Disposal and proposed share buy-back

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

Friends Life Group Limited

("Friends Life", the "Group" or the "Company")

Disposal and proposed share buy-back

Friends Life is pleased to announce the disposal of the entire share capital of its wholly-owned subsidiaries Lombard International Assurance S.A. and Insurance Development Holdings AG (jointly referred to as "Lombard"), the Company's pan-European specialist in estate and succession planning solutions for high and ultra-high net worth individuals, to funds managed by Blackstone(1) ("Blackstone").

Summary

§ Disposal of Lombard to Blackstone for an initial consideration of £317 million (€399 million(2)) subject to anti-trust and regulatory approvals. This includes £254 million (€320 million(2)) upfront consideration, an estimated £7 million (€9 million(2)) interest equivalent, both to be paid in cash upon completion, and £56 million (€70 million(2)) deferred payment in the form of a vendor loan note.

§ Total consideration of up to £356 million (€449 million(2)) based on an additional contingent element, which could increase or decrease the value of the vendor loan note by up to £39 million (€50 million(2)) based on certain criteria relating to Lombard's future assets under administration.

§ Intention to return £261 million(3) (€329 million(2)) to shareholders via a share buy-back programme to commence upon completion, subject to regulatory approvals, equal to the full upfront cash consideration and estimated interest equivalent. 

§ 2013 pro forma Sustainable Free Surplus ("SFS") to ordinary dividend coverage ratio is improved to 1.16x(4) from 1.10x.

§ Completion expected to occur in the second half of 2014.

Andy Briggs, Group Chief Executive of Friends Life said:

"Lombard formed part of the Group's initial purchase of Friends Provident in 2009 and is a leading European provider of long-term wealth planning solutions for high and ultra-high net worth investors. It has always had a different profile to the rest of the Group and we believe its disposal is in the best interests of both Friends Life and Lombard.

"This disposal further improves our cash coverage of the dividend and is in line with our strategy to maximise value from each part of the Group. It also allows us to deliver on our commitment to return cash to shareholders when it is appropriate to do so. It moves the Group further towards being a streamlined life insurance company, focused on serving our customers in the UK and our hubs in Hong Kong, Singapore and the UAE through Friends Provident International."

Menes Chee, Managing Director at Blackstone, said:

"We are excited to be investing in a leading pan-European unit-linked life assurance company. Lombard's compelling value proposition to policyholders, dedication to distribution partners and strong management and employee team have created a unique franchise. We are committed to the company's long term growth strategy."

1. Consideration

The disposal involves the sale of the entire share capital of Lombard to Blackstone in exchange for an initial consideration of £317 million (€399 million(2)), comprising an upfront payment of £254 million (€320 million(2)), an estimated £7 million (€9 million(2)) equivalent to interest on this sum at 3% from 1 January 2014 until the completion date, both payable in cash on completion and a £56 million (€70 million(2)) deferred payment in the form of a vendor loan note. The vendor loan note has an eight year term from the date of completion and a coupon of 7% payable quarterly.

The contingent element, which could increase or decrease the value of the vendor loan note, will be determined with reference to Lombard's assets under administration on 30 June 2017 in the upside scenario and with reference to the Lombard assets under administration and the achievement of certain new business thresholds at 30 June 2019 in the downside scenario. If lapse rates for the period to 30 June 2017 are broadly in line with, or are better than, Friends Life's current MCEV assumptions and if investment returns are in line with or exceed current long term assumptions, then the value of the vendor loan note could increase by up to £39 million (€50 million(2)), increasing the amount to be repaid in 2022 to a maximum of £95 million (€120 million(2)). However, if lapse rates and/or investment returns are significantly worse than current long term assumptions for the period to 30 June 2019, or certain new business thresholds are not met at 30 June 2019, the value of the vendor loan note could reduce by up to £39 million (€50 million(2)) decreasing the amount to be repaid in 2022 to a minimum of £17 million (€20 million(2)). The relevant new business thresholds are significantly below the planned sales expected had Friends Life continued to own Lombard.

