Half Yearly Report

RNS Number : 1636R

Resolution Limited

17 August 2010

 

17 August 2010

 

Resolution Limited

Strong cash generation and profitable growth

 

Performance for the half year ended 30 June 2010

■ Cash available to shareholders increased to £605 million after payment of cash dividend of £61 million, reflecting strong operational cash flow

■ Improved operational performance driven by profitable new business, cost reductions and capital management:

- IFRS based operating profit before tax increased to £203 million with Friends Provident contributing £211 million

- MCEV operating profit before tax increased to £180 million with Friends Provident increasing by 55% to £188 million

- Value of new business at Friends Provident up 153% to £81 million driven by 42% increase in sales on an annual premium equivalent (APE) basis. The increase predominantly arises from International up 43% and Lombard up 187%, with UK sales up 6% and focused on key products

- UK new business strain reduced from 26% of APE to 17% of APE

■ IFRS profit after tax from continuing operations £72 million

■ Annualised return on embedded value (ROEV) for Friends Provident of 9.1% based on MCEV operating profit after tax

■ Strong capital position maintained with estimated IGD surplus as at 30 June 2010 of £1 billion, excluding cash held at Resolution Limited

■ Proposed interim dividend of 5.46 pence per new ordinary share

 

Acquisition of AXA's UK Life Business

■ £2,750 million acquisition announced on 24 June 2010. Resolution's second transaction in its UK Life Project

■ Shareholder approval received on 20 July 2010, £2,055 million rights issue completed on 5 August 2010

■ FSA Change in Control process progressing well and completion expected in September 2010

■ Good progress being made in preparing for separation and integration

 

Outlook

■ The enlarged business will deliver a strong platform for synergies, enhanced cash flow and selected profitable new business

■ Positive environment for ongoing consolidation

 

Michael Biggs, Chairman of Resolution Limited, commented:

 

"The AXA transaction shows the potential value that our consolidation project in the UK Life sector can provide for shareholders."

 

John Tiner, CEO of Resolution Operations, commented:

 

"The results from the first half of 2010 for Friends Provident demonstrate that Resolution's financial disciplines can improve operational performance and release cash from the UK Life sector. We remain highly confident that our UK Life Project will generate strong returns and will result in a group well positioned to prosper in the post-growth phase of the UK market."

 

 

 

Enquiries:

Michael Biggs, Resolution Limited +44 (0)1481 745 000John Tiner, Resolution Operations LLP +44 (0) 20 3372 2902

Investors / analysts Neil Wesley, Resolution Operations LLP +44 (0)20 3372 2928

Media Alex Child-Villiers, Temple Bar Advisory +44 (0)20 7002 1080

Forward-looking statements

This announcement contains certain forward-looking statements with respect to Resolution Limited, 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", "estimate", "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 Limited'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 document. Forward- looking statements in this announcement are current only as of the date of this announcement. Resolution Limited 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 7.30 am (GMT) hosted by John Tiner, Chief Executive of Resolution Operations LLP. Dial in telephone number: +44 (0) 1452 555 566, Passcode: 90235752

Analysts / Investors

A presentation to analysts will take place at 9.30am (GMT) at the London Stock Exchange, 10 Paternoster Square, EC4M 7LS. An audio cast 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 Provident Group plc will issue a separate interim results announcement on 17 August.

 

 

Financial calendar
Third quarter interim management statement	11 November 2010
Annual results 2010	24 March 2011

 

2010 interim dividend
Ex-dividend date	8 September 2010
Dealing days for calculating the price of the new shares to be offered pursuant to scrip dividend scheme for the interim dividend	8 September 2010 - 14 September 2010
Record date	10 September 2010
Final time and date for receipt of the mandate forms and dividend election input messages	5pm, 24 September 2010
Payment of dividend and first day of dealing in the new shares	8 October 2010
Website
www.resolution.gg

 

 

Chairman's statement

Overview

In 2010 we have continued to focus on the delivery of our strategy and we were delighted to announce the agreed acquisition of the AXA UK Life Business (the majority of AXA's UK life assurance businesses) in June. The acquisition price equates to 72.7% of pro forma market consistent embedded value (MCEV) on a levered basis. The acquisition will realise an attractive indicative blended average acquisition price (net of external debt) for Friends Provident and the AXA UK Life Business of 68.8% of net MCEV. The Board believes that the acquisition will create value for shareholders through the realisation of expense synergies and improved cash emergence going forward.

