the businesses which will be transferred during the second half of 2011. The GBP34m is calculated by reference to the expected cash surplus arising on the GOF and TIP portfolios in the period since the acquisition of the AXA UK Life Business by the Group.
WLUK is still legally owned by AXA UK and control is expected to pass to the Company in the second half of 2011. This is conditional upon a transfer under Part VII of the Financial Services and Markets Act 2000 of AXA retained business out of WLUK and FSA approval of change of control being received. The results and net assets of WLUK have therefore not been included in these financial statements.
The June 2010 comparatives do not include either the acquired AXA UK Life Business or BHA as they had not been acquired at the time.
The annual financial statements of the group are prepared in accordance with IFRS as adopted by the EU. The condensed consolidated interim financial statements as at and for the half year ended 30 June 2011 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority, with IAS 34: Interim Financial Reporting as adopted by the EU and with accounting policies adopted in respect of the financial statements for the year ended 31 December 2010, as updated by changes that are intended to be made in the full year 2011 financial statements as a result of changes to IFRS. The condensed consolidated interim financial statements do not constitute statutory accounts as defined in Section 435 of the companies Act 2006.
The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.
The presentation currency of the Group is Sterling. Unless otherwise stated the amounts shown in these financial statements are in millions of pounds Sterling (GBP million).
During the period certain subsidiary companies, FLC and the acquired BHA business, revised their reserving methodology by allowing for negative reserves on protection business as allowed for in PS06/14.
This has been treated as a change in estimates under IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors in line with the accepted approach taken by the UK industry on adoption of PS06/14.
The impact of this methodology changes was as follows:
-- a reduction in policyholder liabilities of GBP243 million and a write-off of DAC on protection business of GBP22 million in the AXA UK Life Business resulting in a one-off benefit to operating profit of GBP221 million;
-- an acceleration of AVIF amortisation of GBP130 million in the AXA UK Life Business and an AVIF impairment of GBP71 million in the acquired BHA business resulting in a one-off adverse impact on non-operating profit of GBP201 million; and
-- a reduction in the emerging surplus and new business strain of GBP15 million.
The net impact on profit before tax was GBP5 million.
The International Accounting Standards Board ("IASB") issued the following changes to existing standards and interpretations which are effective for reporting periods beginning on or after 1 January 2011:
IFRS 7: Financial Instruments: Disclosures. This amendment enhances the requirements for credit risk disclosures;
IAS 1: Presentation of Financial Statements. This amendment is presentational in nature and does not have an impact on the Group as the existing presentation complies with the standard;
IAS 24: Related Party Disclosures. This revision to IAS 24 clarifies the definition of a related party. It does not have a material impact on the Group; and
IAS 34: Interim Financial Reporting. This amendment reinforces the principles in IAS 34 with which the Group already complies;
The IASB issued the following new interpretation which is effective for reporting periods beginning on or after 1 July 2010:
IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments. This interpretation does not have a material impact on the Group.
The IASB issued the following changes to existing standards that are effective for future reporting periods, but where early adoption is permitted. The Group has not adopted them for half year reporting since they have not yet been endorsed by the EU. The impact on the Group is being assessed.
IFRS 7: Financial Instruments: Disclosures. This amendment enhances disclosures about the risks arriving from derecognised assets. Effective for reporting periods beginning on or after 1 July 2011.
IAS 12: Income Taxes. This amendment, in relation to deferred tax, effective for reporting periods beginning on or after 1 January 2012, will not have material impact on the Group.
IAS 1: Presentation of Financial Statements. The amendment requires companies to group together items within Other Comprehensive Income that may be reclassified to the profit or loss section of the income statement. The amendment is effective for reporting periods beginning on or after 1 July 2012.
The IASB has issued the following new standards which are effective for reporting periods beginning on or after 1 January 2013. These have not been endorsed by the EU and have not been adopted for half year reporting. The impact on the Group is being assessed.
IFRS 10: Consolidated Financial Statements provides a single consolidation model that identifies control as the basis for consolidation for all types of entities;
IFRS 11: Joint Arrangements establishes principles for financial reporting by parties to a joint arrangement;
IFRS 12: Disclosure of Interests in Other Entities combines, enhances and replaces the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities; and
IFRS 13: Fair Value Measurement defines fair value and sets out in a single IFRS a framework for measuring fair value.
2. Segmental information
(a) Summary
Segmental information is presented on the same basis as internal financial information used by the Group to evaluate operating performance. Segmental information relating to revenue, net income, products and services for the half year ended 30 June 2011 includes BHA from 31 January 2011. The segmental information for the year ended 31 December 2010 includes 12 months for the acquired Friends Provident Business and four months for the acquired AXA UK Life Business. The half year 2010 segmental information includes six months of Friends Provident only.
The Group's management and internal reporting structure is based on the following operating segments which all meet the definition of a reportable segment under IFRS 8: Operating Segments:
-- UK - comprising Friends Provident UK life and pensions business, the acquired AXA UK Life Business, BHA, Sesame Bankhall and, for the period prior to 19 March 2010 when it was disposed, Pantheon Financial Limited;
-- International - comprising FPIL, the overseas life assurance business within the UK life and pensions subsidiaries and the Group's share of AmLife; and
-- Lombard.
Corporate functions are not strictly an operating segment, but are reported to management, and are provided in the analysis below to reconcile the Group's reportable segments to total profit.
(b) Operating segment information
(i) Operating profit
For the half year ended 30 June 2011
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm --------------------------------- ----- ------ -------- ---------- ------ Life and pensions operating profit 370 43 23 - 436 Longer-term return on shareholder funds 4 - (1) (17) (14) Other income and charges - 1 - (3) (2) Development costs (10) (3) (1) - (14) --------------------------------- ----- ------ -------- ---------- ------ Operating profit/(loss) before tax 364 41 21 (20) 406 Tax on operating profit (57) --------------------------------- ----- ------ -------- ---------- ------ Operating profit after tax attributable to ordinary shareholders of the parent 349 --------------------------------- ----- ------ -------- ---------- ------
For the half year ended 30 June 2010
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm --------------------------------- ----- ------ -------- ---------- ------ Life and pensions operating profit 91 49 15 - 155 Longer-term return on shareholder funds 14 1 (1) 1 15 Other income and charges 2 (1) - (1) - Development costs (8) (2) (1) - (11) --------------------------------- ----- ------ -------- ---------- ------ Operating profit before tax 99 47 13 - 159 Tax on operating profit (25) --------------------------------- ----- ------ -------- ---------- ------ Operating profit after tax attributable to ordinary shareholders of the parent 134 --------------------------------- ----- ------ -------- ---------- ------
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm --------------------------------- ----- ------ -------- ---------- ------ Life and pensions operating profit 176 94 38 - 308 Longer-term return on shareholder funds 30 1 (4) (14) 13 Other income and charges 2 6 - (11) (3) Development costs (21) (6) (1) - (28) --------------------------------- ----- ------ -------- ---------- ------ Operating profit/(loss) before tax 187 95 33 (25) 290 Tax on operating profit 16 --------------------------------- ----- ------ -------- ---------- ------ Operating profit after tax attributable to ordinary shareholders of the parent 306 --------------------------------- ----- ------ -------- ---------- ------
(ii) Reconciliation of operating profit before tax to profit before tax from continuing operations
For the half year ended 30 June 2011
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ------ ------ -------- ---------- ------ Operating profit/(loss) before tax 364 41 21 (20) 406 Non-recurring items (i) (12) - - - (12) Amortisation and impairment of acquired present value of in-force business (353) (67) (33) - (453) Amortisation of other acquired intangible assets (22) (4) (15) - (41) Interest payable on STICS 16 - - - 16 Short-term fluctuations in investment return 3 (1) - (4) (2) ----------------------------- ------ ------ -------- ---------- ------ Loss before tax excluding profit generated within policyholder funds (4) (31) (27) (24) (86) Policyholder tax 165 - - - 165 Profit/(loss) before tax from continuing operations 161 (31) (27) (24) 79 ----------------------------- ------ ------ -------- ---------- ------
(i) UK non-recurring items include GBP68 million (GBP67 million net of stamp duty expenses) in respect of the gain on acquisition of BHA. Further details are set out in Note 9. This is offset by GBP80 million of non-recurring costs comprising GBP41 million of separation and integration costs in respect of the acquired BHA and AXA UK Life Business, GBP24 million in respect of Solvency II and finance system developments and GBP15 million of other costs.
