Final Results

17th Mar 2009 07:00



17 March 2009

Friends Provident plc - Preliminary results for the year ended 31 December 2008 (unaudited)

Strong capital position; good progress on strategy

Financial highlights

Insurance Groups Directive (IGD) surplus remains strong, estimated at £0.85 billion at 31 December 2008 (31 December 2007: £1.3bn) and estimated at £0.8bn at the end of February 2009

Final dividend of 2.6p per share bringing full year dividend per share to 3.9p*

High quality of investments and focused strategy position business well to continue turnaround

IFRS net asset value per share excluding goodwill of 77p (2007: 96p) 

EEV underlying profit up to £420 million (2007: £16m) on our established market-consistent approach

IFRS underlying profit of £27 million (2007: £44m) before £217m  (2007: £90m) addition to corporate bond default reserves

Operating highlights

International contribution from new business of £111 million (2007: £110m) 

UK business restructured to align operations to corporate and individual customer segments

£25 million annualised cost savings at 31 December 2008, well on track to deliver £40 million of annualised savings in the UK by end of 2009

Trevor Matthews, chief executive officer, said:

"We are maintaining our capital strength, our prudent approach to accounting and our dividend policy, all of which position us well in the current conditions. 

"The company is reorganised, the leadership team is strengthened, and operational momentum is building. We have taken significant costs out of the business, sharpening our competitive edge in the key markets we identified at the start of 2008.

"2009 will be a tough year for economies worldwide, but we will continue to enhance our product range and build a business primed to broaden our distribution and grow market share both in the UK and abroad."

Financial Summary

	2008	2007
Cash
Life and pensions net cash operating (deficit)/surplus	£(12)m	£19m
Shareholder cash (outflow)/generation	£(155)m	£177m
Internal rate of return on new business**	12.9%	14.4%
Cash payback on new business**	11 years	9 years
IFRS
IFRS underlying profit excluding impact
of increase to corporate bond default reserves	£27m	£44m
Increase to corporate bond default reserves	£(217)m	£(90)m
IFRS underlying loss** before tax	£(190)m	£(46)m
IFRS loss before tax from continuing operations	£(871)m	£(113)m
Basic loss per share	(23.3)p	(5.0)p
IFRS net asset value per share excluding goodwill	77p	96p
EEV
Contribution from new business**	£139m	£206m
EEV underlying profit** before tax	£420m	£16m
Return on embedded value	7.9%	(4.3)%
Embedded value per share ***	128p	160p
Capital and dividend
Estimated IGD surplus capital resources**	£0.85bn	£1.3bn
Total shareholder return	(44.1)%	(21.5)%
Dividend per share*	3.9p	8.0p

* Final dividend of 2.6p expected to be paid by new holding company following group restructuring

** As defined within Appendix 1

*** Embedded value for 2007 is stated on a pro forma basis, including an uplift of the net asset value attributable to F&C to the market value of the stake

- Ends -

For further information please contact:

Journalists
Nick Boakes	Friends Provident plc	+44 (0) 845 641 7814
Peter Timberlake	Friends Provident plc	+44 (0) 845 641 7834
Vanessa Neill	Finsbury Limited	+44 (0) 20 7251 3801
Alex Simmons	Finsbury Limited	+44 (0) 20 7251 3801
Analysts
Chris Ford	Friends Provident plc	+44 (0) 845 641 7832

Ref: J031

Notes to Editors

1. An interview with Trevor Matthews, chief executive officer, will be available to view in video, audio and text formats at www.friendsprovident.com and www.cantos.com from 7.00am today.

2. An analyst presentation will take place at 9.30am today at JP Morgan Cazenove, 20 Moorgate, London, EC2R 6DA.

3. The analyst presentation will be webcast live from 9.30am and on demand from 2.00pm on the Friends Provident website: www.friendsprovident.com/results 

4. The presentation slides will be available from 9.30am today on www.friendsprovident.com/presentations

5. For more information on Friends Provident including, photos, awards, fast facts, presentations, and media contacts please visit the media section at www.friendsprovident.com/media

6. Financial reporting dates 

	Financial Reporting Calendar:
	Friends Provident interim management statement plus quarter 1 new business	28 April 2009
	Friends Provident plc Annual General Meeting	21 May 2009
	Friends Provident plc interim results	11 August 2009
	Friends Provident interim management statement plus quarter 3 new business	27 October 2009

 

7. Certain statements contained in this announcement constitute 'forward-looking statements'. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements, from time to time, of Friends Provident plc, its subsidiaries and subsidiary undertakings or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, adverse changes to laws or regulations; risks in respect of taxation; unforeseen liabilities from product reviews; asset shortfalls against product liabilities; changes in the general economic environment; levels and trends in mortality, morbidity and persistency; restrictions on access to product distribution channels; increased competition; and the ability to attract and retain personnel. These forward-looking statements are made only as at the date of this announcement and, save where required in order to comply with the Listing Rules, there is no obligation on Friends Provident plc to update such forward-looking statements.

