Half Year Results

13 August 2013

Resolution Limited

Results for the half year ended 30 June 2013

Strong financial performance and improving cash generation

· Sustainable free surplus £147 million, up 23% (30 June 2012: £120 million)

· IFRS based operating profit before tax of £191 million (30 June 2012: £163 million)

· IFRS based operating earnings per share up 17% to 13.26 pence (30 June 2012: 11.32 pence)

· MCEV operating profit before tax of £214 million (30 June 2012: £235 million) reflects expected impact of long-term interest rate environment

Strong capital base underpins dividend

· Available shareholder cash £839 million (31 December 2012: £850 million)

· Group IGCA surplus(i) £2.1 billion, coverage ratio 222% (surplus at 31 December 2012: £2.2 billion, 221% coverage ratio)

· Economic capital surplus(ii) £3.7 billion, coverage ratio 192% (surplus at 31 December 2012: £3.5 billion, 194% coverage ratio)

· Interim dividend of 7.05 pence per share (30 June 2012: 7.05 pence per share)

Improving new business performance

· Strong growth in UK division; value of new business of £89 million, up 41% and at an IRR of 16.7%

· International division core value of new business £21 million (30 June 2012: £22 million) reflecting resilient performance in difficult markets

· Total Group VNB £97 million; Group new business IRR of 11.2%; Group margin increased to 2.8%

Operating highlights

· Successful recapture of an additional £7 billion of assets by in-house asset manager FLI

· Corporate Benefits performance exceeds expectations with 30% increase in VNB, strong pipeline of new schemes and auto-enrolling clients for the rest of the year

· £154 million of cost savings secured at 30 June 2013 (96% of 2015 target)

· Good progress made on delivering the International strategy with controlled exit from German manufacturing to be completed in third quarter 2013 and all other non-core exit actions completed

Andy Briggs, Group Chief Executive said:

"We continue to make excellent operational progress in line with the clear and consistent strategy and value agenda of the Group. The strong performance announced today reflects the attractive strategic outlook of the Group and has been led by the UK division where higher value of new business has been written at a lower cash cost. We have continued to deliver cash from our Heritage division and made good progress on International strategy implementation. This financial discipline underpins strong growth in cash generation and I remain confident about the future prospects of the Group."

Notes:

(i) Represents estimated Insurance Group Capital Adequacy ("IGCA") at the Resolution holding company level

(ii) Economic capital surplus is estimated

Forward-looking statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements" with respect to Resolution, 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. Forward-looking statements are not guarantees of future performance. Resolution'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. Resolution undertakes no obligation to update the forward-looking statement it may make. Nothing in this announcement should be construed as a profit forecast.

Media

There will be a conference call today for wire services at 07.30 (BST). Dial in telephone number: UK Local call 0844 493 3800, UK Standard International +44 (0)1452 555 566 Passcode: 25283960.

Analysts/Investors

A presentation to analysts will take place at 09.30am (BST) at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. Dial in telephone number: 0800 368 0649, UK standard International +44 (0)203 059 8125, *participant password: Resolution.

A webcast of the presentation and the presentation slides will be available on Resolution's website, www.resolution.gg.

In accordance with the obligations for issuers of listed debt contained in the Disclosure and Transparency Rules, Friends Life Group plc will issue a separate half year results announcement later today.

Financial calendar

2013 interim dividend

*Password must be quoted to operator to gain access to the conference.

Chairman's statement

Overview

The half year 2013 results, the first since I became Chairman of the simplified Group in May 2013, show strong performance in a number of areas. I am delighted with what we have achieved over the last six months while maintaining our focus on customers. The operating performance of the Group has been strong and shows the impact of the Group's continued delivery of value over volume. 

The Heritage business, representing the majority of the existing books of business, continues to be the cash engine of the Group. The UK division, which comprises the Corporate Benefits, Protection and Retirement Income businesses, has made good progress towards financial targets reflecting ongoing operational improvements underpinned by improving efficiency of cash usage. We also continue to deliver the targeted cost savings.

I am pleased with the progress made on the operational turnaround of the International business, and a controlled exit will have been made from all non-core businesses by the end of the third quarter of 2013. Notwithstanding the moderate operating drag incurred while we complete this exercise, I am delighted to note the payment of internal interim dividends amounting to £10 million (Lombard £4 million and Friends Provident International ("FPI") £6 million) in July 2013. 

The Chief Executive and Chief Financial Officer's statements that follow, together with the business review, contain a more comprehensive account of the first half of 2013.

Dividend

The Company's dividend policy remains unchanged and is an absolute amount determined by the Board, currently 21.14 pence per share per annum which is in line with dividends declared in respect of 2012. Consistent with the policy of dividends being paid one-third in respect of the interim dividend and two-thirds in respect of the final dividend, the Board has declared an interim dividend of 7.05 pence per share. The Company will consider moving to a progressive dividend when sustainable cash generation meets its £400 million per annum distributable cash target. 

Capital

The Group maintains a strong capital position. The Board is confident that the Group remains well capitalised on both regulatory and economic bases.

Outlook

The Group is making good operating progress and this is supported by our focus on financial and operational discipline. The performance in the first half of 2013 further underpins the Board's confidence in the future performance of the Group.

Chief Executive's Review

We have continued to make excellent progress over the last six months, particularly in increasing sustainable free surplus ("SFS"), a key driver of cash generation, which was up by 23% to £147 million without compromising the strong capital base. The Heritage division continues to be the cash engine of the Group and our focus has moved from capital optimisation to generating incremental cash and value. Our core new business franchises have delivered strong value of new business ("VNB") growth as we continue to write profitable new business for future cash generation.

Despite continued macroeconomic uncertainty in the wider environment, the first half of 2013 saw signs of economic recovery and was marked by an improvement in asset prices with a strong rally in equity markets in particular, before falling back in June.

We are also starting to see the benefits of the International strategy announced in November 2012 with orderly exits from non-core businesses and the payment of dividends amounting to £10 million in July 2013.

The outlook for the Group remains very attractive and we are well-placed to take advantage of key demographic and regulatory trends in our chosen markets. 

1. Strategy

The strategic aim of the Group is unchanged and remains focused on developing a sustainable business that meets the needs of customers and delivers cash and appropriate returns to shareholders. The UK has an ageing population, with reducing state support and a significant need to increase pension provision. The Group's products address these structural issues, as well as meeting customer needs for support for themselves and their families if they die or fall ill. The Group benefits from its existing book of business and the natural synergies that exist between its chosen business lines. In particular, the Heritage division and Corporate Benefits business provide a strong source of future new business for the Retirement Income business. At the same time the Group maintains a robust, low risk balance sheet, improving sustainable cash flow generation, and writing profitable new business to ensure future cash flow generation.

The goal across the UK and International divisions is to achieve higher returns on new business written and in this way to replenish the run-off of the existing book of business managed by the Heritage division. The focus of the Heritage division continues to be on disciplined management of the existing book to deliver cash and manage capital effectively. Turning embedded value into cash takes skilled management and we have a separate, dedicated management team, focused on managing the in-force book of business efficiently in order to deliver cash to the Group. In the UK division, the Group focuses on three core product areas (Corporate Benefits, Protection and Retirement Income) where we believe that we have competitive advantage and scale, and can thereby achieve attractive returns.

The International division is well placed to benefit from growth in global wealth, in line with the strategy we set out in late 2012. Friends Provident International ("FPI") serves expatriates globally and domestic affluent customers in selected markets (Hong Kong, Singapore and Dubai). Lombard continues its existing strategy focused on estate planning for high and ultra high net worth individuals through its private bank distribution in Europe and through targeted expansion in other regions.

2. Market environment

Long term interest rates across a number of countries have fluctuated throughout June and July 2013 but generally started to increase modestly suggesting that the markets are starting to price in economic recovery and the end of quantitative easing. However, in the medium-term a relatively low interest rate environment is expected to persist, as global central banks maintain their focus on loose monetary policy to stimulate economic growth. This continues to present a challenge to the Group as persistent lower interest rates impact the ability of the business to generate free surplus.

The first half of 2013 was characterised by a strong rally in UK equity markets underpinned by quantitative easing in the UK and the US, the avoidance of the US fiscal cliff, and dissipation of fears over the Eurozone. Nonetheless, the economic recovery in the UK remains fragile as evidenced by the equity falls in June and interest rates remaining very low by historical standards.

On 1 April 2013, the Financial Services Act came into force. The Act provides for dual supervision of UK insurance companies by two new regulators: the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA"). The regulatory environment continues to be robust for insurance companies and we maintain a healthy, open and constructive relationship with our regulators. 

We remain well placed to benefit from the key market trends. The corporate benefits market is large and growing as a result of the structural shift from defined benefit pension schemes towards defined contribution and from the introduction of auto-enrolment which will improve the living standards of millions of people as they retire. Our Retirement Income business also benefits from these trends, and from the demographic forces that will bring an increasing number of people, and volume of funds, to retirement income over the next decade. The UK protection market is mature, concentrated and has remained relatively stable over the past few years.

Consistent with its strategy, the International division is focused on affluent domestic and expatriate clients in markets where there are strong external drivers for growth. In Lombard's core markets across Europe, despite an uncertain legal and tax environment, the longer term demand for individually structured Privatbancassurance solutions remains compelling. The core markets for FPI of North Asia, South-East Asia and the United Arab Emirates show strong medium term growth prospects.

3. Operational performance

Financial performance during the first half of 2013 continued to demonstrate execution of our strategy, driving strong progress in sustainable free surplus generation and higher returns on new business written in the UK division, as we manage a controlled exit from non-core International segments.

The Heritage division continues to be the main driver of sustainable free surplus generation, with substantial embedded value in products which are no longer actively marketed. We are constantly seeking new initiatives to generate incremental cash and value for the Group and the Heritage division is currently engaged in a significant range of initiatives to deliver cash from the existing book of business, including improving cost efficiencies, removing some of the inefficiencies in the capital structure and managing the Group's assets more effectively. A good example is the continued development and expansion of Friends Life Investments ("FLI"), which, whilst only launched in July 2012, now has £18 billion of fixed income assets under management, including £7 billion recaptured in the first half of 2013.

The focus of the division has moved to generating incremental cash from the Heritage book. One initiative is a potential deal to reallocate annuity reserves, currently within the with-profits funds, to the non-profits fund. We expect the reallocation of circa £2 billion of reserves to complete in the second half of 2013, subject to regulatory approval. The expectation is that this will deliver circa £10 million per annum sustainable free surplus benefit from 2014 at a cost of circa £(20) million of sustainable free surplus in the second half of 2013. We will continue to consider further de-risking proposals for the Heritage with-profits funds, balancing the needs of customers and shareholders and leveraging the skills of our dedicated divisional management team.