For the half year ended 30 June 2010
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ----- ------ -------- ---------- ------ Operating profit before tax 99 47 13 - 159 Non-recurring items (i) (73) (6) - 76 (3) Amortisation of acquired present value of in-force business (44) (62) (36) - (142) Amortisation of intangible assets (11) (3) (11) - (25) Interest payable on STICS 16 - - - 16 Short-term fluctuations in investment return 71 - 2 (9) 64 ----------------------------- ----- ------ -------- ---------- ------ Profit/(loss) before tax excluding profit generated within policyholder funds 58 (24) (32) 67 69 Policyholder tax 61 - - - 61 Returns on Group-controlled funds attributable to third parties 23 - - - 23 ----------------------------- ----- ------ -------- ---------- ------ Profit/(loss) before tax from continuing operations 142 (24) (32) 67 153 ----------------------------- ----- ------ -------- ---------- ------
(i) Non-recurring items comprise of GBP3 million of UK project costs. They also include GBP76 million which comprises of a management recharge to the life companies for pension scheme contributions. The net impact of the recharge for the Group is GBPnil.
For the year ended 31 December 2010
UK Int'l Lombard Corporate Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ------ ------ -------- ---------- ------ Operating profit/(loss) before tax 187 95 33 (25) 290 Non-recurring items (i) (121) (6) - 928 801 Amortisation of acquired present value of in-force business (169) (123) (72) - (364) Amortisation of intangible assets (27) (8) (28) (1) (64) Interest payable on STICS 31 - - - 31 Short-term fluctuations in investment return 28 2 1 (7) 24 ----------------------------- ------ ------ -------- ---------- ------ (Loss)/profit before tax excluding profit generated within policyholder funds (71) (40) (66) 895 718 Policyholder tax 244 - - - 244 Returns on Group-controlled funds attributable to third parties 23 - - - 23 ----------------------------- ------ ------ -------- ---------- ------ Profit/(loss) before tax from continuing operations 196 (40) (66) 895 985 ----------------------------- ------ ------ -------- ---------- ------
(i) Corporate items include GBP883 million (GBP869 million net of stamp duty expenses) in respect of the gain on acquisition of the AXA UK Life Business.
A further GBP68 million of non-recurring costs comprises GBP34 million of separation and integration costs in respect of the acquired AXA UK Life Business, GBP23 million in respect of Solvency II and finance system developments and GBP11 million of other costs. Segment results also include GBP76 million of non-recurring items which comprises of a management recharge to the life companies for pension scheme contributions. The net impact of the recharge for the Group is GBPnil.
(iii) Revenue and expenses
For the year ended 30 June 2011
Elimination of inter- segment amounts UK Int'l Lombard Corporate (ii) Total GBPm GBPm GBPm GBPm GBPm GBPm ---------------- -------- ------ -------- ---------- ------------ -------- Gross earned premiums on insurance and investment contracts 2,604 545 969 - - 4,118 Investment contract premiums (i) (1,540) (540) (969) - - (3,049) ---------------- -------- ------ -------- ---------- ------------ -------- Gross earned premiums 1,064 5 - - - 1,069 Premiums ceded to reinsurers (296) 1 - - (1) (296) ---------------- -------- ------ -------- ---------- ------------ -------- Net earned premiums 768 6 - - (1) 773 Fee and commission income 273 80 57 - - 410 Investment return 2,792 (76) (140) 21 (18) 2,579 ---------------- -------- ------ -------- ---------- ------------ -------- Total revenue 3,833 10 (83) 21 (19) 3,762 ---------------- -------- ------ -------- ---------- ------------ -------- Inter-segment revenue 1 1 - 17 (19) - Total external revenue 3,832 9 (83) 4 - 3,762 ---------------- -------- ------ -------- ---------- ------------ -------- Other income (iii) 78 - - - - 78 ---------------- -------- ------ -------- ---------- ------------ -------- Net claims and benefits paid 1,504 2 - - - 1,506 Movement in insurance and investment contracts liabilities 1,123 (80) (184) - - 859 Transfer to unallocated surplus 47 2 - - - 49 Movement in net assets attributable to unit-holders 30 - - - - 30 Acquisition expenses 257 20 23 - - 300 Administrative and other expenses 741 95 104 1 (1) 940 Finance costs 48 3 1 44 (18) 78 ---------------- -------- ------ -------- ---------- ------------ -------- Total claims, benefits and expenses 3,750 42 (56) 45 (19) 3,762 ---------------- -------- ------ -------- ---------- ------------ -------- Inter-segment expenses 17 1 - 1 (19) - Total external claims, benefits and expenses 3,733 41 (56) 44 - 3,762 ---------------- -------- ------ -------- ---------- ------------ -------- Share of profits of associate and joint venture - 1 - - - 1 ---------------- -------- ------ -------- ---------- ------------ -------- Profit/(loss) before tax from continuing operations 161 (31) (27) (24) - 79 ---------------- -------- ------ -------- ---------- ------------ -------- Policyholder tax (165) - - - - (165) Shareholder tax 137 1 9 - - 147 ---------------- -------- ------ -------- ---------- ------------ -------- Segmental result after Tax 133 (30) (18) (24) - 61 ---------------- -------- ------ -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include inter-segment premiums and loan interest. Inter-segment transactions are undertaken on an arm's-length basis.
(iii) Includes gain on acquisition of BHA of GBP68 million.
For the half year ended 30 June 2010
Elimination of inter- segment amounts UK Int'l Lombard Corporate (ii) Total GBPm GBPm GBPm GBPm GBPm GBPm ---------------- ------ ------ -------- ---------- ------------ -------- Gross earned premiums on insurance and investment contracts 1,354 495 1,347 - - 3,196 Investment contract premiums (i) (934) (489) (1,347) - - (2,770) ---------------- ------ ------ -------- ---------- ------------ -------- Gross earned premiums 420 6 - - - 426 Premiums ceded to reinsurers (49) - - - (1) (50) ---------------- ------ ------ -------- ---------- ------------ -------- Net earned premiums 371 6 - - (1) 376 Fee and commission income 173 105 46 - (1) 323 Investment return 760 135 290 10 (13) 1,182 ---------------- ------ ------ -------- ---------- ------------ -------- Total revenue 1,304 246 336 10 (15) 1,881 ---------------- ------ ------ -------- ---------- ------------ -------- Inter-segment revenue 4 - 4 7 (15) - Total external revenue 1,300 246 332 3 - 1,881 ---------------- ------ ------ -------- ---------- ------------ -------- Net claims and benefits paid 586 2 - - - 588 Movement in insurance and investment contracts liabilities 135 173 251 - - 559 Transfer to unallocated surplus 1 - - - - 1 Movement in net assets attributable to unit-holders (2) - - - - (2) Acquisition expenses 145 5 16 - - 166 Administrative and other expenses 241 87 100 (72) (7) 349 Finance costs 56 2 1 15 (8) 66 ---------------- ------ ------ -------- ---------- ------------ -------- Total claims, benefits and expenses 1,162 269 368 (57) (15) 1,727 ---------------- ------ ------ -------- ---------- ------------ -------- Inter-segment expenses 9 - 1 5 (15) - Total external claims, benefits and expenses 1,153 269 367 (62) - 1,727 ---------------- ------ ------ -------- ---------- ------------ -------- Share of losses of associate and joint venture - (1) - - - (1) Profit/(loss) before tax from continuing operations 142 (24) (32) 67 - 153 ---------------- ------ ------ -------- ---------- ------------ -------- Policyholder tax (61) - - - - (61) Shareholder tax 3 3 12 (24) - (6) ---------------- ------ ------ -------- ---------- ------------ -------- Segmental result after Tax 84 (21) (20) 43 - 86 ---------------- ------ ------ -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include inter-segment fee income and loan interest. Inter-segment transactions are undertaken on an arm's-length basis.