Resolution's results in the first half of 2010, which do not include the AXA UK Life Business, are characterised by improved shareholder cash resources and sales from international operations while UK sales increased slightly. The embedded value on an MCEV basis was materially unchanged at £3,489 million or £1.44 per existing ordinary share (based on shares in issue at 30 June 2010), after a cash payment in respect of the final dividend of £61 million, with a further £5 million of the dividend payment being satisfied through the scrip option. While the Board has observed a clearer focus in the financial services sector on cash flow and returns, it is still of the view that a re-assessment of the traditional models of business will continue to be driven by capital, regulatory and shareholder demands. The Board expects that financial services groups will continue to optimise their portfolios, including divesting non-core or sub-scale assets, which will provide Resolution with further opportunities to execute its strategy.

Strategy

Resolution seeks to undertake acquisitions only where it considers them capable, in aggregate over a restructuring project, of generating returns consistent with a mid-teens percentage gross internal rate of return.

The Board believes that the acquisition of the AXA UK Life Business is a significant step towards achieving this objective in terms of the UK Life Project. The successful completion of the UK Life Project remains our priority but Resolution Operations LLP (ROL), as adviser to the Company, continues to research opportunities for financial restructuring in other areas and geographies.

AXA UK Life Business

On 24 June 2010, Resolution announced the agreed acquisition of the AXA UK Life Business by its subsidiary undertaking, Friends Provident Holdings (UK) Limited (FPH). The total consideration payable is up to £2,750 million, comprising £2,250 million to be paid in cash to the vendor and up to £500 million, consisting of deferred consideration notes to be issued to the vendor. The transaction is being financed by a fully underwritten rights issue of £2,055 million (before expenses) and a £400 million bridge facility. We were particularly pleased to note that at the time of the announcement of the acquisition, leading shareholders had already sub-underwritten more than 52% of the rights issue.

Following the publication of a prospectus on 29 June 2010 and a circular on 30 June 2010 the acquisition and rights issue were approved by shareholders in a general meeting on 20 July 2010 and the rights issue completed on 5 August 2010, with trading in the rights issue shares commencing on the following day. The opportunity was also taken at the meeting on 20 July to effect a share consolidation to ensure that, following the rights issue, the number of Resolution shares in issue and the likely share price was appropriate for a company of Resolution's size in the UK market.

After completion of the rights issue and the share consolidation, the number of Resolution shares in issue (the new ordinary shares) is 1,450,922,649 and the cash held by Resolution arising from the rights issue is £2,055 million before payment of estimated expenses of £110 million.

Completion of the acquisition is expected to take place in September.

The Board believes that the acquisition will create value for shareholders and that the business being acquired is a good fit with Friends Provident. In addition, it is also expected to result in:

■ annualised expense synergies of approximately £75 million per annum;

■ a targeted aggregate cash emergence for FPH, after interest costs, of at least £400 million per annum from 2011;

■ improved dividend prospects;

■ potential revenue and financial synergies;

■ a high quality asset portfolio;

■ a strengthened management team; and

■ the delivery of returns which the Board believes should be consistent with its previously stated target over the term of Resolution's UK Life Project.

Directors

I am pleased to welcome Tim Wade to the Board. Tim was appointed as an independent non-executive director with effect from 19 May 2010 and has also been appointed Chairman of our Audit and Risk Committee. He is both a lawyer and an accountant, and has a long career in financial services around the world.

Dividend policy

The dividend policy was reviewed by the Board in the light of the AXA acquisition. The Board's intention is to continue recommending the payment of annual dividends equivalent to 4.08 pence per ordinary share in issue as at 30 June 2010. Following the rights issue and share consolidation this equates to an annual dividend of 16.39 pence per new ordinary share. Dividends will continue to be paid one third in respect of the interim and two thirds in respect of the final. Consistent with this policy, the Board is declaring an interim dividend of 5.46 pence per new ordinary share in respect of 2010. The dividend will be paid on 8 October 2010. As with the 2009 final dividend, shareholders will be offered a scrip alternative in respect of the interim dividend which will give them the opportunity to receive new ordinary shares in the company instead of the relevant cash dividend to which they would otherwise have been entitled.

The Board intends to keep under review the appropriateness of the Company moving to a growing dividend by the end of the UK Life Project.