In Corporate Benefits, our assets under management have increased by nearly 11% to £20 billion and VNB has improved by 30% to £13 million. Second quarter performance exceeded our expectations and I am pleased to see that our pipeline of new schemes is nearly three times higher than at the same point in 2012.

In Retirement Income we have improved both our product proposition and the effectiveness of our customer engagement with a new dedicated retirement team, and as a result are well positioned to help a growing generation of retirees with their retirement plans. In the first half of 2012 we launched our own enhanced annuity to our internal vestings customers and expect to launch a version of this proposition to the open market in the fourth quarter of 2013. Margins remained very attractive in the first half of the year. Premium volumes increased by 73% to £324 million, and the value of new business is up 76% to £44 million. Sales have benefited from both improved retention rates of 32% and an initiative to redirect annuity business previously written in the with-profits funds to non-profit funds.

Group protection sales continue to deliver strong profitable growth, offset by lower sales of individual protection products where the gender neutral pricing directive drove higher volumes of business towards the end of 2012, depleting the pipeline of applications that carried on to 2013. I am extremely pleased that all of our business is now written on our target platforms which offer a better service for our customers at a lower cost of administration to the Group, however the competitive environment continues to be challenging. We are therefore continuing to generate distribution opportunities through existing and new partners including a new long-term protection partnership with Virgin Money starting from January 2014.

The International division is starting to see the benefits of last year's strategic review with the completion of the sale of AmLife in January 2013 and a further focus on core markets. I am pleased to note that Lombard has contributed an interim dividend of £4 million and FPI a first ever dividend of £6 million, both paid to the Group in July.

The results of FPI are impacted by the timing of the strategic review in 2012. Changes to assumptions were reflected only in full year 2012 financial statements, and therefore half year results are not directly comparable. In FPI, we have managed an exit or are in a controlled withdrawal from all of the non-core markets which we had identified as being unprofitable or outside our acceptable risk parameters. In Germany, fpb AG (the Group's distribution business) has extended its distribution agreement with Cardea to replace FPI's regular pension products. The process of transitioning to Cardea's pension products is expected to complete in the third quarter of 2013. The core business, focused on the growth in global, and particularly Asian, wealth, has seen assets under management increase by 10% to £6.7 billion. 

Lombard has performed well in a challenging market with flat value of new business on sales down 11% on a constant currency basis (8% in sterling) in a highly uncertain market environment. Assets under management for Lombard increased slightly to €23.5 billion.

4. Capital

The Group continues to maintain a robust low risk balance sheet and deliver improvements in sustainable free surplus generation, underpinned by an IGCA surplus of £2.1 billion, representing a 222% coverage ratio. 

5. Progress on medium-term targets

As indicated previously, progress towards the distributable cash target ("DCT") and the target level of ROEV has been impacted adversely by the fall in interest rates since the targets were announced in 2010. The expectation of relatively low interest rates in the medium term continues to present a challenge to the Group by depressing the emergence of free surplus from the in-force book and reducing the returns available on shareholder assets.

Notwithstanding this challenging economic headwind, the Group continues to pursue achievement of the DCT and ROEV targets in the medium term with the balance of the business and the strategic aims of the divisions firmly aligned with the targets and the drivers of value.

In the first six months of the year, the increase in sustainable free surplus reflects a significant reduction in the investment in new business without compromising the profitability of the new business we write in our chosen markets. This has contributed to improving cash emergence and is a key requirement for improving ROEV.

The level of ROEV is an important driver of market value for life insurance companies. The key drivers of ROEV are the value of new business, investment market conditions and the absolute level of interest rates. Interest rates remain at historically low levels which inevitably cause a drag on ROEV. Over 2013 Resolution has further grown its new business contribution, extracted value from its back book and continues to see benefits from its new asset management strategy. The building blocks of growing our ROEV are fully embedded in our plans and are increasingly visible in our results.

6. Outlook

The Group's priorities in 2013 remain the execution of the Heritage, UK and International divisional strategies, the application of rigorous financial discipline to the management of in-force policies and the writing of profitable new business.

In this way the Group aims to deliver attractive returns for shareholders and positive customer outcomes.

Chief Financial Officer's review

1. Summary

The Group's strategy over the last 18 months has been clear, with a focus on delivering cash generation today, profitable new business and securing cash generation for the future. These principles continue to direct the Group's progress and I am pleased that many of our performance metrics reflect the delivery against these strategic objectives over the first half of 2013.

The focus throughout 2012 on the structure and implementation of the UK and Heritage divisions has delivered notable improvements across these strategic fronts. In particular, it is important to recognise the progress made on new business profitability over the last few periods, with the value of UK and Heritage new business at £81 million in the first half of 2013 over 2.8 times that achieved in the first half of 2011.

Underlying this growth the UK division has delivered VNB of £89 million in the first half of 2013, up 41% on the same period in 2012, and is well on course to reach the UK target of £155 million. Of course there remain some challenges, but notwithstanding this we believe that the focus on value rather than volume has been critical in the delivery of the improved performance of the Group and this focus will continue over the remainder of 2013 and beyond.

The other key area of our recent focus has been the reshaping of our International division, the strategy for which we set out in November 2012. To date, good progress has been made with its implementation, with many of the structural outcomes now in place. The benefits of these changes, as with those delivered in the UK over the last few years, will emerge over time. Our confidence of this is reflected in the payment of interim dividends amounting to £10 million in July 2013 (Lombard £4 million and FPI £6 million) in line with expectations.

In FPI, activities to rebase the business are progressing well, although the impact of these has made comparison to 2012 less meaningful. The withdrawal from non-core markets is apparent in the 2013 results, with new business volumes significantly down on the same period in 2012 following the decision to no longer accept new business from Japanese nationals, the closure to new corporate pensions business and the sale of AmLife. As expected, the 2013 results include a modest operating drag as the business undertakes the controlled withdrawal from writing pensions business in Germany. This withdrawal will be complete by the end of September 2013 and supports the Group's expectation that the operating drag from non-core businesses in 2013 will be short lived.

2. Operating results

The Group operating performance continues to reflect the focus on cash delivery with improving efficiency of cash usage a key driver of the 2013 results. In the first half of 2013 IFRS based operating profit increased 17% to £191 million (30 June 2012: £163 million) and sustainable free surplus increased 23% to £147 million (30 June 2012: £120 million). These improvements reflect a strong period on period performance and are underpinned by the reduction in the cost of writing new business and the absence of one-off costs incurred in 2012.

The economic environment has continued to be challenging in the early part of 2013. Despite equity markets closing above 2012 year end levels, they remain volatile. In addition, the low interest rate environment persists with opening risk free returns lower than prior periods. The impact of this is particularly noticeable in the Group MCEV operating results where, as highlighted in the 2012 full year results, expected returns have been impacted by the reduction in start of year risk free rates from the 1.35% applied in 2012 to 0.67% in 2013. This reduction in rates is broadly mirrored across all asset types and the impact has more than offset the benefit from growing value of in-force in the second half of 2012.

IFRS based operating profit

In our UK and Heritage divisions, IFRS based operating profit of £129 million was £8 million lower than in the first half of 2012. Comparatively however, these results are of better underlying quality with the 2013 results up £20 million after the exclusion of principal reserving changes and one-off items in both periods. Key to this growth has been the focus on reducing the cost of new business. UK and Heritage IFRS new business strain has reduced significantly to £15 million (30 June 2012: £41 million) and includes a strong positive contribution from the Retirement Income business of £21 million as well as the benefits from the migration of new business to the target platforms and lower acquisition costs. Within in-force surplus, the higher equity markets over the first six months have resulted in higher annual management charges.

The International IFRS operating profit in the first six months amounted to £74 million, up £43 million on the same period in 2012. This has been driven by higher income levels as the in-force book grows and positive economic variances resulting in a reduction in guarantee provisions. Additionally, the result has benefitted from an uplift of £10 million in premium margin across certain non-core in-force products, expected to reduce going forwards, and the absence of one-off costs incurred in the comparative period principally relating to the strategic review.

The factors noted above have combined to improve the operating earnings per share by 17% to 13.26 pence.

Sustainable free surplus

The UK and Heritage divisions contributed £178 million to Group sustainable free surplus, up 11% on the same period in 2012. The principal driver, as in the IFRS result, has been the significant reduction in cost of writing new business, validating the Group's strategy in recent periods.

UK and Heritage in-force surplus generation is up in the period with the prevailing economic factors resulting in broadly offsetting impacts. The £263 million surplus generated from the in-force book is higher than the run-off expectation set out at the 2012 year end (annualised £500 million for 2013). However, £13 million of this relates to a spike in With Profits fund maturities.

As we set out in 2012, the expected cash flow contribution from the 2012 in-force book is set to decrease by circa £25 million between 2013 and 2014. This is a key area of focus for the Group with a number of initiatives underway to replenish this run-off. To date, these include the expected benefits from the with-profits annuity transfer (circa £10 million per annum) and an additional £5 million benefit delivered by FLI. The combination of these actions and surplus generated from new business is driving increased confidence in replenishing future run-off.

The contribution to sustainable free surplus from the International division is also up on the same period of 2012 by £14 million. Within the core businesses, an improvement of £3 million reflects growth of Lombard's book and the non-recurrence of one-off costs spent in 2012, partially offset by lower volumes of regular premium savings business written in FPI in 2012. The non-core sustainable free surplus has improved by £11 million principally reflecting the reduced volumes in these businesses. As highlighted below the contribution from non-core businesses includes some modest operating drag, amounting to £(16) million of investment in new business in the first half of 2013.

MCEV operating profit

The UK and Heritage divisions' MCEV operating profit of £241 million is marginally below the first half result in 2012 (30 June 2012: £249 million) and as expected reflects the ongoing challenge presented by reduced in-force returns in a low interest rate environment. In the first half of 2013, lower expected returns reduced the MCEV operating result by £(34) million although this has largely been offset by positive performances elsewhere. These include the continued growth in new business contribution from the UK division, up 41% to £89 million, and a £34 million benefit from recognition of reduced investment expenses as FLI manages more assets in-house.

In contrast, the International division MCEV operating result is down from £43 million to £21 million for the six months ended 30 June 2013. This reduction is largely a result of the impact on new business following the strategic review (highlighted below) as well as the effects of the challenging market and regulatory conditions in Europe. Despite these factors the core International business is now working to a narrower focus and Lombard remains well positioned in its high and ultra high net worth target markets.

The Group new business margin has improved to 2.8% predominately due to substantial improvement in the UK new business margin which has increased from 3.1% to 4.9% with improvement across all UK business units.