For the year ended 31 December 2010
Elimination of inter- segment amounts UK Int'l Lombard Corporate (ii) Total GBPm GBPm GBPm GBPm GBPm GBPm ---------------- -------- -------- -------- ---------- ------------ -------- Gross earned premiums on insurance and investment contracts 3,457 1,063 3,021 - - 7,541 Investment contract premiums (i) (2,181) (1,051) (3,021) - - (6,253) ---------------- -------- -------- -------- ---------- ------------ -------- Gross earned premiums 1,276 12 - - - 1,288 Premiums ceded to reinsurers (240) (1) - - - (241) ---------------- -------- -------- -------- ---------- ------------ -------- Net earned premiums 1,036 11 - - - 1,047 Fee and commission income 373 266 111 1 - 751 Investment return 6,477 569 1,374 22 (18) 8,424 ---------------- -------- -------- -------- ---------- ------------ -------- Total revenue 7,886 846 1,485 23 (18) 10,222 ---------------- -------- -------- -------- ---------- ------------ -------- Inter-segment revenue 3 1 - 14 (18) - Total external revenue 7,883 845 1,485 9 - 10,222 ---------------- -------- -------- -------- ---------- ------------ -------- Other income (iii) 8 - - 883 - 891 ---------------- -------- -------- -------- ---------- ------------ -------- Net claims and benefits paid 1,678 4 - - - 1,682 Movement in insurance and investment contracts liabilities 4,768 694 1,292 - - 6,754 Transfer to unallocated surplus 2 2 - - - 4 Movement in net assets attributable to unit-holders 139 - - - - 139 Acquisition expenses 329 15 48 - - 392 Administrative and other expenses 669 169 208 (18) - 1,028 Finance costs 109 6 3 29 (18) 129 ---------------- -------- -------- -------- ---------- ------------ -------- Total claims, benefits and expenses 7,694 890 1,551 11 (18) 10,128 ---------------- -------- -------- -------- ---------- ------------ -------- Inter-segment expenses 3 1 - 14 (18) - Total external claims, benefits and expenses 7,691 889 1,551 (3) - 10,128 ---------------- -------- -------- -------- ---------- ------------ -------- Share of profits of associate and joint venture (4) 4 - - - - Profit/(loss) before tax from continuing operations 196 (40) (66) 895 - 985 ---------------- -------- -------- -------- ---------- ------------ -------- Policyholder tax (244) - - - - (244) Shareholder tax 98 7 21 (19) - 107 ---------------- -------- -------- -------- ---------- ------------ -------- Segmental result after Tax 50 (33) (45) 876 - 848 ---------------- -------- -------- -------- ---------- ------------ --------
(i) Accounted for as deposits under IFRS.
(ii) Eliminations include inter-segment loan interest. Inter-segment transactions are undertaken on an arm's-length basis.
(iii) Includes gain on acquisition of the AXA UK Life Business of GBP883 million.
(iv) Products and Services
For the Half year ended 30 June 2011
Individual Group Other Total Protection Investment Annuities Pensions Pensions (i) GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Gross earned premiums 568 260 197 36 8 - 1,069 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Net earned premiums 455 259 16 35 8 - 773 Fee and commission Income - 178 - 130 10 92 410 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Total external revenue 455 437 16 165 18 92 1,183 ------------ ----------- ----------- ---------- ----------- --------- ------ ------
For the Half year ended 30 June 2010
Individual Group Other Total Protection Investment Annuities Pensions Pensions (i) GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Gross earned premiums 165 95 156 5 5 - 426 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Net earned premiums 117 94 156 5 5 (1) 376 Fee and commission Income - 167 - 20 40 96 323 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Total external revenue 117 261 156 25 45 95 699 ------------ ----------- ----------- ---------- ----------- --------- ------ ------
For the Year ended 31 December 2010
Individual Group Other Total Protection Investment Annuities Pensions Pensions (i) GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Gross earned premiums 598 312 327 42 9 - 1,288 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Net earned premiums 480 310 207 41 9 - 1,047 Fee and commission Income (3) 423 - 145 6 180 751 ------------ ----------- ----------- ---------- ----------- --------- ------ ------ Total external revenue 477 733 207 186 15 180 1,798 ------------ ----------- ----------- ---------- ----------- --------- ------ ------
(i) Other includes revenue streams from Sesame Bankhall and Pantheon (for the period prior to its disposal on 19 March 2010).
(v) Assets and liabilities
At 30 June 2011
Elimination of inter- segment amounts UK Int'l Lombard Corporate (i) Total GBPm GBPm GBPm GBPm GBPm GBPm --------------- ------- ------ -------- ---------- ------------ -------- Segment assets 96,419 7,341 19,072 1,601 (943) 123,490 Investment in associate and joint venture 5 28 - - - 33 --------------- ------- ------ -------- ---------- ------------ -------- Total assets 96,424 7,369 19,072 1,601 (943) 123,523 --------------- ------- ------ -------- ---------- ------------ -------- Total liabilities 91,652 7,007 18,611 956 (943) 117,283 --------------- ------- ------ -------- ---------- ------------ --------
At 30 June 2010
Elimination of inter- segment amounts UK Int'l Lombard Corporate (i) Total GBPm GBPm GBPm GBPm GBPm GBPm ---------------- ------- ------ -------- ---------- ------------ ------- Segment assets 38,641 6,167 15,627 671 (411) 60,695 Investment in associate and joint venture 8 25 - - - 33 ---------------- ------- ------ -------- ---------- ------------ ------- Total assets 38,649 6,192 15,627 671 (411) 60,728 ---------------- ------- ------ -------- ---------- ------------ ------- Total liabilities 36,412 5,723 15,183 262 (411) 57,169 ---------------- ------- ------ -------- ---------- ------------ -------
At 31 December 2010
Elimination of inter- segment amounts UK Int'l Lombard Corporate (i) Total GBPm GBPm GBPm GBPm GBPm GBPm --------------- ------- ------ -------- ---------- ------------ -------- Segment assets 96,551 7,184 17,930 1,325 (868) 122,122 Investment in associate and joint venture 5 27 - - - 32 --------------- ------- ------ -------- ---------- ------------ -------- Total assets 96,556 7,211 17,930 1,325 (868) 122,154 --------------- ------- ------ -------- ---------- ------------ -------- Total liabilities 91,237 6,814 17,487 936 (868) 115,606 --------------- ------- ------ -------- ---------- ------------ --------
(i) Eliminations mainly comprise intercompany loans.
(c) Geographical segmental information
In presenting geographical segmental information, segment revenue is based on the geographical location of customers. The Group has defined two geographical areas: UK and the rest of the world. BHA is reported as UK, as its customers are located in the UK.