The sale agreement contains customary representations, warranties and indemnities that would be expected in a transaction of this nature. The sale is subject to anti-trust and regulatory approvals and is expected to complete in the second half of 2014.

2. Background to and reasons for the disposal

While Lombard has a market leading position in European privatbancassurance, there are limited strategic and operational synergies between it and the rest of the Group. The Board believes that the disposal of Lombard realises more value for shareholders than its continued ownership by Friends Life would create.

As well as providing shareholders with an immediate cash return, the disposal demonstrates the Company's rigorous financial discipline and the Board's commitment to maximising value from each part of the Group.

3. Information on Lombard

Lombard is a leading pan-European specialist in estate and succession planning solutions for high and ultra-high net worth individuals using life assurance. Based in Luxembourg, the business offers innovative solutions and superior service through a well established distribution network of private banks and independent financial advisers to high and ultra-high net worth individuals across Europe and selected markets in Latin America and Asia. Solutions offered by Lombard are typically based on single premium, whole of life, unit-linked life assurance structures with limited levels of reinsured life cover. The business is well placed to benefit from increasing demand for fully compliant structured solutions for high net worth individuals.

For the full year ended 31 December 2013, Lombard made an MCEV operating loss of £(46) million compared to the Group MCEV operating profit of £489 million and contributed £34 million to the Group's IFRS operating profit of £436 million. The contribution to SFS for the same period was £6 million of the Group's SFS of £331 million, and assets under administration were £20.2 billion of the Group's £117.6 billion. As at 31 December 2013, Lombard had gross assets on an IFRS basis of £20,796 million.

4. Information on Blackstone

Blackstone has provided the Company with the following further information:

"Blackstone is one of the world's leading investment firms. We seek to create positive economic impact and long-term value for our investors, the companies in which we invest and the communities in which we work. We do this by using extraordinary people and flexible capital to help companies solve problems. Our asset management businesses, with almost $300 billion in assets under management, include investment vehicles focused on private equity, real estate, public debt and equity, non-investment grade credit, real assets and secondary funds, all on a global basis. Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. Further information is available at www.blackstone.com. Follow Blackstone on Twitter @Blackstone."

5. Use of proceeds

Friends Life intends to return £261 million (€329 million(2)) to shareholders via a buy-back of Friends Life's shares, equal to the full upfront cash consideration and estimated interest equivalent. The share buy-back programme is subject to regulatory consent and will be funded using the consideration upon completion.

6. Financial effects of the disposal on Friends Life

Had the disposal occurred on 31 December 2013 and after allowing for the receipt of cash and vendor loan note proceeds, Friends Life's IFRS net assets would have decreased by c.£(40) million to £5,189 million and Group MCEV would have decreased by c.£(300) million to £5,765 million. Following the disposal and the share buy-back, Friends Life's IFRS net assets would have decreased by c.£(300) million to £4,929 million(5) and Group MCEV would have decreased by c.£(560) million to £5,505 million(5).

Following the disposal and assuming an immediate share buy-back at a share price of 317.5 pence(6), equating to approximately 82 million shares, pro forma SFS cover of the Group's 2013 dividend totalling 21.14 pence per share, would be improved to 1.16x from 1.10x.

The Board of Friends Life confirms that there is no change in ordinary dividend policy as a result of the disposal and the current dividend per share of the Group is expected to be maintained until such time as the SFS to ordinary dividend coverage ratio of 1.3x is achieved, following which the Board will consider moving to a progressive dividend.