Resolution Operations LLP

The Board has requested that Resolution Operations LLP (ROL) provide an operating report. Consequently an operating report by John Tiner, Chief Executive of ROL, is included immediately after my statement.

 

 

Outlook

The acquisition and integration of the AXA UK Life Business will utilise the skills of the highly experienced team at ROL and Friends Provident. This team will be responsible for ensuring that the process runs smoothly and is delivered in line with the plan and timetable set by the Board. While the Board will have a clear focus on the integration process and delivery of the benefits expected from the acquisition, it will continue to look at other opportunities in line with the Group's strategy.

 

Michael Biggs

Chairman

 

 

Operating Report by Resolution Operations LLP

Introduction

In the first half of the year the Company, advised by ROL, continued the execution of its consolidation strategy in the UK life assurance sector through the announced acquisition of the AXA UK Life Business. The acquired business has a good operational fit with Friends Provident, enhances the cash flow prospects of the enlarged group and is expected to contribute positively to the Company's target mid-teens percentage return over the life of the consolidation project. The acquisition was announced against a background of continued equity and bond market volatility as fears of a double-dip recession were precipitated by, among other factors, fiscal austerity measures announced by central governments around the world and fears of sovereign defaults in parts of Europe.

Market update

The environment for life assurance in the UK continues to be challenging and is characterised by: volatility in asset classes; continued change and uncertainty concerning the regulatory environment; and shareholder pressure to focus on delivering cash based returns from an industry which continues to be post growth. The major players in the UK life assurance industry are responding in a variety of ways to these challenges, including reducing costs, improving the clarity and transparency of reporting, focussing on the emergence of cash flow from operating activities and improving the asset quality of their balance sheets. These are all positive steps towards shaping a sustainable life assurance sector in the UK and yet fundamental weaknesses remain which continue to give Resolution confidence about the continued successful execution of the Company's strategy. Lack of scale and the cash strain associated with writing new business remain key issues for a number of participants. The industry suffers from overcapacity and structural inefficiencies and faces growing uncertainty given the current economic and regulatory environment, with depressed valuations being evident as a result.

Both domestic and international financial groups appear to be re-examining how best to allocate their scarce capital resources among their global businesses to achieve appropriate risk-based returns. The UK is likely to be more a source of potential capital to such owners than a destination for it.

Business performance

The IFRS based operating profit for the Group in the first half of 2010 was £203 million compared to the loss in the first half of 2009 of £7 million. The Company's first acquisition was Friends Provident, which completed in November 2009. Consequently, the Group's results for the first half of 2009 exclude Friends Provident. Friends Provident's first half 2010 results reveal a good overall performance relative to those in the first half of 2009. These results reflect the additional financial discipline and focus on value which Resolution has brought to Friends Provident. New business profits were up by 153% from £32 million to £81 million, returns on new business up from 10.7% to 15.1% and MCEV operating profit up by 55% from £121 million to £188 million. Sales were strong, being up by 42% from £322 million to £458 million on an annual premium equivalent basis. These results reflect strong performances at Friends Provident International and Lombard while the UK continued to face difficulties, notably in the UK individual protection market. The UK results serve to reinforce the case for consolidation.

In keeping with the Company's focus on cash generation and efficient capital utilisation, it is pleasing to report Group shareholder cash resources increased to £605 million at 30 June 2010 against £510 million at 31 December 2009, driven largely by net cash generation from operating activities and a reduction in regulatory capital requirements due to a detailed re-evaluation of the risks within the Group and the significant management actions taken during 2009 and 2010. The balance sheet of the Group remained strong with an IGD surplus of £1 billion or 113% over the IGD minimum. The MCEV at the end of the period was £3,489 million in line with the position at the year end but reflecting payment of cash dividends of £61 million.

AXA UK Life Business

As noted in the Chairman's statement, the Company announced in June 2010 the agreed acquisition of the majority of AXA's UK life assurance business for £2.75 billion. The businesses being acquired provide a good operational fit with Friends Provident and will provide the enlarged group with increased scale. The acquisition is expected to create a leading player in key targeted product areas of protection and corporate pensions. The acquisition will also increase the Group's annuity exposure on an annual premium equivalent basis, although this business remains sub-scale and provides significant opportunity for the capture of vesting annuities and other growth opportunities. The acquisition takes Resolution a step closer towards its goal of creating a business of around £10 billion in terms of MCEV, with significant optionality for the business mix from further acquisitions.