For the half year ended 30 June 2011
Rest of UK the world Total GBPm GBPm GBPm --------------------------------- ------ ---------- ------ Gross earned premiums 1,063 6 1,069 Fee and commission income 282 128 410 --------------------------------- ------ ---------- ------ Revenue from external customers 1,345 134 1,479 Investment return 2,579 Premiums ceded to reinsurers (296) --------------------------------- ------ ---------- ------ Total revenue 3,762 --------------------------------- ------ ---------- ------
For the half year ended 30 June 2010
Rest of UK the world Total GBPm GBPm GBPm --------------------------------- ----- ---------- ------ Gross earned premiums 420 6 426 Fee and commission income 186 137 323 --------------------------------- ----- ---------- ------ Revenue from external customers 606 143 749 Investment return 1,182 Premiums ceded to reinsurers (50) --------------------------------- ----- ---------- ------ Total revenue 1,881 --------------------------------- ----- ---------- ------
For the Year ended 31 December 2010
Rest of UK the world Total GBPm GBPm GBPm --------------------------------- ------ ---------- ------- Gross earned premiums 1,276 12 1,288 Fee and commission income 398 353 751 --------------------------------- ------ ---------- ------- Revenue from external customers 1,674 365 2,039 Investment return 8,424 Premiums ceded to reinsurers (241) --------------------------------- ------ ---------- ------- Total revenue 10,222 --------------------------------- ------ ---------- -------
3. Appropriations of profit
(a) Dividends paid on ordinary shares
Dividends paid during the period and recognised in reserves:
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm --------------------------------------- ---------- ---------- ---------- Dividend in respect of the year ended 31 December 2010 (2009) paid in 2011 (2010) 350 65 65 --------------------------------------- ---------- ---------- ----------
The distributable reserves of the Company at 30 June 2011 are GBP3,514 million (30 June 2010: GBP1,377 million, 31 December 2010: GBP3,478 million).
(b) STICS interest
The STICS are accounted for as equity instruments under IFRS and consequently the interest on the STICS is recorded in the financial statements as though it were a dividend.
Interest on the 2003 STICS is paid in equal instalments in May and November each year at a rate of 6.875%. During the period ended 30 June 2011, interest of GBP7 million (30 June 2010: GBP7 million, 31 December 2010: GBP14 million) was paid to the 2003 STICS holders.
Interest on the 2005 STICS is paid annually in June at a rate of 6.292%. During the period ended 30 June 2011, interest of GBP17 million (30 June 2010: GBP17 million, 31 December 2010: GBP17 million) was paid to the 2005 STICS holders.
4. Taxation
(a) Tax charged to the income statement
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ----------------------------------------- ---------- ---------- ---------- Current tax UK corporation tax at 26.5% (2010: 28%) 45 44 16 Adjustments in respect of prior periods (6) (5) (15) Overseas taxation 11 4 7 ----------------------------------------- ---------- ---------- ---------- Total current tax charge 50 43 8 ----------------------------------------- ---------- ---------- ---------- Deferred tax Origination and reversal of temporary differences (32) 27 121 Adjustments in respect of prior periods - (3) 8 ----------------------------------------- ---------- ---------- ---------- Total deferred tax (credit)/charge (32) 24 129 ----------------------------------------- ---------- ---------- ---------- Total tax charge 18 67 137 ----------------------------------------- ---------- ---------- ---------- Analysed as: Policyholder tax 165 61 244 Shareholder tax (147) 6 (107) ----------------------------------------- ---------- ---------- ---------- Total tax charge 18 67 137 ----------------------------------------- ---------- ---------- ----------
Policyholder tax is tax on the income and investment returns charged to policyholders of linked and with-profits funds. Shareholder tax is tax charged to shareholders on the profits of the Group.
(b) Factors affecting tax charge for period
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ---------------------------------------- ---------- ---------- ---------- Profit before tax from continuing operations 79 153 985 ---------------------------------------- ---------- ---------- ---------- Profit before tax from continuing operations multiplied by the standard rate of corporation tax in the UK of 26.5% (2010: 28%) 21 43 275 Effects of: Non-taxable income (147) (36) (115) Deductions not allowable for tax purposes 3 2 46 Tax on reserving adjustments 31 - 7 Overseas tax (1) - - Valuation of excess expenses 12 (6) (8) Valuation of tax losses (16) 12 (42) Valuation of unrealised capital losses (1) 6 - With-profits minority interest (i) - (7) (8) Adjustments in respect of prior periods (1) (8) (7) Non taxable gain on acquisition (18) - (247) Reduction in corporation tax rate to 26% (2010: 27%) (30) - (8) Policyholder tax 165 61 244 ---------------------------------------- ---------- ---------- ---------- Total tax charge 18 67 137 ---------------------------------------- ---------- ---------- ----------
(i) This relates to tax on F&C CPT prior to deconsolidation.
5. Intangible assets
Movements in intangible assets are as follows:
For the half year ended 30 June 2011
Goodwill AVIF Other Total GBPm GBPm GBPm GBPm ------------------------------ --------- ------ ------ ------ Cost ------------------------------ --------- ------ ------ ------ At 1 January 2011 13 5,107 515 5,635 Acquisition of BHA - 172 8 180 Other additions - - 2 2 Foreign exchange adjustments 1 33 9 43 ------------------------------ --------- ------ ------ ------ At 30 June 2011 14 5,312 534 5,860 ------------------------------ --------- ------ ------ ------ Amortisation and impairment ------------------------------ --------- ------ ------ ------ At 1 January 2011 - 422 73 495 Amortisation charge for the period - 382 41 423 Impairment charge - 71 - 71 Foreign exchange adjustments - (2) 3 1 ------------------------------ --------- ------ ------ ------ At 30 June 2011 - 873 117 990 ------------------------------ --------- ------ ------ ------ Carrying amounts at 30 June 2011 14 4,439 417 4,870 ------------------------------ --------- ------ ------ ------
For the half year ended 30 June 2010
Goodwill AVIF Other Total GBPm GBPm GBPm GBPm ------------------------------ --------- ------ ------ ------ Cost ------------------------------ --------- ------ ------ ------ At 1 January 2010 13 2,938 369 3,320 Other additions - - 2 2 Foreign exchange adjustments (1) (50) (12) (63) ------------------------------ --------- ------ ------ ------ At 30 June 2010 12 2,888 359 3,259 ------------------------------ --------- ------ ------ ------ Amortisation ------------------------------ --------- ------ ------ ------ At 1 January 2010 - 59 10 69 Amortisation charge for the period - 142 25 167 Foreign exchange adjustments - (3) 5 2 ------------------------------ --------- ------ ------ ------ At 30 June 2010 - 198 40 238 ------------------------------ --------- ------ ------ ------ Carrying amounts at 30 June 2010 12 2,690 319 3,021 ------------------------------ --------- ------ ------ ------
For the year ended 31 December 2010
Goodwill AVIF Other Total GBPm GBPm GBPm GBPm -------------------------------- --------- ------ ------ ------ Cost -------------------------------- --------- ------ ------ ------ At 1 January 2010 13 2,938 369 3,320 Acquisition of AXA UK Life Business - 2,192 150 2,342 Other additions - - 4 4 Foreign exchange adjustments - (23) (8) (31) -------------------------------- --------- ------ ------ ------ At 31 December 2010 13 5,107 515 5,635 -------------------------------- --------- ------ ------ ------ Amortisation -------------------------------- --------- ------ ------ ------ At 1 January 2010 - 59 10 69 Amortisation charge for the period - 364 64 428 Foreign exchange adjustments - (1) (1) (2) -------------------------------- --------- ------ ------ ------ At 31 December 2010 - 422 73 495 -------------------------------- --------- ------ ------ ------ Carrying amounts at 31 December 2010 13 4,685 442 5,140 -------------------------------- --------- ------ ------ ------
An analysis of intangible assets by significant cash generating unit ("CGU") is set out below:
Net book Cost Impairment Amortisation value 30 June 2011 GBPm GBPm GBPm GBPm --------------------------- ------ ----------- ------------- ------ UK - Friends Provident (life and pensions including Sesame Bankhall) 1,457 - (195) 1,262 UK - AXA UK Life Business 2,342 - (328) 2,014 UK - BHA 180 (71) (9) 100 International (including FPI and AmLife Berhad) 1,059 - (204) 855 Lombard 822 - (183) 639 --------------------------- ------ ----------- ------------- ------ Total 5,860 (71) (919) 4,870 --------------------------- ------ ----------- ------------- ------ Net book Cost Amortisation value 30 June 2010 GBPm GBPm GBPm ---------------------------------- ------ ------------- --------- UK - Friends Provident (life and pensions including Sesame Bankhall) 1,457 (86) 1,371 International (including FPI and AmLife Berhad) 1,056 (76) 980 Lombard 746 (76) 670 ---------------------------------- ------ ------------- --------- Total 3,259 (238) 3,021 ---------------------------------- ------ ------------- --------- Net book Cost Amortisation value 31 December 2010 GBPm GBPm GBPm ---------------------------------- ------ ------------- --------- UK - Friends Provident (life and pensions including Sesame Bankhall) 1,457 (142) 1,315 UK - AXA UK Life Business 2,342 (86) 2,256 International (including FPI and AmLife Berhad) 1,057 (141) 916 Lombard 779 (126) 653 ---------------------------------- ------ ------------- --------- Total 5,635 (495) 5,140 ---------------------------------- ------ ------------- ---------
Impairment
All identifiable intangible assets are reviewed at each reporting date, or where impairment indicators are present, to assess whether there are any circumstances that might indicate that they are impaired. If such circumstances exist, impairment testing is performed and any resulting impairment losses are charged to the income statement. As at 30 June 2011, based on an impairment review of each of the CGUs, the Directors are satisfied that none of the Group's intangible assets are impaired except as stated below.