3. International non-core business impacts

As previously reported, the strategic actions in 2012 to refocus the International business remain a factor within the 2013 results. Implementation progress remains on track with swift action taken to close certain product lines at the end of 2012. The Group has also made good progress on the controlled withdrawal from manufacturing for the German market, although this has resulted in an element of ongoing operating drag from this business. This withdrawal is due to complete by the end of the third quarter of 2013 at which point the operating drag is expected to fall away. Excluding the non-core elements, the International businesses are now well positioned to deliver ongoing growth in their core markets.

4. Cost savings

One of the Group's key targets over the last few years has been the delivery of UK and Heritage cost savings. In the first half of 2013, the Group has delivered run-rate cost savings of £119 million, 94% of the 2013 target. A further £35 million cost savings have been contractualised in outsourcing agreements, taking our total secured savings to 96% of our 2015 £160 million target. 

Activities to separate our infrastructure from that of AXA UK have supported the delivery of our cost savings. In the six months to 30 June 2013, the Group successfully completed the single largest remaining element of this programme. This challenging piece of the programme was more complex than originally expected, but it has been completed within the revised expectations set out in November 2012. Both the separation and integration programme and the Diligenta outsourcing remain on track and within the guidance previously provided.

5. Balance sheet

The Group has maintained a strong capital position over the period with an estimated IGCA surplus of £2.1 billion at 30 June 2013, representing a coverage ratio of 222% (31 December 2012: £2.2 billion, coverage ratio 221%). The reduction since the end of 2012 principally reflects the payment of the 2012 final dividend in May 2013 which amounted to £200 million. Our economic capital position also remains strong with estimated surplus capital of £3.7 billion representing a coverage ratio of 192%.

The Group continues to manage a highly rated portfolio of corporate bonds and has as an immaterial exposure to peripheral European sovereign debts. The Group holds a shareholder's share of credit default reserve of £0.5 billion to cover the risk of defaults in the corporate bonds backing the Group's annuity portfolios. No defaults have been experienced in the first half of 2013.

Available shareholder cash of £839 million (31 December 2012: £850 million) decreased by £11 million as the contribution from the life companies and increase in cash set aside at holding company level was more than offset by dividends paid to shareholders.

6. Outlook: target delivery

In summary, the Group's performance in the first half of 2013 is pleasing, with the strategic execution delivering results. As expected, economic conditions continue to have some impact on our results, particularly embedded value returns, although this has to a large extent been mitigated by positive actions and strong operational delivery.

The delivery of profitable new business at lower cost validates the important decisions taken in the UK and Heritage divisions over the last 18 months and more recently in the International division.

In our International division we can see the results of the revised strategy taking effect. Actions to exit non-core markets have been swift and will be completed by the end of the third quarter of 2013, leaving the focus of the core business narrowed and results rebased.

Looking forwards, the Group will continue to focus on what it has done best over recent periods and whilst there remain a number of challenges including increased competitive pressure in the individual protection marketplace, we are confident of achieving the vast majority of the financial performance targets set for the end of the year.

Business review

1 Key performance indicators

The Group uses the following key performance indicators:

· IFRS based operating profit before tax of £191 million is £28 million higher than the £163 million reported in 2012 principally reflecting the reduction in the cost of writing new business, positive economic factors and higher levels of income, and the non-recurrence of one-off costs in the International division. These benefits are partially offset by a lower contribution from principal reserving changes and one-off items.

· IFRS profit after tax of £61 million (30 June 2012: £(58) million) principally reflects favourable investment return variances from narrowing credit spreads and the release of credit default allowances, a lower level of non-recurring costs as the Group nears the completion of the separation and integration projects, the gain on the sale of the Group's 30% stake in AmLife as well as the amortisation of the acquired intangible assets.

· Sustainable free surplus increased by £27 million to £147 million principally reflecting the reduction in the cost of writing new business, reduced volumes in the non-core business and the non-recurrence of one-off costs.

· MCEV operating profit before tax of £214 million (30 June 2012: £235 million) reflects lower expected returns in the ongoing low interest rate environment. These are partially offset by positive assumption changes reflecting the benefits of asset recapture in FLI.

· MCEV profit after tax of £321 million is higher than the £296 million reported in the first half of 2012 principally reflecting lower non-recurring costs.

· Group embedded value on an MCEV basis of £5,980 million (31 December 2012: £5,831 million) is up by £149 million with both the operating performance and positive economic variances partially offset by dividend payments in respect of 2012.

· FLG operating ROEV of 6.1% (30 June 2012: 6.4%) reflects lower expected returns in the low interest rate environment.

· Group available shareholder cash of £839 million (31 December 2012: £850 million) is at a similar level to end 2012, and reflects dividends paid to shareholders and the contribution from life companies in the first six months.

· IGCA surplus capital of £2.1 billion (31 December 2012: £2.2 billion) represents a coverage ratio of 222% (31 December 2012: 221%).

· The Group has maintained high asset quality, with 98% of shareholder-related corporate debt and asset backed securities at investment grade or above (31 December 2012: 97%). The Group has no significant shareholder exposure to sovereign debt or corporate bonds of higher risk European economies. No defaults were recorded in the period and the shareholder's share of default provisions amounted to £0.5 billion.

(i) The MCEV basis is in compliance with the European Insurance CFO Forum MCEV Principles ("MCEV Principles") (Copyright© Stichting CFO Forum Foundation 2008), issued in June 2008, and re-issued in amended form in October 2009.

(ii) Friends Life Group ("FLG") operating ROEV is calculated on an annualised basis as the MCEV operating return, after tax and financing, divided by the start of period net embedded value, and is adjusted to allow for the timing of significant capital movements such as dividends and acquisitions.

(iii) IGCA is presented at Resolution Holding company level.

(iv) Corporate debt and asset-backed securities at investment grade.

2 Group results

2.1 Group IFRS results

The Group's IFRS results are set out below, including a reconciliation from IFRS based operating profit to the IFRS result after tax. The Group uses the operating profit measure as its key IFRS metric as the Board considers that this better represents the underlying performance of the business and the way in which it is managed.

Operating profit

The Group IFRS based operating profit in the period to 30 June 2013 totalled £191 million compared to £163 million in the same period of 2012. This improvement principally reflects the reduction in the cost of writing new business, positive economic factors and higher levels of income, in addition to the non-recurrence of one-off costs in the International division. These benefits are partially offset by the lower contribution from principal reserving changes and one-off items.

A summary of the Group's operating performance is provided in the Chief Financial Officer's review. Further details of the operating performance of the Group's divisions are included in the relevant operating reviews below.

Non-operating items

Short-term fluctuations in investment returns, on assets backing the shareholder and non-profit funds, were a favourable £133 million in the period to 30 June 2013. This benefit mainly reflects the narrowing of credit spreads and the release of credit default allowances.

Gain on sale of associates of £20 million reflects the profit on the sale of the Group's 30% stake in AmLife (AmLife Insurance Berhad and AmFamily Takaful Berhad), which was completed on 4 January 2013.

Other non-recurring items of £(57) million include:

· separation and integration programme costs, net of provision releases, of £(10) million;

- the cumulative spend on the separation and integration projects amounted to £(267) million (31 December 2012: £(257) million).

· outsourcing implementation costs of £(30) million;

- costs incurred to date in respect of Diligenta outsourcing implementation total £(155) million with total implementation costs expected to be in the region of £(280) million.

· finance transformation costs of £(10) million largely relating to Solvency II; and

· costs of the capital optimisation programme of £(7) million.

A shareholder tax charge of £(9) million is recognised for the period and includes £50 million tax credit in relation to the amortisation and impairment of AVIF and other intangibles in the period.

At 30 June 2013, IFRS total equity was £5,562 million (31 December 2012: £5,698 million), with equity attributable to equity holders of the parent of £5,233 million (31 December 2012: £5,377 million). IFRS net assets per share attributable to shareholders were £3.69 (31 December 2012: £3.79) based on shares in issue at the balance sheet date.

2.2 Group free surplus generation

The generation of free surplus, net of movements in required capital, underpins the declaration of future dividends. The table below analyses the free surplus result after tax for the period.

Sustainable free surplus

Sustainable free surplus generated in the period was £147 million, up 23% on the £120 million generated in the prior period. The increase reflects a reduction in the cost of writing new business in the UK and Heritage divisions, reduced volumes in the non-core FPI business and the non-recurrence of one-off costs in the International division.

A summary of the Group's operating performance is provided in the Chief Financial Officer's review. Further details of the operating performance of the Group's divisions are included in the relevant operating reviews below.

Other free surplus movements

In the period to 30 June 2013, operating assumption changes within International, primarily in respect of changes to the capital requirements, reduced free surplus by £11 million.

Positive economic variances of £62 million increased free surplus, principally driven by the impact of narrowing credit spreads on assets backing the annuity business. Other non-operating items include £(89) million in respect of a provision made to meet the deficit reduction plan for the Group's defined benefit pension scheme, bringing the total provision to £(108) million, equivalent to 5 years of the 10 year funding plan; and £(25) million in respect of non-recurring costs.

Available shareholder cash

Available shareholder cash ("ASC") represents cash available to cover corporate costs, to service debt issued by holding companies and, subject to shareholder approval, to pay dividends. ASC provides a buffer, firstly to ensure that sufficient cash is available to meet the next 12 months dividend commitments and secondly to enable the Group to continue to grow its sustainable free surplus in line with its medium term business plan in volatile investment markets.

Dividends declared by Friends Life Limited ("FLL"), and due for payment to FLG later in 2013 totalled £110 million, and this gives the contribution to the distributable cash target ("DCT") for the period. This dividend includes dividends declared by the International subsidiaries (FPIL and Lombard) totalling £10 million in the period. Free surplus generated within the long term funds of the life companies does not contribute to ASC until the year end actuarial valuation has been completed and any transfers agreed.

Other movements in ASC comprise corporate cash flows, including external interest payments net of interest received from life companies, and changes in the amount of cash set aside at holding company level to fund working capital requirements. In 2012, this included the provision in working capital for deficit reduction contributions for the Group's pension scheme. This has been released in the period as the deficit reduction contributions have now been provided for in the life companies (reducing free surplus).

Dividends

The Company's dividend policy can be summarised as being an absolute amount determined by the Board, currently 21.14 pence per share per annum, with the expectation that a progressive dividend would be considered once sustainable cash generation reaches the £400 million per annum distributable cash target. The Company expects to pay one-third of the total annual dividend as an interim dividend and two-thirds of the total annual dividend as the final dividend.

The interim dividend in respect of the period to 30 June 2013 will be 7.05 pence per share.

2.3 Group MCEV results

MCEV is an alternative accounting basis to IFRS for life assurance companies. MCEV reporting is designed to recognise profit as it is earned over the lifetime of each policy and reflects the future cash flows that are expected to arise from sales in the period, together with the effect of updating the previous period's assumptions on existing business for the actual experience. The total profit recognised under both MCEV and IFRS will be the same over the life of each policy, it is the timing of the recognition of that profit which differs.