The acquisition has also provided the opportunity to strengthen the leadership team for the enlarged Friends Provident group. This team is well placed to execute the separation and integration of the AXA UK Life Business with Friends Provident and now has the leadership and strength in depth to build a winning position in the marketplace.

Completion is expected to take place in September 2010 with immediate steps taken thereafter to create a single sales and marketing face to the market with a view to launching the new Friends Life brand early next year.

Financing the AXA UK Life Business acquisition

The Company is financing the consideration of £2,750 million plus transaction costs through a pre-emptive rights issue of £2,055 million, bridge debt financing of £400 million, £500 million of deferred consideration notes issued to AXA and existing cash resources of the Group. 

The bridge debt financing is expected to be replaced through an issue of Tier 2 regulated debt by FPH following completion, subject to debt markets offering acceptable pricing. 

The deferred consideration notes issued to AXA will be repayable over a period of up to 8 years and subject to a reduction in capital repayment of up to £150 million in the event that less than £1 billion of the reattributed inherited estate is releasable to shareholders.

We were delighted to have the opportunity to work closely with the Company's major investors to secure sub-underwriting of over half of the equity rights issue in advance of the formal announcement of the transaction and thereby manage overall underwriting costs to levels which were attractive by current market standards and where a good proportion of underwriting fees went to shareholders.

Future acquisitions

The Company continues to target further life company acquisitions to both increase scale and build market leading positions in protection, workplace savings and annuities. The Company also continues to believe that the addition of an asset management capability which delivers further value to shareholders from the scale and synergies derived from consolidating the Group's assets under management would be attractive. The Company's focus in this area, given the nature of the enlarged group, tends towards institutional asset management and could be achieved either through the acquisition of a stand-alone asset manager or a life assurance group with existing asset management capability. 

We expect the UK Life Project to last between two and four years, it having commenced with the acquisition of Friends Provident. ROL is continuing to maintain dialogue with potential vendors and to target the period through to the middle of next year for announcing a further acquisition.

Research and development

While ROL has been focussed on maintaining momentum in the UK life assurance consolidation project we, as adviser to the Company, and other members of The Resolution Group have also continued to study market opportunities and to talk to market participants and potential vendors in other financial services sectors and geographies. We believe there may be significant opportunities in consolidating life assurance businesses in the US and also in the eurozone countries. As the company stated in its recent prospectus, the Board has not taken any decision in relation to any other project and continues to assess the attractiveness of other projects being undertaken concurrently with the UK Life Project.

Conclusion

We and the Company are grateful to our shareholders for their continuing support of the life restructuring project and strongly endorsing the acquisition of the AXA UK Life Business, with over 52% committing to sub-underwriting prior to the announcement of the deal. ROL remains committed to helping the Company deliver its strategy and continues to believe that shareholder value will be created as consolidation benefits are realised.

 

John Tiner

Resolution Operations LLP - CEO

 

 

 

 

Business Review

Summary

The Group made an IFRS based operating profit before tax of £203 million for the half year to 30 June 2010 (30 June 2009: operating loss £7 million) of which Friends Provident contributed £211 million and the Resolution holding companies incurred an operating loss of £8 million. IFRS profit from continuing operations was £139 million before tax and £72 million after tax (30 June 2009: loss £7 million). Friends Provident was acquired by Resolution in November 2009 and the first half results for 2009 therefore exclude the acquired business. Consolidated IFRS net assets per share(i) were £1.42 at 30 June 2010.

On an MCEV basis the operating profit for the half year was £180 million and total profit before tax was £186 million. The Friends Provident business contributed £188 million to operating profit and £200 million to profit before tax with the Resolution holding companies reporting an operating loss of £8 million and loss before tax of £14 million. Consolidated MCEV net assets per share(i) were £1.44 at 30 June 2010 and the annualised FPH operating return on embedded value, net of tax, was 9.1%.

The Group announced the agreed acquisition of the AXA UK Life Business in June and, following the publication of the prospectus at the end of that month and the subsequent approval by shareholders, completion is expected to take place in September. The acquisition is subject to a number of conditions customary for a transaction of this nature including shareholder approval which was given at a general meeting on 20 July 2010, and regulatory consents.