Impact of negative reserves
As explained in Note 1, the benefit of negative reserving has been offset by an acceleration of AVIF amortisation of GBP130 million in the UK - AXA UK Life business CGU and by an impairment charge against AVIF of GBP71 million in the acquired BHA CGU. This is included within administrative and other expenses in the condensed consolidated income statement.
The impairment arose from the implementation of negative reserves which resulted in an earlier recognition of surplus and the recoverable amount of the AVIF being assessed to be lower than the carrying value. The AVIF asset which has been impaired is included in the UK segment (disclosed in note 2).
For the purpose of the AVIF impairment test, the calculation of the recoverable amount is consistent with its measurement at initial recognition and is based on a current adjusted MCEV VIF balance for pre-acquisition business only, which represents a reasonable basis for determining future profits generated by the asset acquired.
6. Financial assets
The Group's financial assets are summarised by measurement categories as follows:
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ----------------------------------------- ---------- ---------- ---------- Fair value through the income statement (Note 6 (a)) 100,882 49,041 98,788 Loans at amortised cost (Note 6 (c)) 207 12 677 ----------------------------------------- ---------- ---------- ---------- Total financial assets 101,089 49,053 99,465 ----------------------------------------- ---------- ---------- ----------
(a) Analysis of financial assets at fair value through the income statement
As at 30 June 2011
Non Non- - With- Unit- linked linked Share- profits linked Annuities Other holder Total GBPm GBPm GBPm GBPm GBPm GBPm ------------------- -------- ------- ---------- ------- ------- -------- Shares and other variable yield securities 7,771 53,709 - 202 7 61,689 Debt securities and other fixed-income securities: Government securities 7,168 7,664 642 567 76 16,117 Corporate bonds 9,230 5,703 5,774 991 542 22,240 Derivative financial instruments 406 26 38 5 (6) 469 Deposits with credit institutions - 349 - 18 - 367 ------------------- -------- ------- ---------- ------- ------- -------- Total financial assets 24,575 67,451 6,454 1,783 619 100,882 ------------------- -------- ------- ---------- ------- ------- --------
As at 30 June 2010
Non Non- - With- Unit- linked linked Share- profits linked Annuities Other holder Total GBPm GBPm GBPm GBPm GBPm GBPm -------------------- -------- ------- ---------- ------- ------- ------- Shares and other variable yield securities 2,351 28,526 - 222 7 31,106 Debt securities and other fixed-income securities: Government securities 3,752 1,906 347 247 183 6,435 Corporate bonds 4,085 3,380 2,526 525 361 10,877 Derivative financial instruments 278 8 - 4 (4) 286 Deposits with credit institutions - 337 - - - 337 -------------------- -------- ------- ---------- ------- ------- ------- Total financial assets 10,466 34,157 2,873 998 547 49,041 -------------------- -------- ------- ---------- ------- ------- -------
As at 31 December 2010
Non Non- - With- Unit- linked linked Share- profits linked Annuities Other holder Total GBPm GBPm GBPm GBPm GBPm GBPm -------------------- -------- ------- ---------- ------- ------- ------- Shares and other variable yield securities 8,114 52,017 - 241 8 60,380 Debt securities and other fixed-income securities: Government securities 6,937 7,644 659 716 189 16,145 Corporate bonds 8,885 5,445 5,634 922 569 21,455 Derivative financial instruments 393 24 39 5 (5) 456 Deposits with credit institutions 3 349 - - - 352 -------------------- -------- ------- ---------- ------- ------- ------- Total financial assets 24,332 65,479 6,332 1,884 761 98,788 -------------------- -------- ------- ---------- ------- ------- -------
The above unit-linked column and with-profits column include GBP1,058 million (30 June 2010: GBP602 million; 31 December 2010: GBP964 million) of financial assets comprising GBP794 million of shares and other variable yield securities, GBP77 million of corporate bonds and GBP187 million of government bonds (30 June 2010: GBP122m of shares and GBP480m of corporate bonds; 31 December 2010: GBP316 million of shares and GBP648 million of corporate bonds) relating to the minority interests in the Open Ended Investment Companies ("OEICs") that have been consolidated as the Group holding is 50% or more.
For unit-linked funds, the policyholders bear the investment risk and any change in asset values is matched by a broadly equivalent change in the liability.
Asset backed securities (excluding those held by the linked funds) amount to GBP2,420 million (30 June 2010: GBP929 million; 31 December 2010: GBP2,505 million) and 91% (30 June 2010: 95%; 31 December 2010: 92%) of these are at investment grade as set out in 6 (b).
(b) Creditworthiness of financial assets
The following table gives an indication of the level of creditworthiness of those categories of assets which are neither past due nor impaired and are most exposed to credit risk using principally ratings prescribed by Standard and Poor's and Moody's. Assets held within unit-linked funds have been excluded from the tables below as the credit risk on these assets is borne by the policyholders rather than the shareholders. The carrying amount of assets included in the statement of financial position represents the maximum credit exposure.
Not As at 30 June 2011 AAA AA A BBB BB B rated Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm --------------- ------ ------ ------ ------ ----- ----- ------ ------- Corporate bonds 3,055 3,147 4,308 2,965 338 46 258 14,117 Asset backed securities 529 709 618 344 120 2 98 2,420 Derivative financial instruments 66 139 244 - - - (6) 443 Reinsurance assets - 2,377 236 - - - 1 2,614 Deposits with credit institutions - 18 - - - - - 18 Cash and cash equivalents 1,624 872 1,551 38 - - 97 4,182 Total 5,274 7,262 6,957 3,347 458 48 448 23,794 --------------- ------ ------ ------ ------ ----- ----- ------ ------- % 22% 31% 29% 14% 2% 0% 2% 100% --------------- ------ ------ ------ ------ ----- ----- ------ ------- Not As at 30 June 2010 AAA AA A BBB BB B rated total GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ---------------- ------ ------ ------ ----- ----- ----- ------ ------- Corporate bonds 1,408 2,439 1,746 506 186 19 264 6,568 Asset backed securities 246 262 222 148 5 3 43 929 Derivative financial instruments - - 278 - - - - 278 Reinsurance assets - 1,926 - - - - - 1,926 Cash and cash equivalents 535 829 787 - - - 131 2,282 Total 2,189 5,456 3,033 654 191 22 438 11,983 ---------------- ------ ------ ------ ----- ----- ----- ------ ------- % 18% 46% 25% 5% 2% 0% 4% 100% ---------------- ------ ------ ------ ----- ----- ----- ------ ------- Not As at 31 December 2010 AAA AA A BBB BB B rated Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm --------------- ------ ------ ------ ------ ----- ----- ------ ------- Corporate bonds 2,876 3,196 4,147 2,645 315 57 269 13,505 Asset backed securities 560 825 622 289 110 2 97 2,505 Derivative financial instruments 46 141 245 - - - - 432 Reinsurance assets - 2,349 287 - - - 1 2,637 Deposits with credit institutions - 3 - - - - - 3 Cash and cash equivalents 1,831 945 1,210 36 - - 6 4,028 Total 5,313 7,459 6,511 2,970 425 59 373 23,110 --------------- ------ ------ ------ ------ ----- ----- ------ ------- % 23% 32% 28% 13% 2% 0% 2% 100% --------------- ------ ------ ------ ------ ----- ----- ------ -------
The exposure of the Group to the debt of the governments and companies of Ireland, Italy, Portugal and Spain in shareholder and annuity funds is set out in the table below. There is no exposure to Greece and the exposure to the economies of Ireland and Portugal is relatively immaterial. The corporate debt is diversified across industries and relates mainly to companies with trans-national operations. Where the Group holds securities issued by financial companies, it has considered the Company's financial strength and the ability of the domicile government to provide financial support in the event of stress.