The results and financial position of the Group's life and pensions business ("covered business") are presented on the MCEV basis with all other businesses included on an IFRS basis.

Operating profit

The Group MCEV operating profit in the period to 30 June 2013 was £214 million, £21 million lower than the prior year of £235 million. The results reflect stable performance in the UK and Heritage divisions, where the impact of the reduction in expected returns from the low interest rate environment has largely been offset by continued growth in new business. This was offset by a lower contribution from the International division, primarily driven by the strategic market exits as well as the effects of the challenging economic conditions in Europe.

The FLG operating ROEV, after tax, for the period to 30 June 2013 was 6.1% (31 December 2012: 5.1%) and continues to reflect the low expected returns achievable in the current economic environment. The Group continues to focus on this performance measure and remains committed to the targeted ROEV of 10% in the medium term.

A summary of the Group's operating performance is provided in the Chief Financial Officer's review. Further details of the operating performance of the Group's divisions are included in the relevant operating reviews below.

Non-operating items

Economic variances combine the impact of changes to economic assumptions with the investment return variances over the period. Total economic variances in the first half of 2013 had a £228 million positive impact on MCEV profit before tax. The key positive variances arose from the narrowing of corporate bond spreads and higher than expected movement in the equity markets. Corporate bond spreads narrowed by around 35bps over the period which resulted in an increase in MCEV profit of £189 million, primarily in respect of annuity business in the Heritage division. The equity market movements increased the value of future annual management charges on unit-linked business, resulting in an increase of £164 million. These positive movements were offset by a £(110) million charge from an increase in long term interest rates from low opening levels.

Non-recurring costs in the first half of 2013 total £(70) million and include costs of £(57) million, consistent with those reported within the IFRS result, in addition to net costs of £(13) million specific to MCEV. The £(13) million includes a £(28) million difference between the actual tax relief expected and the notional tax gross up applied to all non-recurring costs under MCEV. The application of these different tax rates results in a higher cost, gross of notional tax, under MCEV than under IFRS. This is partially offset by the release of £15 million of provisions for the Diligenta outsourcing, the AXA separation project and Solvency II under MCEV.

The balance of non-recurring and non-operating variances represent the impact of the additional 1% reduction in the rate of Corporation Tax from 1 April 2015 announced on 20 March 2013.

At 30 June 2013, net Group MCEV was £5,980 million (31 December 2012: £5,831 million) giving MCEV per share of £4.22 (31 December 2012: £4.11).

3 UK and Heritage divisions

Structure

The Heritage division forms the bulk of the UK based business by assets and in-force value and as a result is the principal driver of the Group's surplus generation. The division is focused on the management of products that are no longer actively marketed and is therefore distinct from the activities undertaken by the UK division.

The UK division combines the Corporate Benefits, Protection and Retirement Income business units. These business units are focused on scale markets where good margins are generally available and where the Group has strong market positions enabling access to those margins.

The UK division's results also include intermediary business Sesame Bankhall Group ("SBG"). In February, SBG confirmed that it had appointed advisors to carry out a strategic review.

The operational reviews of these standalone divisions are set out in the sections that follow. The financial metrics for the combined UK and Heritage divisions are shown below.

(i) UK result includes £(5) million of a £(6) million FCA fine in Sesame Limited (£(1) million was included in 2012 results)

(ii) This represents dividends from FLL to Group.

3.1 UK and Heritage divisions, financial performance

UK and Heritage divisions IFRS based operating profit

The 2013 half year UK and Heritage IFRS based operating profit of £129 million is £(8) million lower than in 2012, with the improvement in IFRS new business strain, following the continued focus on target new business platforms and lower costs, being offset by reduced principal reserving changes and one-off items compared to 2012. New business strain is incurred evenly across the divisions despite the majority of new business being written in the UK division. This reflects the £21 million positive contribution from annuity business which is largely written in the UK division. 

In-force surplus has improved primarily as a result of the higher management charges received on unit-linked business reflecting the improved equity markets in 2013. However, the change in the long-term investment return has offset this due to lower interest rates on shareholder assets and higher internal debt costs paid to the Corporate segment, following the $575 million UT2 debt issued in November 2012. The Heritage division meets all of these internal debt costs.

Other income and charges includes £(5) million of a £(6) million FCA fine on Sesame Limited (of which £1 million was provided in the 2012 full year results).

Operating expenses

In November 2012, the Group announced an increase in the cost savings run-rate target to £160 million by the end of 2015 with savings to be achieved by the end of 2013 also increased to a run-rate of £126 million.

At 30 June 2013, the UK and Heritage divisions have delivered run-rate savings of £119 million (31 December 2012: £86 million) with a further £35 million secured through contractual arrangements with outsource providers. In total, savings equate to 96% of the £160 million 2015 target. The increase in realised synergies is due primarily to the successful implementation of the IT infrastructure separation programme from AXA, enabling reduced IT service costs.

The Group expects to deliver its 2013 target of £126 million through the completion of in-flight savings initiatives and maintaining controls over operational costs. In 2014 and 2015, the delivery of the £160 million target remains aligned to the realisation of contractualised savings already secured.

(i) 2010 full year baseline includes an estimate of 12 months operating expenses for AXA UK Life Business, BHA and the acquired WLUK business.

Development costs continue to be incurred on building propositional changes to the UK and Heritage businesses with the level of development spend this year focusing on developing the Group's annuities capability, new product launches and some continued spend on auto-enrolment across UK and Heritage.

UK and Heritage divisions MCEV operating profit

The UK and Heritage MCEV operating profit of £241 million is £(8) million lower than the £249 million reported in 2012, with an increase in value of new business and favourable operating assumption changes being offset by the expected material reduction in expected existing business contribution.

The contribution from new business has improved with the £81 million reported in 2013 representing a 21% improvement on the same period last year. The improvement in new business profitability has been driven by lower costs due to a higher proportion of new business now being written on target platforms and continued focus on value over volume.

MCEV operating profit includes an expected existing business contribution which is calculated with reference to risk free interest rates. As advised previously, expected existing business contribution has reduced significantly compared to the same period in 2012 to £136 million (30 June 2012: £170 million), due to material reductions in the level of expected rates of return on all asset classes in line with the rates reported at year end 2012. The rates applied to the opening balance sheet are shown below with the cash and gilt rate halving to 0.67%.

(i) Returns on corporate bonds vary by portfolio with the rates shown being a weighted average.

The £(14) million operating experience variances mainly reflect a strengthening of provisions in respect of a number of operational items. In addition, both the UK and Heritage divisions have experienced persistency impacts as a result of the RDR changes introduced at the start of 2013, with the remaining £(33) million provision set up to cover these expected impacts being fully utilised and materially covering the losses experienced.

A benefit of £34 million has been recognised during the period reflecting revised assumption changes in respect of future investment expenses. This has been enabled by the recapture of certain asset portfolios with these being managed by FLI.

Favourable other operating variances of £30 million principally relate to modelling adjustments, including a £15 million benefit from an increase in deferred tax assets on pension business following a review of methodology.

UK and Heritage divisions sustainable free surplus generation

The UK and Heritage sustainable free surplus generation of £178 million is up 11% on the first half of 2012. Consistent with the IFRS based operating result, this is largely due to an improvement in the investment in new business, reflecting the migration on to the target new business platforms and lower costs.

Expected return from in-force business at £272 million is broadly consistent with that in 2012 despite an £(11) million impact from reduced returns on shareholder assets from lower interest rates. This is offset by higher returns following a spike in with profits maturities.

Operating experience of £(15) million mainly reflects the strengthening of provisions in respect of a number of small operational items, whilst the Sesame result of £(6) million largely relates to the FCA fine.

3.2 Heritage division

Market environment

The end of 2012 brought significant regulatory change for the UK Life and Pensions market, with the Heritage division's broad range of products being impacted by the Retail Distribution Review ("RDR"), gender neutral pricing and auto-enrolment of occupational pensions. The impact of the RDR on the 2013 results has been materially within the amounts previously provided for although the business remains focussed on further potential impacts as schemes begin to select providers for auto-enrolment staging. Financial conditions have seen a narrowing of credit spreads and improvement in stock markets (that partially reversed in June).

Strategy

The Heritage division serves circa four million customers. It manages a significant proportion of the value of in-force of the Group, relating to a large suite of products that are no longer actively marketed and are administered on complex legacy systems. A dedicated management team focused on the Heritage business is in place, with the aim to be the United Kingdom's leading legacy business manager with the knowledge and expertise to maximise the value created from legacy books.

The value drivers for the Heritage division are:

· operational excellence - focused customer service within an efficient cost base in line with business scale;

· capital efficiency - minimisation of capital required for the business;

· strong product management - maximisation of value generated and retention of business;

· robust financial risk and balance sheet volatility management; and

· in-house asset management - utilising the recently created internal asset management capability to maximise returns and lower costs.

In the context of this strategy, the Heritage division is making good progress towards achieving its strategic outcomes.

The Group's outsourced suppliers continue to provide good service to Friends Life's customers. In March, Friends Life successfully moved a number of IT services (helpdesk, networks, telephony) from an existing supplier to one of the Group's strategic partners, Diligenta (and their parent company TCS). In the second half of 2013, the Group is planning the first major migration from two legacy administration systems onto the Diligenta BaNCS IT platform, representing a key milestone in the deliveries of Friends Life's customer strategy.

The 2013 capital optimisation programme has received initial High Court direction to notify all impacted customers of the proposals to transfer the remaining acquired AXA UK Life Businesses to the separate UK and Heritage companies. Subject to final Court sanctioning of the transfer, this will leave two active life companies within the UK and Heritage group, with all six with-profits funds managed under a single Heritage life company Friends Life Limited ("FLL"). Whilst no material capital release is expected from this initiative, the capital efficiency gains are expected to cover the programme's costs, with the principal benefits achieved through material operational simplification of the Group.

In addition, a multi-year programme to implement a uniform capital management framework for the six with-profits funds is ongoing. As part of that development and the Heritage division's ongoing objective to ensure that with-profit funds remain appropriately invested, a proposal for an initial annuity book reallocation has been agreed between the With-Profits Committee and the Board of FLL. These proposals have also been submitted to the regulators for review before expected reallocation later in 2013. Further de-risking proposals are being developed as part of this programme as well as seeking other value generation opportunities in the Heritage business.

Having been launched in July 2012, FLI now manages £18 billion of fixed interest assets, including a further £7 billion of recaptures in 2013. This has delivered more internal control over the investment performance, together with a material reduction in investment costs, benefitting MCEV operating profit in 2012 by £11 million and in the first half of 2013 by a further £34 million. Work continues to assess further potential recaptures. 