The total consideration payable to AXA is up to £2,750 million and together with the transaction costs is being funded by a £2,055 million rights issue, a £400 million term loan facility and existing cash resources of the Group. Deferred consideration notes of up to £500 million are also being issued to the vendor. The majority of the costs of the transaction, expected to be around £110 million, will be reported in the second half of the year as a component of the acquisition accounting. However, certain costs amounting to £6 million have been expensed and have therefore been included in the results of the Resolution holding companies for the first half of the year.

Trading conditions for Friends Provident in 2010 have continued to be challenging in the UK life and pensions market, with no evidence to date of a sustainable economic recovery. Sales in the UK nevertheless were up 6% on an annual premium equivalent basis on the first half of 2009. Overseas markets have, however, improved strongly as world markets appear to emerge from recession driving a 43% increase in International business sales, and Lombard reported a 187% increase over the period.

In relation to expenses, the Friends Provident UK business remains on course to deliver against its full year £215 million run rate commitment for 2010 thus achieving its targeted 20% reduction in UK operating expenses measured against a 2007 base. Expenses for the overseas businesses were flat in the period, against a backdrop of significantly increased sales.

The Group continues to focus on cash and capital management with surplus cash held either at Group or intermediate holding company level. The Group had shareholder resources of £1,503 million at 30 June 2010 (31 December 2009: £1,397 million) of which £482 million (31 December 2009: £677 million) is being used to support the capital requirements of the Friends Provident business and £416 million represents assets not immediately available for distribution or loan from the life businesses. This leaves £605 million of cash resources available to shareholders (31 December 2009: £510 million) of which £297 million (31 December 2009: £307 million) is held at Resolution Group level.

(i) Calculated on shares in issue at 30 June 2010 of 2,418,204,413

 

The estimated IGD surplus of £1 billion at 30 June 2010 remains unchanged from that reported at last year end and has limited exposure to equity markets. This position is calculated at FPH level and therefore does not take account of cash held at Resolution Group level.

The investment portfolio of Friends Provident remains strong with over 97% of the Group's corporate bond and ABS holdings in the non-profit and shareholder funds being of investment grade. As disclosed at the 2009 year end the majority of the Group's sovereign debt exposure is to the UK gilt market with the non-linked and shareholder funds having minimal exposure to the sovereign debts of Greece, Portugal, Spain, Italy and Ireland.

While the Group did not acquire Friends Provident until November 2009, where indicated the comparative results for Friends Provident for the first half of 2009 on an IFRS and MCEV basis are being provided for comparability.

In the light of the performance of the business in the first half of 2010 and the statements made in connection with the proposed acquisition, the directors are declaring an interim dividend in line with the Company's dividend policy.

Acquisition of the AXA UK Life Business

The acquisition values the AXA UK Life Business, on a Resolution MCEV basis, at £3,446 million at 31 December 2009.

The total consideration payable is up to £2,750 million, comprising:

■ £2,224 million to be paid in cash;

■ £26 million net (plus interest) to be paid in cash on completion of certain steps in an agreed post-completion reorganisation; and

■ Up to £500 million, consisting of deferred consideration notes to be issued to the vendor repayable in instalments over periods of between 5 and 8 years from completion of the acquisition.

The business to be acquired includes a "reattributed inherited estate" which is currently held in shareholder-owned non-profit funds. Transfers of the reattributed inherited estate to shareholders' funds can only take place if it meets the requirements for testing prescribed at the time that the reattributed inherited estate was established.

The consideration will be reduced if less than £1 billion of the reattributed inherited estate is available for release in 2011 as a result of the testing process. If none of the estate is available, the consideration will fall to £2,600 million. The consideration could also be increased by up to £50 million if the seller is required to inject further capital into the AXA UK Life Business for regulatory reasons prior to completion.

The acquisition is being financed by:

■ a fully underwritten rights issue of £2,055 million (gross), which successfully completed on 5 August 2010 with the new ordinary shares issued by Resolution commencing trading on the London Stock Exchange on the following day;

■ a certain funds acquisition finance facility of £400 million;

■ existing funds of the Group; and

■ £500 million deferred consideration notes as outlined above.

Resolution undertook a share consolidation on 20 July 2010 to ensure that, following the rights issue, the number of shares in issue and the likely share price is appropriate for a company of its size in the UK market. The share consolidation was undertaken on the basis that shareholders received one consolidated ordinary share for every 30 existing ordinary shares held at the share consolidation record date. At 30 June 2010, the issued share capital of the Company was 2,418,204,413 ordinary shares of nil par value. Following the share consolidation and the rights issue the issued share capital of the Company is 1,450,922,649 ordinary shares of nil par value.