Half year 2011 Half year 2010 Full year 2010 Govt Corporate Govt Corporate Govt Corporate debt Debt Total debt debt Total debt debt Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ---------- ----- ---------- ------ ----- ---------- ------ ----- ---------- ------ Ireland - 38 38 - 35 35 - 50 50 Portugal - 12 12 - 2 2 - 14 14 Italy 8 217 225 - 30 30 7 221 228 Spain - 172 172 - 22 22 - 159 159 Total 8 439 447 - 89 89 7 444 451 ---------- ----- ---------- ------ ----- ---------- ------ ----- ---------- ------
(c) Loans
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ---------------- ---------- ---------- ---------- Mortgage loans 3 3 61 Other loans 204 9 616 ---------------- ---------- ---------- ---------- Total loans 207 12 677 ---------------- ---------- ---------- ----------
Loan assets of GBP600m which were held at 31 December 2010 were repaid in March 2011. A further GBP200 million collateralised loan was provided to Barclays on 11 May 2011.
(d) Unit-linked net assets
The amounts included in the statement of financial position in respect of net assets held within unit-linked funds are as follows:
2011 2010 2010 Half year Half year Full year GBPm GBPm GBPm ------------------------------------------ ---------- ---------- ---------- Investment properties 1,759 548 1,831 Shares and other variable yield securities 53,962 28,404 52,180 Debt securities and other fixed-income securities 12,134 4,806 11,893 Derivative financial instruments 26 8 25 Deposits with credit institutions 349 337 349 Other receivables 461 173 356 Cash and cash equivalents 4,175 2,527 4,879 ------------------------------------------ ---------- ---------- ---------- Total assets 72,866 36,803 71,513 ------------------------------------------ ---------- ---------- ---------- Other payables (495) (126) (235) ------------------------------------------ ---------- ---------- ---------- Total unit-linked net assets 72,371 36,677 71,278 ------------------------------------------ ---------- ---------- ----------
The impact of consolidating OEICs in which the Group has a holding in excess of 50% has been excluded from the above analysis of unit-linked net assets. However the underlying holdings in the OEICs are included within shares and other variable yield securities.
7. Loans and borrowings
The Group's loans and borrowings are as follows:
30 June 30 June 31 Dec Coupon 2011 2010 2010 % GBPm GBPm GBPm ------------------------------------ -------- -------- -------- ------- Subordinated liabilities: Lombard undated subordinated loans Various 3 4 3 Friends Life Group plc subordinated debt due 2021 (i) 12.00 184 187 186 Friends Life Group plc subordinated debt due 2022 (ii) 8.25 497 - - Reinsurance: Lombard financial reinsurance treaties Various 13 20 15 Friends Provident financial reinsurance treaties (iii) Various 50 12 29 Other: Fixed rate unsecured notes (iv) 9.00 200 - 700 Amount owed to credit institutions (v) 60 59 79 Total loans and borrowings 1,007 282 1,012 ------------------------------------ -------- -------- -------- -------
Unless otherwise stated below, the carrying values of interest-bearing loans and borrowings closely approximate fair value.
(i) The Friends Life Group plc subordinated debt due 2021 is irrevocably guaranteed on a subordinated basis by FPLP. This debt is carried at amortised cost. The fair value of this subordinated debt is GBP208 million.
(ii) On 21 April 2011, the Company issued a GBP500 million Lower Tier 2 (LT2) debt instrument with a coupon of 8.25% and a maturity of 2022 which is guaranteed on a subordinated basis by FPLP. This debt is carried at amortised cost being GBP500 million principal less capitalised issue costs of GBP3 million.
(iii) FPLP has two financial reinsurance contracts with Munich Reinsurance Company UK Limited ("Munich Re") to finance new German unit-linked pensions business written in the years ended 31 December 2010 and 2011 respectively. The total amount owed to Munich Re under these financial reinsurance arrangements as at 30 June 2011 was GBP42 million (30 June 2010: GBP10 million; 31 December 2010: GBP29 million).
On 30 June 2011, FPIL entered into a financial reinsurance agreement with Munich Re to finance new Hong Kong Premier regular premium savings business written since 1 January 2011. The amount owed to Munich Re as at 30 June 2011 was GBP8 million.
(iv) On 14 September 2010, the Company issued fixed rate unsecured loan notes, due in 2020, to Resolution Holdings (Guernsey) Limited ("RHG") with an agreed principal amount of GBP700 million. Following the issue of the subordinated debt, detailed in note (ii), the company repaid GBP500 million of the principal including interest due to RHG.
(v) Amounts owed to credit institutions (overdrafts) includes GBP47m relating to credit balances held within OEICs that have been consolidated as the Group holding is 50% or more.
8. Contingent liabilities
In the normal course of its business, the Group is subject to matters of litigation or dispute or regulatory uncertainty. While there can be no assurances at this time the directors believe, based on the information currently available to them, that it is not probable that the ultimate outcome of any of these matters will have a material adverse effect on the financial condition of the Group.
9. Business combinations
Acquisition of Bupa Health Assurance
In January 2011, the Group through its subsidiary, FPLP, acquired 100% of the shares in BHA from Bupa Investment Limited and its parent Bupa Finance plc. The Group is deemed to have acquired control of BHA on 31 January 2011, the date at which the last substantive condition to legal completion was satisfied, and has consolidated it from that point. The gross consideration paid in cash was GBP168 million compared to an announced price in October 2010 of GBP165 million. The increase in price reflects an additional GBP3 million of capital injected into BHA in December 2010 by British United Provident Association Limited.
The acquisition is consistent with the UK Life Project of the Group's ultimate parent, Resolution Limited, which aims to generate value by consolidating UK life and asset management businesses.
In the period from the acquisition to 30 June 2011, BHA contributed revenue of GBP44 million and made a loss after tax of GBP3 million. If the acquisition had occurred on 1 January 2011, management estimate that consolidated revenue would have been GBP53 million, and the consolidated loss after tax for the half year would have been GBP2 million. In determining these amounts, management has assumed that the fair value adjustments which arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2011.
The following summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date:
GBPm ---------------------------------------------------- ------ Cash paid 168 Fair value of purchase consideration 168 Fair value of net assets acquired (236) ---------------------------------------------------- ------ Excess of the interest in the fair value of assets acquired over costs (68) ---------------------------------------------------- ------
The condensed consolidated income statement includes GBP1 million within administrative and other expenses in relation to stamp duty payable on the shares acquired.
Identifiable assets acquired and liabilities assumed
Recognised values on acquisition GBPm -------------------------------------------------- ------------ Intangible assets: Acquired value of in-force business 172 Other intangible assets 8 Financial assets 83 Current assets 30 Cash and cash equivalents 90 Total identifiable assets 383 -------------------------------------------------- ------------ Insurance liabilities 67 Other liabilities 80 Total identifiable liabilities 147 -------------------------------------------------- ------------ Net identifiable assets acquired and liabilities assumed 236 -------------------------------------------------- ------------ Attributable to equity holders of the parent 236 -------------------------------------------------- ------------
The values of assets acquired and liabilities assumed, recognised on acquisition, are their estimated fair values.