Financial performance

Value of in-force business

The Heritage business represents a significant proportion of the Group's in-force value and regulatory capital. There has been no change in the overall value of in-force business. The breakdown by product is shown below.

Heritage unit-linked funds under management

The operating performance during 2013 indicates that the lapse experience of the book is performing broadly in line with the business's assumptions other than for unit-linked group pensions, where lapse experience has been worse than expected in the short term due to increased scheme re-broking activity as part of RDR and the new auto-enrolment requirements in 2012-14. This worsened experience is covered by the RDR provision that has been released at the half year in line with previous expectations.

Heritage unit-linked funds under management were up 6% primarily driven by market growth in the period. Net flows however, continue to reflect the maturity of products and are in line with expectations of the Heritage division's run-off strategy.

New business

The Heritage division specifically focuses on those products no longer actively marketed. Despite not actively seeking new business, the Heritage book delivers ongoing incremental business written across all product types. This incremental new business is largely required to retain the existing business, but requires a relatively fixed cost base to support it.

The fall in investment in new business reflects the lower sales volumes and corresponding reduction in Heritage capital costs, with the balance reflecting the relatively fixed cost base of the division.

The contribution from Heritage new business in 2013 was a loss of £(8) million compared to a profit of £4 million in 2012. This reduction reflects 2012 being the final year of Department of Work and Pensions ("DWP") rebate new business, following regulatory changes. The 2012 full year VNB for DWP business was £13 million with £8 million in the first half of 2012.

Outlook

During the second half of 2013, planned actions include the first major migration from two legacy administration systems onto the Diligenta platform, and completing the final stage of the Part VII initiatives to leave only two active UK territory life companies.

The Group also expects, subject to regulatory approval, to conclude on the reallocation of a circa £2 billion annuity book to a shareholder backed fund. The financial impact will depend on achievement of asset allocation changes over coming months and market conditions at year end. However, within sustainable free surplus where the impact allows for the target investment mix, a reduction of circa £(20) million in the second half of 2013 is anticipated followed by an increase of circa £10 million per annum from 2014 onwards.

3.3 UK division

Structure

The UK division comprises three business lines:

· Corporate Benefits is a Workplace Savings business specialising in Trust and Contract based pensions and workplace ISAs;

· Protection specialises in individual and group, Critical Illness, Income Protection and Life Cover products; and

· Retirement Income specialises in Retirement Annuity and other retirement products.

The division brings together the UK-based, market-facing businesses and enables better operational efficiencies and management of costs and capital between these business lines as Friends Life rationalises and optimises pricing, capital and channel management functions. Additionally, the UK Division expects to take advantage of the natural synergies between Corporate Benefits and Retirement Income in the savings and retirement life-cycle and between Protection and Corporate Benefits in the management of the Group's corporate customers.

Market environment

The UK businesses operate in markets with distinct features and different recent regulatory and economic impacts. 2013 has seen the introduction of RDR and auto-enrolment (principally affecting Corporate Benefits), and the effects of gender neutral pricing implemented at the end of last year (affecting Protection and Annuity business); all against a backdrop of continued economic pressure.

Corporate Benefits operates in a large, fast-growing but low-margin market with strong price competition. Expectations are that this market will grow from £0.4 trillion to £1.2 trillion by 2020. Currently, market activity continues to focus on auto-enrolment which was introduced in the UK in the latter part of 2012. The business has yet to see significant changes to the distribution landscape following the introduction of RDR with a period of uncertainty anticipated following the pension minister's stated plan to ban consultancy charging. Friends Life does not promote consultancy charging.

The UK protection market is mature, and has remained relatively stable over the last few years despite the turbulent macro-economic climate. Implementation of gender neutral pricing and life tax reforms around the turn of the year have generally resulted in a rise in average market prices although impacts have varied by product. Further, these changes drove significant volumes of peaks and troughs in late 2012 and early 2013. For Friends Life, this drove high volumes of business towards the end of 2012, depleting the pipeline of applications carried into 2013, though over the fourth quarter of 2012 and the first quarter of 2013 the Group's market share was similar to the first three quarters of 2012.

The annuity market experienced significant growth in 2012 and is expected to continue to grow, from £14 billion in 2012 to £40 billion in 2020, driven by demographic trends, including the retirement of the baby boomer generation. Sales in the open market continue to show a strong trend towards enhanced annuities which account for approximately half of total open market sales.

Strategy

Friends Life presented the UK division's strategic agenda at an investor briefing in November 2011 and excellent progress has been made across the division in progressing this agenda.

Friends Life is ready for the opportunities now being presented by the regulatory and market changes. The division has developed auto-enrolment technology which, through automatically assessing employee eligibility and linking employer payroll systems to Friends Life product platforms, eases the legislative and administrative burden on employers, and has been launched with encouraging take up. The division has also completed the range of its innovative Simple Protection propositions in the first quarter of 2013 and will look to strengthen its position through further developments largely aimed at customers who choose to self serve or purchase without advice.

Investment in proposition enhancements continues:

· a new range of default funds launched for auto-enrolling schemes: the 'My Future' solution has attracted interest from a large number of auto-enrolling clients with many already using it;

· the Group has recently announced a partnership with Key Retirement Solutions to provide a 'shopping around' service which will support customers close to or at retirement with options around provider and product type which will be piloted in the second half of 2013;

· planned enhancements to the highly regarded Protect+ range of products are expected to deliver further growth in the value of new business in the second half of the year; and

· retirement income capabilities, including market testing, for an open market offering are well advanced and are planned to launch in the last quarter of 2013.

More than 80% of new group scheme business and all of protection new business is now written on target platforms, while the business continues to focus on profitable growth driven by the provision of market leading products in both individual and group protection - in particular critical illness and income protection; and to selectively write profitable new business within its target range of mid to large group pension schemes.

Financial performance

The UK division delivered improved value of new business up 41% on the first half of 2012, on lower volumes and with reduced Investment in New Business.

Corporate Benefits: £13 million VNB, 30% increase on prior period

VNB for Corporate Benefits is up 30% despite lower sales volumes and with the VNB for the second quarter being 333% of the first quarter. This momentum is expected to continue driven by the pipeline of new scheme wins and auto-enrolling schemes highlighted below.

Corporate Benefits continues to follow a value based strategy, targeting mid to large sized employers, and shifting focus towards the My Money corporate wrap proposition and away from less profitable lines which drove high volume but low value in the first half of 2012. This strategy is delivering improvements in cash generation, with the business now cash positive when comparing fee income to fully loaded costs.

The first half of 2013 has seen positive experience of auto-enrolment participation despite the slower than anticipated development of this business as more employers exercised their right to defer commencement. Some 40 schemes have staged with Friends Life in the first half of the year with more than 150 further schemes confirmed as staging in the second half, the majority of which are expected to make use of the auto-enrolment hub.

New sales APE on the My Money platform are up 135% against prior period. This growth is set to accelerate in the second half of 2013, with a pipeline of all scheme wins expected to result in premiums in the second half of 2013 at three times the level of new sales in the same period of last year.

Corporate Benefits funds under management

Fund inflows of £1.1 billion in the first half of 2013 and healthy investment returns have resulted in a strong increase in total assets under administration. Outflows are temporarily high, as expected, with approximately half of the £1.1 billion outflow in the first half in respect of closed lines of business or schemes paying initial commission. Inflows have also been depressed by the low number of new schemes commencing in the first half of the year, but, as above, this is expected to materially improve in the second half of the year.

A provision was made in MCEV at the end of 2011 to allow for an expected peak of adverse persistency experience driven by corporate pensions business being re-broked prior to the implementation of RDR on 1 January 2013. Experience of scheme losses to commission-paying providers in 2012 and the first half of 2013 is broadly in line with the expectations underpinning this provision though there is a small proportion of schemes which may still be affected by the impact of reviews in the run up to RDR. These, combined with the continuing unfavourable economic environment, may lead to some further modest movement in the second half of 2013.

Protection: £32 million VNB, 14% increase on prior period

Following the successful migration to low cost target platforms at the end of last year, all new business is now written on target platforms, delivering significant cost savings and increasing the value of new business.

Group protection volumes continue to deliver strong growth, up 5% on the same period in 2012. Focus on more profitable lines and promotion of flexible benefits continues to deliver positive results with group protection VNB up 58%.

The trajectory for volumes of individual protection is gathering pace with volumes in the second quarter of 2013 up 46% on the first, and value up over 400% over the same period as a result of continuing strong relationships with key partners and distributors.

Retirement Income: VNB of £44 million up 76% on prior period

The Retirement Income business has delivered £44 million of VNB, up 76% on the same period in 2012, with a new business surplus of £3 million.

In conjunction with the Heritage division and reflecting a desire to de-risk the with-profits fund, annuity business previously written in the former AXA with-profit funds has been redirected to non-profit funds. This has made a significant contribution to the increased APE which is up 68% to £32 million in the period. Sales have also benefitted from the launch of the enhanced annuity proposition which was only launched towards the end of the first half of 2012. Retention rates of 32% have been achieved, peaking at over 50% for customers engaging with the enhanced proposition. System enhancements to enable more sophisticated pricing have been implemented facilitating progressive improvements in competitiveness through the first half.

In line with the change implemented at the end of 2012, new business results now include the premium in respect of the cost of the guarantee for policies with guaranteed annuity options accounting for further improvement against the first half of 2012.

Outlook

Relationships with Employee Benefits Consultants continue to be strong and the client relationship managers are focusing on the full engagement of key auto-enrolling clients and clients transitioning from the Embassy platform to ensure high levels of retention. Focus is also being given to corporate actions in the market (Defined Benefit scheme closures and acquisitions, for example) where growth opportunities are anticipated.

Friends Life continues to secure protection scale across a strong, diverse distribution footprint, including through intermediary panels, banks, estate agencies and brands for individual protection and Employee Benefit Consultants for group protection. New distribution opportunities involve both developing new channels with existing partners and the growth of new partners including the long-term partnership with Virgin Money starting in January 2014. The company is also continually enhancing its proposition portfolio to ensure that it remains a market leader in terms of product quality.

Retirement Income volumes are expected to grow in the second half of 2013 as the division continues to roll out improvements to its annuity proposition and the more sophisticated pricing flexibility supports an improvement in retention rates.

The division remains focused on achieving its 2013 full year targets as outlined in the table above although competitive pressures in the individual protection marketplace are increasing.

4 International division

Structure

The International division comprises two business units, Lombard and FPI.

Lombard is the leading pan-European specialist in estate and succession planning solutions for high and ultra-high net worth individuals ("HNWIs") 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 HNWIs across Europe and selected markets in Latin America and Asia. Solutions offered by Lombard are typically based on single premium, whole of life, unit-linked life assurance structures with limited levels of reinsured life cover. The business is well placed to benefit from increasing demand for fully compliant structured solutions for HNWIs that are both robust and portable.