	No of shares
Issued ordinary shares at 30 June 2010	2,418,204,413
Consolidation of shares (1 for 30)	80,606,814
Additional shares issued on rights issue (17 for 1)	1,370,315,835
Issued ordinary shares at 6 August	1,450,922,649

IFRS results

	RSL 2010  Half year	RSL(i) 2009 Half year	RSL(ii) 2009 Full year
	£m	£m	£m
UK	160	-	20
International	38	-	9
Lombard	13	-	4
Corporate	(8)	(7)	(13)
IFRS based operating profit before tax	203	(7)	20
Short-term fluctuations in investment return	12	-	(2)
Returns on F&C Commercial Property Trust	23	-	23
Policyholder tax not attributable to shareholders	61	-	1
Acquisition accounting adjustments:
Amortisation of acquired in-force business	(142)	-	(59)
Amortisation of other acquired intangible assets	(25)	-	(10)
Non-recurring items:
Gain on the acquisition of Friends Provident	-	-	1,202
Costs associated with the Friends Provident acquisition	-	-	(16)
Costs associated with the proposed AXA UK Life Business acquisition	(6)	-	-
Other	(3)	-	4
STICS interest adjustment to reflect IFRS accounting for STICS as equity	16	-	5
IFRS profit before tax	139	(7)	1,168

The Group's IFRS results are set out below, including a reconciliation from operating profit to IFRS profit before tax:

 

(i) Resolution Limited (RSL) includes the results of the Resolution Group holding companies but not the Friends Provident Group.

(ii) 2009 full year comparatives include the Friends Provident Group for two post acquisition trading months.

 

 

IFRS based operating profit excludes, inter alia, acquisition related accounting adjustments and items of a non-recurring nature. It includes longer term investment return on shareholder funds as well as surplus assets held within long-term funds. Interest payable on the Friends Provident Group plc (FPG) step-up tier 1 insurance capital securities is treated as an operating expense, although in the IFRS primary statements it is required to be accounted for as equity with the interest being recorded as a reserves movement.

IFRS based operating profit for the period to 30 June 2010 was £203 million. The Friends Provident business contributed a profit of £211 million to this with Resolution recording an operating loss of £8 million. The Resolution operating loss, shown in the corporate line of the segmental presentation above, is a combination of investment return earned on the largely cash based assets of the holding companies offset by the fees payable to Resolution Operations LLP (ROL), directors' emoluments as well as other day-to-day expenses. In respect of the acquisition of the AXA UK Life Business most of the estimated costs of £110 million will be incurred in the second half of the year when the transaction is expected to complete. However, £6 million of costs related to the transaction have been included in the first half results.

The contribution to IFRS based operating profit by the Friends Provident business has been mainly generated by the UK segment, with operating profits of £160 million in the period. The International and Lombard businesses generated operating profits of £38 million and £13 million respectively. A more detailed breakdown of the segmental results is shown below.

IFRS segmental results

The life operating business is managed and reported in three operating segments. These are the UK, International (comprising Friends Provident International Limited (FPIL), the overseas life assurance business within the UK life and pensions subsidiaries (OLAB) and Friends Provident's 30% share in AmLife) and Lombard (Lombard International Assurance SA).

 

 

The Group's segmented IFRS results for the half year ended 30 June 2010 are set out below, including a reconciliation from operating profit to IFRS profit before tax:

	FPH UK	FPH Int'l	FPH Lombard	FPH Total	RSL holding companies	RSL Total
	£m	£m	£m	£m	£m	£m
New business strain	(35)	(13)	(23)	(71)	-	(71)
In-force surplus	124	49	38	211	-	211
Investment return and other items	15	1	(1)	15	-	15
Principal reserving changes and one-off items	3	2	(1)	4	-	4
Fixed interest investment variance including bond spreads	53	-	-	53	-	53
Share of result of AmLife Insurance Berhad	-	(1)	-	(1)	-	(1)
Other	-	-	-	-	(8)	(8)
IFRS based operating profit before tax	160	38	13	211	(8)	203
Short-term fluctuations in investment return	10	-	2	12	-	12
Returns on F&C Commercial Property Trust	23	-	-	23	-	23
Policyholder tax not attributable to shareholders	61	-	-	61	-	61
Acquisition accounting adjustments:
Amortisation of acquired in-force business	(44)	(62)	(36)	(142)	-	(142)
Amortisation of other acquired intangible assets	(11)	(3)	(11)	(25)	-	(25)
Non-recurring items:
Costs associated with the proposed AXA UK Life Business acquisition	-	-	-	-	(6)	(6)
Other	3	(6)	-	(3)	-	(3)
STICS interest adjustment to reflect IFRS accounting for STICS as equity	16	-	-	16	-	16
IFRS profit before tax	218	(33)	(32)	153	(14)	139