The gain of GBP68 million recognised as a result of the acquisition is attributable to the purchase price being at a discount to the fair value of the net assets acquired which is based on the market consistent embedded value of BHA. The gain is reported within other income in the condensed consolidated income statement.
10. Related parties
In the ordinary course of business, the Group and its subsidiary undertakings carry out transactions with related parties, as defined by IAS 24 Related Party Disclosures. Material transactions for the half year (period from acquisition in respect of transactions related to BHA) are set out below.
(a) Services provided to related parties
No material transactions occurred in relation to services provided to related parties.
(b) Services provided by related parties
2011 Half year 2010 Half year 2010 Full year Income Receivable Income Receivable Income Receivable earned at earned at earned at in period in period in year year period end period end end GBPm GBPm GBPm GBPm GBPm GBPm -------- -------- ----------- --------- ----------- -------- ----------- Joint - - - - 6 - venture Other - - - - - - related parties -------- -------- ----------- --------- ----------- -------- ----------- Total - - - - 6 - -------- -------- ----------- --------- ----------- -------- -----------
(c) Other related parties
Transactions made between the Group and related parties were made in the normal course of business. Loans from related parties are made on normal arm's length commercial terms.
As detailed in Note 7 FPLP, a subsidiary, provided a guarantee in respect of the GBP500 million LT2 debt instrument issued by the Group on 22 April 2011.
11. Post Balance Sheet events
(a) Name Change
On 1 July 2011, Friends Provident Holdings (UK) plc changed its name to Friends Life Group plc.
(b) Change in rates of corporation tax
During 2010 and the first half of 2011, legislation was announced to bring in a phased decrease in the rate of corporation tax commencing with a reduction to 26% on 1 April 2011 and further reductions of 1% per annum until 1 April 2014, from when the rate will be 23%. Under IFRS deferred tax is calculated using substantively enacted rates and as such only the reduction to a 26% rate has been taken into account in the closing deferred tax balance (the opening balance is calculated using a 27% rate, being the rate which was substantively enacted at 31 December 2010).
The reduction to 25% effective from 1 April 2012 became substantively enacted on 5 July 2011 when Finance Bill 2011 completed the report stage and third reading in the House of Commons. The effect of this is to increase the Group's net assets by approximately GBP30 million.
Subsequent reduction (to 24% and 23%) will be dealt with by future legislation. The benefit to the Group's net assets from the further 2% reduction in the rate is estimated as approximately GBP51 million in total and will be recognised as the legislation is substantively enacted.
(c) Future tax regime applicable to life insurance companies
The Chancellor's Budget which took place on 23 March 2011 contained significant announcements in relation to the tax regime applicable to life insurance companies, followed by a consultation document which was issued on 7 April 2011 with the closing date for responses being 28 June 2011. Detailed discussion is continuing and draft legislation will not be published until late 2011. Given the outstanding detail the impact on the deferred tax assets and liabilities recognised in the balance sheet is too uncertain to quantify.
(d) Supreme Court Judgement in the Case Scottish Widows plc v Commissioners for Her Majesty's Revenue and Customs
The Supreme Court issued its judgement in respect of the above case on 6 July 2011. The judgements found in favour of HMRC in this court case involving the tax treatment of surplus assets accumulated in a mutual and passed into a proprietary environment on demutualisation. This decision impacts on the legacy Friends Provident business which demutualised shortly after Scottish Widows. However, the impact for Friends Life is minor based on the Group's fact pattern, and a provision is held in the accounts to cover the additional tax payable.
Appendix 1: New business information
Analysis of Life and Pensions new business
In classifying new business premiums the following basis of recognition is adopted:
-- single new business premiums consist of those contracts under which there is no expectation of continuing premiums being paid at regular intervals;
-- regular new business premiums consist of those contracts under which there is an expectation of continuing premiums being paid at regular intervals, including repeated or recurrent single premiums where the level of premiums is defined, or where a regular pattern in the receipt of premiums has been established;
-- non-contractual increments under existing group pensions schemes are classified as new business premiums;
-- transfers between products where open market options are available are included as new business; and
-- regular new business premiums are included on an annualised basis.
Regular and single premiums
Group
Regular premiums Single premiums ------------------------ --------------------------- H1(i) H1(ii) H1(i) H1(ii) 2011 2010 Change 2011 2010 Change GBPm GBPm % GBPm GBPm % ----------------------- ------ ------- ------- -------- -------- ------- UK Corporate - pensions 209.3 140.1 49 327.1 120.3 172 - protection 11.8 2.5 372 0.0 0.0 - UK Individual - protection 44.0 18.0 144 0.0 0.0 - - pensions 8.5 3.1 174 246.1 116.1 112 - investments 0.0 0.0 - 219.8 16.7 1216 Annuities 0.0 0.0 - 188.7 135.1 40 ----------------------- ------ ------- ------- -------- -------- ------- Total UK Life and Pensions 273.6 163.7 67 981.7 388.2 153 ----------------------- ------ ------- ------- -------- -------- ------- International 96.0 97.2 (1) 361.6 232.6 55 Lombard 0.0 0.0 - 968.7 1,348.1 (28) ----------------------- ------ ------- ------- -------- -------- ------- Total International Life and Pensions 96.0 97.2 (1) 1,330.3 1,580.7 (16) ----------------------- ------ ------- ------- -------- -------- ------- Total Life and Pensions 369.6 260.9 42 2,312.0 1,968.9 17 ----------------------- ------ ------- ------- -------- -------- -------
(i) includes the trading results of the acquired BHA business for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA UK Life business was acquired in Q3 2010
Friends Life excluding acquired businesses AXA UK Life and BHA
Regular premiums Single premiums ----------------------- --------------------------- H1 H1 H1 H1 2011 2010 Change 2011 2010 Change GBPm GBPm % GBPm GBPm % --------------------- ------ ------ ------- -------- -------- ------- UK Corporate - pensions 153.4 140.1 9 275.1 120.3 129 - protection 4.4 2.5 76 0.0 0.0 - UK Individual - protection 14.0 18.0 (22) 0.0 0.0 - - pensions 3.2 3.1 3 114.0 116.1 (2) - investments 0.0 0.0 - 16.0 16.7 (4) Annuities 0.0 0.0 - 109.2 135.1 (19) --------------------- Total UK Life and Pensions 175.0 163.7 7 514.3 388.2 32 --------------------- ------ ------ ------- -------- -------- ------- International 96.0 97.2 (1) 361.6 232.6 55 Lombard 0.0 0.0 - 968.7 1,348.1 (28) --------------------- ------ Total International Life and Pensions 96.0 97.2 (1) 1,330.3 1,580.7 (16) --------------------- ------ ------ ------- -------- -------- ------- Total Life and Pensions 271.0 260.9 4 1,844.6 1,968.9 (6) --------------------- ------ ------ ------- -------- -------- -------
Acquired businesses of AXA UK Life and BHA
AXA UK Life BHA -------------------- -------------------- Regular Single Regular Single premiums premiums premiums premiums 6 months 6 months 5 months 5 months 2011 2011 2011 2011 GBPm GBPm GBPm GBPm ------------------------- --------- --------- --------- --------- UK Corporate - pensions 55.9 52.0 0.0 0.0 - protection 0.0 0.0 7.4 0.0 UK Individual - protection 20.4 0.0 9.6 0.0 - pensions 5.3 132.1 0.0 0.0 - investments 0.0 203.8 0.0 0.0 Annuities 0.0 79.5 0.0 0.0 ------------------------- --------- --------- --------- --------- Total Life and Pensions 81.6 467.4 17.0 0.0 ------------------------- --------- --------- --------- ---------
Group new business - APE
APE represents annualised new regular premiums plus 10% of single premiums.