FPI sells unit-linked savings, single premium bonds and protection products with a strategic focus on affluent domestic customers and expatriates in its core markets via branches in Hong Kong, Singapore and Dubai, as well as serving UK customers with offshore products. FPI is in the course of completing its previously announced withdrawal from non-core markets with the sale of its 30% stake in AmLife on 4 January 2013 and the closure to new business with Japanese residents in 2012. The closure to manufacturing of new pensions business from Germany is scheduled for completion by the end of the third quarter of 2013.

Market environment

The legal and tax environment in most of Lombard's core markets across Europe remains uncertain. This leads to a continued lack of momentum in the market with clients and partners more reluctant to take long-term investment decisions. Whilst Lombard is seeing this trend across most of its European markets, it has been particularly evident in Belgium in the first half of 2013, where significant tax and legal uncertainties have resulted in increased lapses and substantial reductions in new business.

Notwithstanding the challenging short-term market conditions, the longer term drivers of the demand for individually structured Privatbancassurance solutions remain compelling. Lombard's position as a leading player in this market means it is well placed to benefit from opportunities arising from the changes in the market.

FPI's main markets are in Hong Kong, Singapore and the United Arab Emirates. The life markets in Hong Kong and Singapore are attractive and growing strongly. However, as a result of uncertainty from more demanding regulatory requirements, the unit linked segments have declined in the first quarter of 2013 compared with the same period last year by 11% and 13% in Hong Kong and Singapore respectively. In the Middle East, the Emirates life insurance market has experienced growth of 19% per annum since 2008 and includes an increasing non-resident Indian population as well as professionals as the local economy benefits from relative stability compared to the wider region.

International strategy

The International strategy was presented to the market in November 2012 and is unchanged. It will enhance value creation through a sustainable portfolio of international businesses in regions with sound regulatory frameworks, focusing on profitable growth and cash generation. The priorities of the division are to:

· selectively grow the business and generate an IRR of new business of 20% for the division as a whole;

· improve the efficiency of the back-office and deploy more resources to Asia; and

· increase the dividends to Group to £50 million per annum from 2015 onwards (target of £33 million for 2013).

Financial performance

The consolidated results of the International division are set out below. The results of the Lombard and FPI businesses are set out in the following sections, including a split of the core and non-core elements in FPI.

The International division results include good progress on IFRS and cash generation, but a reduction in MCEV operating profit.

The International division's IFRS based operating profit was £74 million, up 139% on 2012. This largely reflects positive economics on the return of premium guarantee in Germany, income from the larger in-force book in FPI together with the non-recurrence of Lombard's one-off costs incurred in 2012.

International MCEV operating profit of £21 million was lower than in the first half of 2012, principally reflecting the effects of the revised strategy announced in November 2012 and the subsequent year end assumption change on the FPI business. Whilst these changes make comparisons between periods less meaningful, the results do reflect the impact of reduced sales in the non-core business as well as the negative lapse experience in Lombard.

Sustainable free surplus of £18 million for the International business increased by £14 million above 2012 and reflects the strategic decisions taken to exit FPI's non-core businesses, better experience variance in FPI than in 2012 and the non-recurrence of one-off costs in Lombard.

Outlook

The Group remains confident that the International division will make an increasing contribution towards generating shareholder cash, as evidenced by the £10 million of dividends paid in July 2013.

4.1 Lombard operating review

The persisting significant macroeconomic uncertainty combined with important changes in the tax and legal framework of several key markets in which Lombard operates, adversely impacted the sales volumes and MCEV operating profits. Notwithstanding this, funds under management continue to grow supported by market returns and now total £20.1 billion (€23.5 billion) at 30 June 2013. Lombard paid the second dividend in its history following the £4 million dividend paid in November 2012 with an interim dividend of £4 million paid in July 2013.

New business profitability

(i) Lombard IRR takes into account the Luxembourg regulatory regime in which DAC is an allowable asset.

Lombard's value of new business amounted to £12 million, the same level as in the first half of 2012. The impact of lower volumes (8% down on the same period last year) is offset by overall margin improvement as a result of a lower proportion of large cases and the benefits of expense reduction initiatives last year. IRR and investment in new business are in line with the first half of 2012. Results to date reflect Lombard's sales profile, which remains materially weighted towards the latter part of the year, whilst the acquisition cost base is largely fixed. As such, extrapolation of the current period's results will not be indicative of the full year's results.

Some regions have performed well compared to the prior period, notably UK, Southern European and Scandinavian markets. However, in Northern Europe, there was a significant reduction in sales in Belgium.

In line with Lombard's long-term strategy, the mix of new business sales increasingly originates through private banks (49% in the first half of 2013 compared with 46% in the same period in 2012) rather than IFAs.

APE performance by region is as follows:

IFRS based operating profit

Lombard generated an IFRS based operating profit before tax of £20 million in the first half of 2013, £10 million up on the same period in 2012. The period on period increase principally reflects the non-recurrence of one-off expenses totalling £(9) million incurred in 2012. Excluding these costs, IFRS based operating profit was 5% above 2012.

IFRS new business strain is 11% lower than in the first half of 2012 (6% in constant currency), benefitting from lower acquisition expenses.

Funds under management

FUM continued to increase in 2013. Positive investment return and weakening of the Euro against sterling in 2013, while net trading volumes were neutral, drove FUM from £18.9 billion (€23.3 billion) at the end of 2012 to £20.1 billion (€23.5 billion) at 30 June 2013. Over the 12-month period from 30 June 2012, FUM has grown 7% in Euro terms. 

Operating expenses

Operating expenses, which exclude commission payments, were 22% below those in the first half of 2012; although comparative maintenance costs included one-off and restructuring costs totalling £(9) million, while 2013 includes restructuring costs of £(1) million. Excluding one-off costs, operating expenses are stable on 2012. Lombard has retained tight control of recurring expense levels which, despite an increase in average funds under management, have remained in line with 2012 levels.

MCEV operating profit

MCEV operating profit was down 56% on the first half of 2012 primarily due to negative lapse experience. This arose across a number of European territories with the single largest impact arising in Belgium.

Expected existing business contribution

Expected existing business contribution is in line with 2012, as a result of the higher opening value of the in-force book being broadly offset by reduced economic assumptions.

Operating experience variances

Adverse operating experience variances of £(18) million primarily consist of persistency experience relating to surrenders, particularly in Belgium, where new tax reforms including the launch of new rules around asset regularisation have been implemented in 2013. This new landscape has materially affected the wider Luxembourg life assurance market in respect of Belgium.

Sustainable free surplus generation

Sustainable free surplus of £5 million is up £8 million on the first half of 2012 and reflects both the higher operating funds under management as well as the non-recurrence of £(7) million of one-off expenses incurred in 2012.

4.2 FPI operating review

The results of the FPI business in 2013 are encouraging. The results in the first half of 2012 did not reflect the impact of one-off charges relating to market exits and assumption changes allowed for in the 2012 full year, principally in the non-core businesses, which dominated the full year 2012 results.

The FPI results are shown in the sections below analysed between the core and non-core business. Additional detail is shown at the end of this section including the Lombard business. The core business excludes AmLife, OLAB (mainly Germany) and new business written in Japan in 2012 (prior to market exit).

New business profitability

Total FPI sales volumes were 24% lower than in 2012, reflecting the good progress made in reducing non-core regular premium business in particular new business with Japanese nationals, the sale of AmLife and a controlled exit from writing new business in Germany.

Whilst the unit-linked markets in Hong Kong and Singapore fell by 11% and 13% from first quarter 2012 to first quarter 2013 respectively, core business APE fell by just 5%. Despite the challenging environment in Asia, sales of single premium bonds increased. Core FPI IRR improved to 11.4%, benefiting from this favourable mix of business combined with a favourable impact of mortality assumption changes on protection business. The ratio of investment in new business to APE has been maintained. VNB in the core business is lower at £9 million as the benefits of assumption changes and lower expenses are offset by the lower volumes. 

Non-core value of new business of £(5) million was significantly lower than 30 June 2012 reflecting the planned reduction in volumes and assumption changes relating to German business allowed for in the 2012 full year results. In addition, the impact of modelling improvements already accounted for in the final quarter of 2012 increased the cost of embedded German guarantees. IRR and investment in new business relative to sales volumes were similarly impacted.

IFRS based operating result

FPI IFRS based operating result increased to £54 million from £21 million in the same period of 2012. This reflects an increase in IFRS in-force surplus of £28 million due to a larger book of in-force business together with the impact of improved economic conditions largely relating to the return of premium guarantee business in Germany. Additionally, the results have benefited from an uplift of £10 million in premium margin across certain non-core in-force products which is expected to reduce going forwards. IFRS new business strain is in line with prior period at £(24) million. Core new business strain benefits from lower expenses and assumption changes on protection business. This is offset by increases in non-core new business strain due to assumption changes and higher guarantee costs partially offset by lower sales volumes.

Principal reserving changes of £3 million relate to improvements in the modelling of the costs of the guarantees on German business.

Funds under management

Funds under management as at 30 June 2013 increased to £7.3 billion. The business generated net inflows of £0.3 billion and market growth accounted for a further £0.4 billion.

Operating expenses

Operating expenses, which exclude commission payments and non-recurring costs, decreased to £34 million from £38 million in the first half of 2012. Acquisition costs decreased largely as a result of the lower new business volumes following the strategic market exits. Maintenance expenses are in line with 2012. Development expenses amounting to £(4) million principally reflect the International transformation programme focusing on system and process improvements. Work on core Personal Portfolio Bond systems and the development of the digital portal strategy will drive efficiencies including the online submission of new business and dealing. In addition, a service improvement programme will deliver staffing efficiencies in the back office by June 2014.

MCEV operating result

FPI MCEV operating profits of £10 million (30 June 2012: £18 million) reflects a £9 million improvement in operating experience variances including favourable persistency, expenses and fund rebate income experience compared to the prior period. Strategic reductions in volume, changes in assumptions, mostly in the German business, and the more onerous cost of embedded German guarantees driven by interest rate movements at the end of 2012 resulted in a lower VNB. 

MCEV operating profits on core business at £15 million remain consistent with the same period last year (30 June 2012: £14 million). Non-core MCEV operating result of £(5) million has been adversely impacted by assumption changes made in the 2012 full year results. 

Expected existing business contribution

The expected existing business contribution has reduced from £12 million to £9 million reflecting the lower opening in-force book resulting from the assumption changes arising from the strategic review combined with lower rates of expected return on all assets.

Operating experience variances

A small favourable operating experience variance of £1 million represents a number of small offsetting items particularly in respect of mortality, persistency and expenses.

