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