 

The UK segment generated the majority of the Group IFRS based operating profit with an in-force surplus of £124 million and a contribution of £53 million from the impact of fixed interest investment variances largely in respect of the annuity book. Overall, the results have benefitted from higher annual management charges as fund values increased in line with more favourable investment market conditions, as well as from reduced levels of operating expenses. 

In April 2010 the Friends Provident UK business reduced its holdings in F&C Commercial Property Trust from 50.3% to 34.15% in order to manage the property exposure of the life funds. As a result the Group is no longer required to consolidate the assets, liabilities and results of this investment trust and the first half results therefore only include F&C Commercial Property Trust through to April.

 

 

MCEV results

	RSL	RSL	RSL
	2010 Half year	2009 Half year(i)	2009 Full year(ii)
	£m	£m	£m
Life and pensions
Value of new business	81	-	52
Expected existing business contribution	92	-	28
Operating experience variances	28	-	(25)
Operating assumption changes	-	-	1
Other operating variances	(2)	-	-
Development costs	(11)	-	(5)
Life and pensions covered business operating profit before tax	188	-	51
Other income and charges	-	-	3
Life and pensions operating profit before tax	188	-	54
Corporate income and charges	(8)	(7)	(13)
Operating profit before tax	180	(7)	41
Economic variances	16	-	40
Amortisation of non-covered business acquired intangible assets	(1)	-	(1)
Non-recurring items and non-operating variances	(9)	-	5
Profit / (loss) from continuing operations before tax	186	(7)	85
(i) Resolution Limited (RSL) includes the results of the Company for the stated period.
(ii) 2009 full year comparatives include Friends Provident for two trading months only.

 

MCEV operating profit before tax for the half year was £180 million. The Friends Provident business contributed £188 million, reflecting strong operating results across all three business segments. Resolution holding companies reported an operating loss of £8 million (shown in the corporate income and charges line), due to a combination of investment return earned on the largely cash based assets of the holding companies offset by the fees payable to ROL, directors' emoluments as well as other day-to-day expenses.

The 2009 full year comparatives include the results of the Friends Provident business for the last two months only. In this two month period a high proportion of the value of new business related to Lombard, which historically generates the majority of its business in the final months of the year.

 

 

MCEV balance sheet

	30 Jun 2010 Net worth £m	30 Jun 2010 VIF £m	30 Jun 2010 Total £m	31 Dec 2009 Total £m
Gross life and pensions MCEV
UK	1,426	952	2,378	2,618
International	83	454	537	475
Lombard	(46)	489	443	440
Gross life and pensions MCEV	1,463	1,895	3,358	3,533
FPH and other (i)	375	-	375	153
Gross FPH MCEV	1,838	1,895	3,733	3,686
STICS	(344)	-	(344)	(318)
Lower tier 2 subordinated debt	(197)	-	(197)	(187)
Net FPH MCEV	1,297	1,895	3,192	3,181
RSL	297	-	297	307
Net Group MCEV	1,594	1,895	3,489	3,488

(i) includes IFA distribution and management services businesses.

At 30 June 2010, net Group MCEV was £3,489 million (31 December 2009: £3,488 million) giving MCEV per share of £1.44 (31 December 2009: £1.45), based on shares in issue, before the share consolidation, at the balance sheet date.

Net FPH MCEV increased to £3,192 million (31 December 2009: £3,181 million) with post-tax MCEV earnings of £162 million offset by a £65 million dividend to Resolution, £32 million of negative exchange movements mostly in relation to Lombard and a negative movement of £54 million in relation to the defined benefit pension scheme, being a combination of actuarial losses of £78 million and a deferred tax credit of £24 million.