8. We received a large number of awards in 2008, showing continued recognition of the quality of our products and service:

FTAdviser.com - Online Service Awards 2008. Friends Provident received the 4 Star award for Life & Pensions Provider

Money Marketing Financial Services Awards 2008. Friends Provident came 3rd in the category of Company of the Year 

eBusiness

Investment Life & Pensions Moneyfacts 2008 Awards. Winner of Best Online Service

FTAdviser.com - Online Service Awards 2008. Friends Provident received the 5 Star award for Investment Providers and Packagers

Financial Technology Research Centre - e-Excellence Ratings 2008. Friends Provident received numerous Triple E ratings: Individual Pensions, Group SIPP, Life Protection, Critical Illness, Income Protection and Group Personal Pensions including Stakeholder for both new and existing business

Pensions

Incisive Media - Gold Standard Awards 2008. Friends Provident won the Group Pensions category 

European Pensions Awards 2008. Friends Provident was awarded Pension Provider of the Year

Protection

Online Finance Awards 2008. Friends Provident was awarded Best Online Protection Provider

Incisive Media - Gold Standard Awards 2008. Winner of Protection category

Health Insurance Awards 2008. Friends Provident was named Best Individual Income Protection Provider 

Investments

Investment Life & Pensions Moneyfacts 2008 Awards. Friends Provident won award for Best Ethical Investment Provider 

Overview

Market conditions in 2008 formed a challenging backdrop for the implementation of our new strategy, announced at the start of the year. The outcome of this strategy will be a more profitable cash-generating business with a strong foundation for growth, both in the UK and international markets. Our conservative investment strategy for shareholder assets and prudent accounting methodologies mean we remain well-capitalised.

We have significantly strengthened the operational management team in 2008. Trevor Matthews took up his appointment as chief executive officer at the end of July. In November we announced the appointment of Evelyn Bourke as chief financial officer, a position she will take up from 1 May 2009. Two experienced non-executive directors, David Rough and Robin Phipps, were also appointed to the Board during the year. Rodger Hughes, who was previously a long-standing partner of PricewaterhouseCoopers, will join the Board in March 2009. Lady Judge will retire from the Board on 21 May 2009, the date of Friends Provident's Annual general Meeting.

Strategy implementation

The operational structure of the UK business has been reorganised during the year to align our decision-making structures with the UK corporate and UK individual customer and distributor segments. This is a key change that allows greater flexibility and accountability. Many key UK corporate distributors reacted to corporate uncertainty early in 2008 by removing us from their panels of providers. We have addressed their concerns and we are now back on almost all of the panels that we target.

During the year we reviewed our ownership of a majority stake in F&C Asset Management plc, Lombard International (Lombard), the Luxembourg-based specialist life insurance business, and the financial adviser Pantheon Financial. The intention was to find the approach that offered the optimal value for Friends Provident shareholders. For both Lombard and Pantheon Financial the decision taken was to retain and develop the businesses within Friends Provident. We have taken steps to align both Lombard and Pantheon Financial management incentive schemes with the priorities of our new strategy. We are progressing towards distribution of our stake in F&C Asset Management to our shareholders. 

In January 2008 we set out a target for £40m run-rate of annual cost savings by the end of 2009. We remain confident of reaching this target and reported £25 million run-rate of savings as at 31 December 2008. 

Financial strength

We remain well capitalised with estimated surplus on the IGD basis at the year-end of £0.85 billion arising from capital resources of £1.80 billion less requirements of £0.95 billion, a coverage ratio of 1.9 times. The IGD surplus measure is conservative, excluding £0.6 billion of surplus assets held within long-term funds. The impact on IGD surplus of distributing our investment in F&C Asset Management plc to shareholders and after allowing for payment of dividend and interest in the first half of 2009 will be an increase of £0.1bn. 

We manage the FPLP With Profits Fund on the realistic basis, and on this basis the surplus within this fund continues to cover its risk capital margin without requiring additional shareholder support. 2008 saw significant adverse market movements in equities, bonds and commercial property which, as would be expected, reduced the regulatory surplus. It exceeded capital requirements by £0.3 billion at the year end. The equity backing ratio (which includes commercial property investments) of asset shares in this fund was reduced over the second half of 2008 to around 16% by the end of the year. Consequently, IGD surplus was not materially sensitive to movements in equity markets.

Our corporate debt portfolio remains highly-rated, with over 98% of £6.1 billion of corporate bonds (excluding unit-linked funds) at investment grade. Asset backed securities (excluding unit-linked funds) were £1.2 billion, of which 98% were at investment grade.

Allowing for investment market movements since the year-end, we estimate the IGD surplus to be £0.8 billion at the end of February and that this surplus would not be reduced by more than £0.1 billion if bond spreads were to widen by a further 100 basis points, or more than £0.2 billion for 150 basis points.