The impact of the sale and share buy-back on the Group's Pillar 1 capital is expected to be a small reduction in the IGCA surplus of less than £0.1 billion, which if the sale and share buy-back had occurred at the end of 2013 would have resulted in the Group's IGCA surplus remaining at £2.2 billion(5) but with coverage increasing from 238% to 239%. The equivalent impact on economic capital is expected to be a reduction of £(0.2) billion, which if the sale and share buy-back had occurred at the end of 2013 would have reduced the Group's economic capital surplus from £3.9 billion to £3.7 billion(5) but increased coverage from 193% to 194%.

For further details on the financial effects of the disposal, see Appendices 1, 2 and 3.

7. Impact on Value Share

Adjusting for the disposal and share buy-back, pro forma total gross equity deployed in Resolution Holdco No.1 LP as at 31 March 2014 is approximately £4,056 million and the pro forma accumulated value of net equity deployed (at 4% per annum) is approximately £3,067 million.

- Ends -

Enquiries

Notes

1. Blackstone means the Blackstone Group L.P. and its affiliates. The Blackstone entity that will acquire Lombard is BTO Monarch Luxembourg Holdings S.A.R.L., a company incorporated in Luxembourg.

2. GBP:Euro exchange rate of 1.2605 has been applied to the consideration amounts. It represents the forward rate as at 10 July 2014 to the estimated completion date.

3. The proposed share buy-back amount of £261 million equals the full upfront cash consideration of £254 million and estimated £7 million equivalent to interest on this sum from 1 January 2014 to the estimated date of completion, each figure assuming a GBP:Euro exchange rate of 1.2605.

4. The pro forma SFS to dividend coverage ratio is restated using the assumptions detailed in Appendix 2.

5. The pro forma impact of the disposal and share buy-back on IFRS net assets, Group MCEV and solvency metrics includes estimated disposal costs and fair value adjustments and excludes 2014 results, foreign exchange movements and LTIP adjustments.

6. The 10 day rolling average share price as at 10 July 2014.

This announcement includes statements that are, or may be deemed to be, "forward-looking statements" with respect to Friends Life Group, its subsidiary undertakings and their outlook, plans and current goals. In some cases, these forward-looking statements can be identified by the use of forward looking terminology, including the terms "targets", "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend upon circumstances that may or may not occur in the future. No representation is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements are not guarantees of future performance. Friends Life Group's actual performance, results of operations, internal rate of return, financial condition, liquidity, distributions to shareholders and the development of its acquisition, financing and restructuring and consolidation strategies may differ materially from the impression created by the forward-looking statements contained in this announcement. Forward-looking statements in this announcement are current only as of the date of this announcement. Friends Life Group undertakes no obligation to update the forward-looking statement it may make. Nothing in this announcement should be construed as a profit forecast. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.

Appendix 1: Impact of Lombard disposal on the Group financials

No allowance for the consideration or the use of consideration has been made in the restated Group position.

Appendix 2: Impact of disposal and proposed share buy-back based on the 2013 Group financials

To illustrate the impact of the disposal and proposed share buy-back, 2013 Group metrics have been adjusted using the following assumptions:

§ Lombard is assumed to be excluded from the 2013 Group results.

§ 2013 interim and final dividends have been recalculated excluding the shares bought back.

§ The share buy-back assumes a share price of 317.5 pence which equates to 82 million shares and is assumed to have happened immediately on 31 December 2013.

(1) 2013 pro forma SFS includes positive adjustment of £3 million reflecting expected interest on the vendor loan.

(2) IFRS TNAV calculated as equity attributed to shareholders less intangible assets, DTL, DAC and DFF.

(3) MCEV TNAV calculated as equity attributed to shareholders less VIF, intangible assets, DTL and DAC.

Appendix 3: Impact of disposal and proposed share buy-back based on the Q1 2014 Group financials

To illustrate the impact of the disposal and proposed share buy-back, the first quarter 2014 Group metrics have been adjusted using the following assumptions:

§ Lombard is assumed to be excluded from the 2014 Group results.

§ The share buy-back assumes a share price of 317.5 pence which equates to 82 million shares and is assumed to have happened immediately on 31 March 2014.