Operating assumption changes

There are no operating assumption changes impacting MCEV during the period. The 2012 full year results reflected the assumption changes for persistency and expenses as a result of the strategic review.

Sustainable free surplus generation

FPI sustainable free surplus increased to £13 million (30 June 2012: £7 million) arising from better experience variances than in the first half of 2012, particularly from expenses and higher rebates.

The core business sustainable free surplus has reduced compared with 30 June 2012 as a result of the lower in-force surplus from lower volumes of regular premium savings business written in 2012 compared with 2011. The surplus emergence on the regular premium savings business is weighted towards the early years of the contract, hence the recent volumes of new business and the phasing over the year will impact expected returns in subsequent reporting periods. The non-core sustainable free surplus has improved significantly as the volumes of regular premium German pensions business, and hence the investment in new business, is reduced.

International division additional information

IFRS based operating profit

MCEV operating profit

Sustainable free surplus

5 Corporate review

The Corporate segment includes the corporate holding and service companies of the Group.

Corporate IFRS based operating result

(i) 2012 half year and full year external finance costs include net finance costs within the Resolution holding companies of £(4) million and £(7) million respectively and reflect the receipt of interest from FLG and payment of DCN interest.

The Corporate IFRS operating result is principally driven by external finance costs and corporate costs, offset by interest on internal debt. The period on period increase in external finance costs reflects the UT2 subordinated debt issue in November 2012 together with a refinement to the finance cost methodology.

Other corporate net costs of £(13) million principally relate to overhead costs associated with management of the Resolution holding companies with the increase primarily reflecting an increase in provisions for long term incentive plan costs.

Corporate MCEV operating results

The Corporate segment consists of both non-covered and covered business. The non-covered element relates to the net assets of the corporate holding and service companies whilst the covered element principally represents the net debt liabilities held at the Group level.

The expected existing business contribution on debt has increased to £(37) million in the first half of 2013 reflective of the additional UT2 debt and higher market value of debt. These factors have largely been offset by a reduction in the expected rates of return applied in calculation of the debt contribution.

Corporate sustainable free surplus generation

The sustainable free surplus contribution from Corporate principally reflects the debt costs (net of tax) incurred by the Group. Following the repayment of the £363 million deferred consideration notes in 2012 and the raising of the UT2 reset perpetual subordinated debt, all of the Group's finance costs are now reflected within sustainable free surplus.

Sustainable free surplus continues to exclude corporate costs relating to the Resolution holding companies.

Financing and interest costs

The Group has a number of debt instruments and the operating costs of financing these for the period ended 30 June 2013 are presented below.

(i) Market value is based on listed ask price, at 30 June 2013, excluding accrued interest.

(ii) The UT2 reset perpetual subordinated debt is a $575 million US Dollar denominated instrument. The principal and clean market values represent sterling equivalent values as at 30 June 2013. The finance cost of £14 million is based on the hedged sterling equivalent principal on the day of issue of £356 million.

(iii) Finance costs within sustainable free surplus amount to £(45) million, being the IFRS amount of £(60) million net of tax.

The finance cost included within IFRS based operating profit reflects the actual coupon paid. This represents a refinement in estimation to reflect a more accurate view of the longer term cost of the Group's external debt. In previous periods operating finance costs were based on the market value of the debt instruments. The change has not had a material impact on the results of the Group. Finance costs within the MCEV result continue to reflect the expected rate of return.

Gearing and liquidity

(i) IFRS debt gearing excludes the 2003 and 2005 STICS, as these securities are classified as equity in IFRS.

At 30 June 2013, the ratio of debt to IFRS equity attributable to equity holders of the parent, gross of debt, was 17.5% (31 December 2012: 17.0%), with the change in equity principally reflecting the payment of dividends in the period.

The MCEV gearing of 20.6% (31 December 2012: 21.5%) is marginally down over the period reflecting the increase in gross Group MCEV.

The liquidity of the Group remains strong and is complimented with an undrawn £250 million funding facility with a consortium of banks. This facility was renegotiated in May 2013 with a five year term and replaces the previous £500 million facility which had never been drawn.

6 Cash and capital

Introduction

The Group remains committed to the optimisation of capital within the business. The Group has established cash and capital frameworks which are used to evaluate and monitor excess cash and capital, driven by strong governance and subject to regulatory approval. The cash and capital position of the Group at 30 June 2013 remains strong with available shareholder cash ("ASC") of £839 million and an estimated IGCA surplus of £2.1 billion resulting in a coverage ratio, excluding with-profits insurance capital component ("WPICC")(i), of 222%. At 30 June 2013 the estimated economic capital surplus(ii) at Group level was £3.7 billion corresponding to a coverage ratio of 192%.

(i) WPICC represents the difference between the surplus capital calculated on a regulatory basis and that on a realistic basis, in accordance with regulations, and is excluded from both capital resources and capital resources requirements under the Group's capital management policies ("CMPs").

(ii) The economic capital position at 30 June 2013 of the Group and its subsidiaries (including FLL on an economic capital basis, see (iii) below) is estimated and unaudited.

(iii) Economic capital is based on the individual Pillar 2 capital assessments for the UK life companies. FLL's economic capital is derived from consolidating the individual life companies' Pillar 2 capital requirements including making appropriate allowance for the diversification of risk between the companies. Pillar 2 strictly only applies at individual life company level and is the Individual Capital Assessment ("ICA") determined by management including any amounts set by the PRA as ICG.

6.1 Capital management policies and monitoring buffers

The Group's CMPs that apply at a life company level and at the Group level were set out in the 2012 full year results. These policies remain unchanged and are summarised below.

Life companies CMP:

The CMP of FLL, the principal UK life company, is to meet the higher of:

· 150% of Pillar 1 requirements, excluding WPICC, FPIL and Lombard; and

· 125% of Pillar 2 requirements, including any Individual Capital Guidance ("ICG") and specifically excluding FPIL and Lombard.

In addition to the above, capital within FLL is held to cover at least one year of the FLL debt servicing costs (currently £115 million per annum) and any debt repayment requirements in the following year.

Group CMP:

The CMP at Group level is to meet 150% of IGCA requirements, excluding WPICC. In order to protect the CMP in the highly remote event that payment of debt costs would lead to a breach of the policy, the Group has an additional requirement in respect of debt servicing costs. This requirement is to hold excess capital, over 150%, in the form of cash or cash equivalents at holding company level sufficient to pay at least the next year's gross annual interest cost (currently £120 million per annum) and any repayments of principal that fall due on debt in the next year.

Capital monitoring buffers:

The Group has a robust monitoring system and in addition to the amounts held to meet its CMPs, it holds a prudence buffer in the holding companies together with amounts for working capital in both the holding companies and the life companies. The monitoring buffers remain unchanged from those reported in the 2012 full year results.

6.2 Cash and capital management framework

The Group's cash and capital management framework is based on the movement in MCEV, reflecting the basis of MCEV as the discounted value of expected future cash flows on a market consistent basis. The chart below shows how the core components of MCEV and their respective values as at 30 June 2013, reconcile to ASC.

The total MCEV is split between the net worth, or shareholder resources, and the VIF. Shareholder resources comprise the free surplus, required capital and inadmissible assets of the business. Required capital is based on the most onerous CMP for the Group, currently the IGCA. For Resolution and Friends Life holding companies and other non-regulated businesses, free surplus is defined as IFRS net assets less required capital and inadmissible assets on an IGCA basis (for MCEV, where these assets relate to non-covered business, they are all included within free surplus). VIF comprises the value of the future cash flows arising from the policies currently in-force.

External debt issued by FLG is offset against required capital in the life businesses as this debt has been guaranteed by life operating companies and has been used to support their activities.

Working capital represents assets set aside to cover known future requirements and amounts necessary to maintain sufficient flexibility to facilitate compliance with the Group capital policy and additional regulatory requirements. In addition, any assets subject to restriction in their availability to shareholders will be designated as working capital.

ASC consists of cash held by the Friends Life and Resolution holding companies, together with any dividends declared and approved by the operating companies that are yet to be remitted. As such, ASC is stated after the deduction of working capital from free surplus. ASC represents cash available to cover Resolution's corporate costs, to service debt issued by holding companies and, subject to shareholder approval, to pay dividends or return to shareholders. The generation of ASC therefore represents a key performance metric of the Group.

The following table outlines the key movements in each of the components of total MCEV during the period:

(i) Required capital at 30 June 2013 includes £236 million in respect of non-covered business required capital and inadmissible assets which are classified as free surplus in MCEV.

The free surplus generated in the six month period of £74 million is explained in section 2.2.

Other reserve movements include the impact of foreign exchange movements and actuarial losses on the Group's defined benefit pension scheme.

Working capital and other assets and liabilities

The working capital at 30 June 2013 of £433 million has reduced from £470 million at 31 December 2012, but includes a contribution to the 2013 final dividend in the first half of the year. This contribution will only be released to ASC once the year end actuarial valuations have been completed.

The remaining working capital comprises:

· amounts required to meet current estimates of future non-recurring costs, offset by related benefits that are expected in the short term;

· an appropriate monitoring buffer to facilitate ongoing compliance with the Group's Capital Management Policies;

· amounts to cover the necessary funding to protect against any temporary shortfall in delivery of cash generation relative to Group targets; and

· restricted assets (e.g. illiquid or intangible assets) included within free surplus.

The largest components are the monitoring buffer (£171 million) and amounts set aside to meet non-recurring costs (£109 million).

Working capital is held in both the life companies and the holding companies. The working capital in the life companies has reduced reflecting the utilisation of the working capital to fund non recurring spend, offset by the contribution to the 2013 final dividend. The working capital in the holding companies has reduced to reflect the utilisation of the working capital to fund the provision set up for the deficit reduction contributions in the Group's pension scheme.

Available shareholder cash

The ASC of £839 million comprises £661 million of shareholder cash at Friends Life holding company level (including the £110 million interim dividend proposed by FLL, net of service company capitalisation), together with £178 million held by Resolution holding companies. Details on ASC movements are set out in section 2.2.

The following table outlines the key components of ASC by reference to the expected utilisation of the cash balances:

The ASC balance as at 30 June 2013 is held to cover the costs of the interim dividend and to maintain a prudence buffer of £400 million which is designed to cover an additional year of the Company's dividend cost, debt interest and the holding companies corporate costs. This prudence buffer is also designed to cover the Group CMP requirement to hold cash at FLG sufficient to meet one year of FLG's debt servicing costs. As this is expected to be met from capital retained in the life companies, this is not considered to be a restriction on the availability of FLG cash.

6.3 Economic capital position

The UK life operations perform a risk-based assessment of economic capital, incorporating management's estimate of the capital required to mitigate the risk of insolvency to a minimum of a 99.5% confidence level over a one year period ("the ICA"). At an individual life company level this is referred to as the Pillar 2 basis of capital management.