Outlook

2009 is expected to reflect a continuation of the trading environment of the second half of 2008, with new business in early 2009 below the 2008 comparatives. 

In the UK we are seeing increased traction with group pensions distributors and we are on almost all of the distributor panels for our targeted market segments. We expect this to continue to support new scheme wins. A further £17 million of APE over the next six months is expected from new schemes signed up in the first two months of 2009. The protection market remains subdued in line with the housing market. We are working hard to broaden our distribution, to allow greater utilisation of the strengths of our efficient platform.

In line with our policy, we have updated our persistency assumptions to reflect recent experience. We are closely monitoring policy lapses due to the potential impact of the ongoing recession.

We expect cost savings in the UK to contribute to improvement in new business profitability when the full run-rate is achieved from the end of 2009.

FPI's short term results will depend to some extent on the reaction of the diverse markets in which it operates to the ongoing global economic turmoil, although further product additions place us well within most markets. In the Middle East we have launched our Optus group savings product. We are aiming to provide further products in the German market. Both FPI and Lombard continue to have strong prospects for growth in the medium and longer term.

Financial performance

Cash

Life and pensions net cash operating flow was a deficit of £(12) million (2007: £19m surplus) as we reduced new business strain in line with the new strategy, but in-force surplus was also lower than last year

Shareholder cash outflow was £(155) million (2007: £177m inflow) as a result of increases to corporate bond default reserves (£(217)m outflow) 

Internal rate of return on new business was 12.9% (2007: 14.4%) and cash payback increased to 11 years (2007: 9 years) as a result of a number of factors described in the Business Review.

IFRS

IFRS underlying profit before increases to corporate bond default reserves was £27 million (2007: £44m), with the new business strain and in-force surplus both reducing, together with one-off charges of £(70) million, mainly for changes to expense assumptions.

The allowance for corporate bond defaults within statutory reserves increased by £217 million (2007: £90m) over the year, leading to a charge for this amount in the IFRS and cash results. The charge is after allowing for a £193 million release from changes to the liability reserving basis. Our reserving approach remains prudent, with an allowance for defaults of approximately £500 million on assets backing annuity liabilities of £2.7 billion.

IFRS loss before tax from continuing operations was £(871) million  (2007: £(113)m) and basic loss per share (23.3)p (2007: (5.0)p). These measures reflect a £(264) million charge for impairment of intangible assets related to F&C, £(154) million for losses attributable to minority interests in the F&C Commercial Property Trust and one-off costs of strategy implementation of £(78) million.

IFRS net asset value per share excluding goodwill was 77p (2007: 96p) and represents the equity attributable to ordinary shareholders only, less all goodwill.

EEV

Our embedded value results are calculated on the market-consistent basis that we have used since 2005. Our basis differs in some details from the CFO Forum Market Consistent Embedded Value Principles, notably in that we use the forward gilt curve rather than the swap curve to define risk-free rates. 

Contribution from new business was £139 million (2007: £206m) as UK business showed the anticipated fall in profitability due to more prudent assumptions and lower volumes.

EEV underlying profit before tax of £420 million (2007: £16m) improved significantly as there was no recurrence of significant charges for assumption changes that impacted the 2007 results. Operating assumption changes were £(22) million (2007: £(361)m).

Return on Embedded Value on an underlying basis was 7.9% (2007: (4.3)%) and not materially impacted by adverse operating assumption changes as in 2007.

Embedded value per share reduced to 128p (2007: 160p) reflecting a 15p decrease from reduced market value of the F&C stake, payment of dividends to Friends Provident shareholders and investment market movements.

Distribution of stake in F&C Asset Management

We are progressing toward distribution of our stake in F&C Asset Management to our shareholders by way of a return of capital. In order to achieve the return of capital, it is necessary to undertake a reorganisation that involves establishing a new holding company on top of the Group to effect the demerger and to create sufficient distributable reserves to enable future dividends to be paid by the Group. The approval of shareholders and the court will be required for this reorganisation and it is expected that shareholders will receive relevant documentation at the end of April 2009. It is anticipated that completion will take place at the end of June 2009.

Dividend

The Directors continue to believe that it is in the interests of shareholders to maintain the Group's existing dividend policy. While the Group has sufficient cash to support a final dividend of 2.6 pence per share for the year ended 31 December 2008, as a technical legal and accounting matter, the distributable profits shown in the individual company accounts for Friends Provident plc are insufficient to enable it to declare the final dividend, following the impairment of F&C in its accounts. Having considered these factors, the Directors believe that the establishment of a new holding company for the Group is the most suitable and effective way to provide greater flexibility in the capital structure of the Group, effect the demerger of F&C and provide sufficient distributable reserves to enable payment of a final dividend for 2008. The final 2008 dividend will be paid as soon as practicable after establishment of the new holding company. The directors will make a judgement on future dividend levels, taking into account future developments and the circumstances prevailing. 

ENDFR SFMSMWSUSEDD

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