H1(i) H1(ii) Q2(i) Q1 2011 2010 Change 2011 2011 Change GBPm GBPm % GBPm GBPm % ------------------------- ------ ------- ------- ------ ------ ------- UK Corporate - pensions 242.0 152.1 59 128.8 113.2 14 - protection 11.8 2.5 372 7.3 4.5 62 UK Individual - protection 44.0 18.0 144 21.9 22.1 (1) - pensions 33.1 14.7 125 23.3 9.8 138 - investments 22.0 1.7 1,194 8.5 13.5 (37) Annuities 18.9 13.5 40 10.1 8.8 15 ------------------------- Total UK Life and Pensions 371.8 202.5 84 199.9 171.9 16 ------------------------- ------ ------- ------- ------ ------ ------- International 132.2 120.6 10 68.8 63.4 9 Lombard 96.9 134.9 (28) 62.5 34.4 82 ------------------------- ------ ------- ------- ------ ------ ------- Total International Life and Pensions 229.1 255.5 (10) 131.3 97.8 34 ------------------------- ------ ------- ------- ------ ------ ------- Total Life and Pensions 600.9 458.0 31 331.2 269.7 23 ------------------------- ------ ------- ------- ------ ------ -------
(i) includes the trading results of the acquired BHA business for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA UK Life business was acquired in Q3 2010
Friends Life excluding acquired AXA UK Life and BHA businesses - APE
H1 H1 Q2 Q1 2011 2010 Change 2011 2011 Change GBPm GBPm % GBPm GBPm % ---------------------------- ------ ------ ------- ------ ------ ------- UK Corporate - pensions 180.9 152.1 19 95.4 85.5 12 - protection 4.4 2.5 76 1.9 2.5 (24) UK Individual - protection 14.0 18.0 (22) 6.6 7.4 (11) - pensions 14.6 14.7 (1) 10.4 4.2 148 - investments 1.6 1.7 (6) 0.7 0.9 (22) Annuities 11.0 13.5 (19) 5.8 5.2 12 ---------------------------- Total UK Life and Pensions 226.5 202.5 12 120.8 105.7 14 ---------------------------- ------ ------ ------- ------ ------ ------- International 132.2 120.6 10 68.8 63.4 9 Lombard 96.9 134.9 (28) 62.5 34.4 82 ---------------------------- Total International Life and Pensions 229.1 255.5 (10) 131.3 97.8 34 ---------------------------- ------ ------ ------- ------ ------ ------- Total Life and Pensions 455.6 458.0 (1) 252.1 203.5 24 ---------------------------- ------ ------ ------- ------ ------ -------
Acquired businesses of AXA UK Life and BHA - APE
AXA UK Life BHA -------------- ------------- Q2 Q1 Q2 Q1(i) 2011 2011 2011 2011 GBPm GBPm GBPm GBPm ---------------------------- ------ ------ ----- ------ UK Corporate - pensions 33.4 27.7 0.0 0.0 - protection 0.0 0.0 5.4 2.0 UK Individual - protection 9.4 11.0 5.9 3.7 - pensions 12.9 5.6 0.0 0.0 - investments 7.8 12.6 0.0 0.0 Annuities 4.3 3.6 0.0 0.0 ---------------------------- ------ ------ ----- ------ Total UK Life and Pensions 67.8 60.5 11.3 5.7 ---------------------------- ------ ------ ----- ------
(i) comprises the trading results for the period 1 February 2011 to 31 March 2011
International
H1 H1 2011 2010 Change APE by region (actual exchange rates) GBPm GBPm % -------------------------------- ------ ------ ------- North Asia 55.4 47.8 16 South Asia 13.2 10.8 22 Middle East 24.2 23.3 4 Europe (Excl UK) 15.5 18.1 (14) UK 9.7 5.3 83 Rest of World 10.0 9.8 2 Malaysia (AmLife) 4.2 5.4 (22) -------------------------------- ------ ------ ------- Total 132.2 120.5 10 -------------------------------- ------ ------ -------
Lombard
H1 H1 2011 2010 Change APE by region (actual exchange rates) GBPm GBPm % -------------------------------- ----- ------ ------- UK and Nordic 25.2 32.8 (23) Northern Europe 18.0 53.2 (66) Southern Europe 40.7 43.3 (6) Rest of World 13.0 5.6 132 -------------------------------- ----- ------ ------- Total including large cases 96.9 134.9 (28) -------------------------------- ----- ------ ------- Of which: Large cases (greater than EUR10m) 38.6 40.6 (5) -------------------------------- ----- ------ ------- Total excluding large cases 58.3 94.3 (38) -------------------------------- ----- ------ -------
New business APE at constant exchange rates
All amounts in currency in the tables above other than Sterling are translated into Sterling at a monthly average exchange rate. The estimated new business assuming constant currency rates would be as follows:
H1 H1 2011 2010 Change GBPm GBPm % --------------- ------ ------ ------- International 136.6 120.5 13 Lombard 96.3 136.2 (29) --------------- ------ ------ -------
New Business - Present value of new business premiums ("PVNBP")
PVNBP equals new single premiums plus the expected present value of new regular premiums. Premium values are calculated on a consistent basis with the EV contribution to profits from new business. Start of period assumptions are used for the economic basis and end of period assumptions are used for the operating basis. A risk free rate is used to discount expected premiums in future years. The impact of operating assumption changes across a whole reporting period will normally be reflected in the PVNBP figures for the final quarter of the period that the basis changes relate to. No change in operating assumptions will be reflected in the PVNBP for the first and third quarters, when the contribution to profits from new business is not published. All amounts in currency other than Sterling are translated into Sterling at a monthly average exchange rate.
H1(i) H1(ii) Q2(i) Q1 2011 2010 Change 2011 2011 Change GBPm GBPm % GBPm GBPm % --------------------- ------ ------- ------- ------ ------ ------- UK Corporate - pensions 1,199 676 77 622 577 8 - protection 74 15 393 47 27 74 UK Individual - protection 287 105 173 145 142 2 - pensions 288 128 125 206 82 151 - investments 220 17 1,194 86 134 (36) Annuities 189 135 40 101 88 15 --------------------- ------ ------- ------- ------ ------ ------- Total UK Life and 2,257 1,076 110 1,207 1,050 15 Pensions --------------------- ------ ------- ------- ------ ------ ------- International 828 696 19 432 396 9 Lombard 969 1,348 (28) 625 344 82 --------------------- ------ ------- ------- ------ ------ ------- Total International Life and Pensions 1,797 2,044 (12) 1,057 740 43 --------------------- ------ ------- ------- ------ ------ ------- Total Life and Pensions 4,054 3,120 30 2,264 1,790 26 --------------------- ------ ------- ------- ------ ------ -------
(i) includes the trading results of the acquired BHA business for the period 1 February 2011 to 30 June 2011
(ii) represents the Friends Provident business only as the AXA UK Life business was acquired in Q3 2010
Appendix 2: Analysis of 2010 full year baseline comparators
Adjustments 2010 2010 Full year Full year GBPm (unless otherwise As reported Annualisation Inclusion Baseline Stated) Total of ex-AXA of BHA Total ------------------------ ------------ -------------- ---------- ---------- UK products Individual protection NBS (85) (91) (17) (193) IRR 2.7% 3.0% 7.1% 3.3% APE 52 32 22 106 ------------------------ ------------ -------------- ---------- ---------- Corporate benefits NBS (58) (22) (80) IRR 6.2% (0.3%) 4.2% APE 330 69 399 ------------------------ ------------ -------------- ---------- ---------- Retirement income NBS 19 7 26 IRR 20.0% 10.3% 16.5% APE 29 10 39 ------------------------ ------------ -------------- ---------- ---------- Group Blended new business IRR (including Group protection and other products) 11.2% 8.6% New business strain: (238) (392) UK (149) (134) (20) (303) International (83) (83) Lombard (6) (6) ------------------------ ------------ -------------- ---------- ----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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