The Group's CMP is to maintain capital resources at the life company level to cover 125% of the capital requirements on an economic capital basis.

The Group also monitors a pro forma economic capital position at a Group level, which comprises:

· the surplus of FLL, excluding FPIL and Lombard, on an economic capital basis;

· the surpluses of the International life companies on an economic capital basis; and

· the fungible net assets of the other operating and holding companies.

The estimated Group economic capital surplus above capital requirements as at 30 June 2013 is strong at £3.7 billion (a coverage ratio of 192%), the increase since 31 December 2012 (surplus of £3.5 billion) primarily reflecting market movements.

The sensitivities to market shocks show that economic capital surplus at a Group level would have reduced by:

· an estimated £0.7 billion in the event of a combined 40% fall in equity markets and a 30% fall in property markets;

· an estimated £0.1 billion in the event of a 200bps fall in interest rates; and

· an estimated £0.7 billion in the event of a widening of corporate bond spreads of 200bps (of which one-third is assumed to relate to defaults).

The sensitivities reflect various modelling improvements and de-risking activities implemented since 31 December 2012.

6.4 Insurance Groups Capital Adequacy

In addition to individual company requirements, the Group is required to meet the IGCA requirements of the Insurance Groups Directive. Following the governance changes made in the first half of 2013 Resolution Limited is now deemed to be the ultimate EEA parent undertaking of the Group and as such the IGCA requirements are now monitored at the RSL level. The Group's capital policy is to maintain sufficient Group capital resources to cover 150% of Group CRR (excluding WPICC).

The balance sheet remains strong with an estimated IGCA surplus of £2.1 billion at 30 June 2013, with Group capital resources being 222% of Group CRR (excluding WPICC of £3.8 billion).

The movement in IGCA surplus over the period largely reflects the external dividend paid offset by the generation of surplus and the proceeds from the sale of the 30% stake in AmLife.

At 30 June 2013 the capital held to meet CMPs was £856 million (1 January 2013: £889 million) and the excess over the CMPs was £1,237 million (1 January 2013: £1,265 million).

At a Friends Life Group level, excluding the assets and liabilities of Resolution Limited and the other Resolution holding companies established in Guernsey, the estimated IGCA surplus was £1.9 billion representing a coverage ratio of 212% (31 December 2012: £2.0 billion, coverage 214%).

The sensitivities to market shocks show that IGCA surplus would have reduced by:

· an estimated £0.1 billion in the event of a combined 40% fall in equity markets and a 30% fall in property markets;

· an estimated £0.3 billion in the event of a 200bps fall in interest rates; and

· an estimated £0.5 billion in the event of a widening of corporate bond spreads of 200bps (of which one-third is assumed to relate to defaults).

6.5 Asset quality and exposure

The Group's financial assets as at 30 June 2013, excluding cash, are summarised as follows:

Shareholder exposure to corporate bonds and asset-backed securities is analysed by fund and credit rating as follows:

97.9% of the corporate bond and asset-backed securities to which the shareholder funds are exposed are investment grade. The Group controls its exposures to corporate issuers by rating, type of instrument and type of issuer. The sub-investment grade bonds held in investment portfolios are monitored closely in order to maximise exit values. Where asset-backed securities and other complex securities are held, the Group monitors closely its exposures to ensure that the relevant structure, liquidity and tail credit risks are well understood and controlled.

No defaults have been experienced in the period to 30 June 2013. The Group holds default reserves to cover the risk of defaults and credit rating downgrades on corporate bonds that back all annuity business within Friends Life group. The reserves reflect assumed defaults over the outstanding terms to maturity of the bonds. The shareholder share of default reserves at 30 June 2013 was £0.5 billion (31 December 2012: £0.5 billion). This represents a haircut of 49% of the overall corporate bond spreads over gilts of equivalent term (31 December 2012: 43%).

The vast majority of the Group's exposure to sovereign debt holdings is to UK gilts. The Group has £6 million direct shareholder exposure (including shareholder fund exposure to non-profit and with-profits funds) to the higher risk government debts of Spain, Portugal, Italy, Ireland and Greece (31 December 2012: £7 million).

6.6 Financial strength ratings

The Group targets financial strength ratings in the single A range for its principal life business and expects them to remain there for the foreseeable future. Current financial strength ratings are set out below.

7 Principal risks and uncertainties

The Group included details of the principal risks and uncertainties related to its business on pages 61-64 of its 2012 Annual Report and Accounts. The Group actively manages its risk profile and the Group's risk appetite framework drives the identification and mitigation of strategic, financial and operational risks to support the achievement of its objectives. The principal risks and uncertainties to which the Group has been exposed during the first six months of 2013 are unchanged from those described in the 2012 Annual Report and Accounts. These were published under the following headings:

· Economic conditions

· Sustained low interest rates

· Integration and restructuring

· Regulatory and taxation change and compliance

· Principal valuation assumptions

· Outsourcing

All of these are expected to remain relevant and applicable for the remainder of 2013.

Economic conditions remain volatile and uncertain. These conditions are expected to continue in coming months given the ongoing uncertainty in the Eurozone's financial stability and the UK economy continues to be depressed. Whilst the Group actively manages its exposure to market risk, its performance remains sensitive to factors such as the level of equity markets, interest rates and credit spreads which impact the investment return earned by the Group and the valuation of its liabilities. In particular, sustained low interest rates could have a material impact on the Group's business.

Economic uncertainty also acts to depress demand for financial products. Eurozone instability is expected to continue to reduce the total market for the investment products offered by the Group's international businesses. In the UK, the position going forward is more difficult to predict as the impact of adverse economic conditions is going to be combined with the effects of regulatory changes such as auto-enrolment in workplace pensions and the recently implemented prohibition of payment of commission to advisers under the Retail Distribution Review. Auto-enrolment is expected to increase the corporate pensions market once established and so offers significant opportunities to the Group whereas prospects for growth in the protection market are likely to remain modest.

Overall the Group's integration and restructuring work is continuing as planned, highlighted by the successful completion of activities to separate the Group's infrastructure from that of AXA UK. Despite this progress, the combination of the restructuring and regulatory change agenda faced by UK life insurers, means that the Group is facing a challenging change agenda and this is expected to continue through this year and into 2014. The Group operates project management disciplines to mitigate the risks to delivery, in particular to monitor delivery relative to plan and budget, to identify and manage interdependencies between projects and to escalate any delivery issues. However, there remain operational risks to the delivery of the change agenda to the expected timetables and budgets.

Proposals for Solvency II continue to be the subject of debate. The Group is monitoring developments closely but while key legislative requirements remain to be agreed it is not possible to assess the capital implications for the Group and the scope for optimising the Solvency II capital position.

The reliance of the Group on outsource service providers is unchanged and the risk that an outsourcer is or becomes unable to provide the expected services or required standard and quality of services remains. To mitigate this, processes for managing all outsourcing contracts are actively monitored and managed, in particular in relation to service improvement plans.

The strategic decision by the Group to simplify its governance arrangements and move to a conventional governance structure was completed in March 2013 which reduced the regulatory risk associated with proposed changes to the listing rules.

As stated in note 1 to the condensed consolidated financial statements, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

Going concern and Directors' responsibility statement

Going concern

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. In assessing whether the going concern basis is appropriate, the Directors have considered the information contained in the financial statements, the latest business plan profit forecasts, the latest working capital forecasts and estimated forecast solvency of the regulated subsidiaries of the Group. These forecasts have been subject to sensitivity tests and the Directors are satisfied that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. Key information in respect of the Group's business activities, financial performance (including cash generation and financial strength) and risks is set out on pages 12 to 52.

Directors' responsibilities

Each of the Directors of the Company confirms that to the best of their knowledge:

· the condensed consolidated financial statements have been prepared in accordance with IAS 34: Interim financial reporting as adopted by the European Union;

· the interim results statement includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7, namely important events that have occurred during the period and their impact on the condensed consolidated financial statements, as well as a description of the principal risks and uncertainties faced by the Company and the undertakings included in the condensed consolidated financial statements taken as a whole for the remaining six months of the financial year; and

· the interim results statement includes a fair review of material related party transactions and any material changes in the related party transactions described in the last annual report as required by Disclosure and Transparency Rule 4.2.8.

By order of the Board

Tim Tookey

Director

12 August 2013

Independent review report to Resolution Limited

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the interim results statement for the six months ended 30 June 2013 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of IFRS based operating profit, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and the related notes 1 to 12. We have read the other information contained in the interim results statement and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim results statement is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim results statement in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim results statement has been prepared in accordance with International Accounting Standard 34: Interim financial reporting, as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim results statement based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim results statement for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

12 August 2013

IFRS FINANCIAL INFORMATION

Condensed consolidated income statement

(i) As a result of the revision to IAS19: Employee benefits, curtailment gains of £10 million for the six months ended 30 June 2012 and £32 million for the year ended 31 December 2012 have been presented within administrative expenses, rather than within investment return. Refer to note 6 for further details.

(ii) All profit attributable to equity holders of the parent is from continuing operations.

Notes 1 to 12 form an integral part of these financial statements.

The condensed consolidated income statements for the half year ended 30 June 2012 and for the year ended 31 December 2012 include the results of AmLife Insurance Berhad and AmFamily Takaful Berhad (collectively "AmLife"). The condensed consolidated income statement for the half year ended 30 June 2013 includes the results of AmLife up until the date of its disposal on 4 January 2013.

Condensed consolidated statement of comprehensive income

(i) Foreign exchange adjustments relate to the translation of overseas subsidiaries.

(ii) Shadow accounting that may be reclassified subsequently to profit and loss is as a result of a gain £8 million (30 June 2012: £nil, 31 December 2012: loss of £5 million) in respect of foreign exchange adjustments on translation of overseas subsidiaries held by the with-profits fund of Friends Life Limited ("FLL").

(iii) Shadow accounting that will not be reclassified to profit and loss is in respect of a loss of £nil (30 June 2012: loss of £1 million, 31 December 2012: loss of £2 million) relating to the revaluation of owner occupied properties, held by the with-profits fund of FLL.

Condensed consolidated statement of IFRS based operating profit

(i) IFRS based operating profit excludes: (a) investment variances from expected investment return for non-linked business which is calculated using a longer term rate of return; (b) significant non-recurring items; and (c) amortisation and impairment of present value of acquired in-force business and other intangible assets and is stated after policyholder tax and the deduction of interest payable on STICS. Given the long-term nature of the Group's operations, IFRS based operating profit is considered to be a better measure of the performance of the Group and this measure of profit is used internally to monitor the Group's IFRS results.

Condensed consolidated statement of financial position