Dividends totalling £292 million have been paid from the UK life operating businesses to FPH during the period, £180 million in March and £112 million in June, with the June dividend being used to settle internal loans.

At the end of the period the ratio of debt to gross Group MCEV was 13.4% (31 December 2009: 12.6%), primarily reflecting the change in the market value of the debt.

Resolution net worth reduced by £10 million over the period reflecting the result for the period and the excess of the dividend of £65 million received from FPH over the £61 million dividend paid in cash.

 

 

Group cash and capital

Group cash management

The business has continued to focus on cash management during the period and cash available to shareholders at the end of the period has increased from £510m at 31 December 2009 to £605 million at 30 June 2010. The increase in available cash of £95 million reflects:

■ the generation of £170 million of cash in the Friends Provident life operating businesses, after interest payments;

■ corporate costs in Resolution and Friends Provident group entities of £29 million;

■ the release of £15 million of cash from Group holding company working capital and illiquid assets; and

■ payment of the 2009 final dividend of £61 million to Resolution shareholders.

 

The £170 million increase in life operating businesses available cash derives from an increase in operating shareholder resources of £196 million and a reduction of £203 million in resources required to cover capital requirements. Of the £399 million potential shareholder cash resources available, £229 million has been retained in the business as working capital, illiquid or restricted assets and £170 million was paid up to Friends Provident group companies on 16 August.

 

Core deployment of the shareholder resources is shown below. 

		30 Jun 2010 RSL/RHG	30 Jun 2010 FPH and its group cos	30 Jun 2010 Life operating businesses		30 Jun 2010 Total	31 Dec 2009 Total
		£m	£m	£m		£m	£m
Resources covering capital requirements		-	172	310		482	677
Working capital, illiquid and restricted assets		-	-	416		416	210
Available shareholder cash		297	138	170		605	510
Shareholder resources		297	310	896		1,503	1,397
	RSL/RHG(i)		FPH and its group companies	Life operating businesses	Total
	£m		£m	£m	£m
Movement in shareholder resources:
- generated in-force surplus	-		-	210	210
- new business strain	-		-	(131)	(131)
- other operating items (ii)	(8)		-	91	83
- operating total	(8)		-	170	162
- investment return	-		(6)	60	54
- non-recurring items	(6)		(4)	1	(9)
- interest paid on STICS and subordinated debt	-		(2)	(23)	(25)
- other, including tax on non-operating items	-		(3)	(12)	(15)
Movement in shareholder resources before dividends	(14)		(15)	196	167
(Increase)/ decrease in resources required to cover capital requirements	-		(8)	203	195
Decrease/ (increase) in working capital, illiquid and restricted assets	-		65	(271)	(206)
Transfer of illiquid/ restricted assets	-		(42)	42	-
Movement in available shareholder cash before dividends and loan repayments	(14)		-	170	156
Available shareholder cash at 1 January 2010	307		23	180	510
Movement in available shareholder cash before dividends and loan repayments	(14)		-	170	156
Internal dividends net of internal loan repayments	65		115	(180)	-
Shareholder dividend	(61)		-	-	(61)
Available shareholder cash at 30 June 2010	297		138	170	605

 

(i) Resolution Holdings (Guernsey) Limited (RHG) is the parent company of FPH

(ii) Other operating items include taxation and the effect of fixed interest investment variances, including bond spreads

The available shareholder cash of £605 million at 30 June 2010 shown above represents the liquid resources available to shareholders, after deducting amounts required to support the capital requirements of the Group, in accordance with Group capital policy. The movements in available shareholder cash are driven by changes in:

- the assets in shareholder funds at life company level ("shareholder resources");

- the amount of shareholder resources required to cover capital requirements;

- the amount of shareholder resources invested in illiquid assets; and

- the amounts retained at entity level to support working capital requirements.

 

 

Changes in shareholder resources

The increase in shareholder resources generated by the operating activities of the Group was £162 million in the six months to 30 June 2010, driven by a reduction in operating costs and a focus on cash return metrics for new business, together with improved investment market conditions enhancing annual management charges from existing policies. On 30 June 2010, the International business agreed a financial reinsurance transaction with Munich Re, which benefitted new business cash strain in the period by £10 million.

Other operating items totalling £83 million comprise a tax credit of £19 million (driven by investment performance and the ability to obtain tax relief for expenses), £53 million benefit from the experience of the corporate bond portfolio backing annuities and £11 million in relation to other net income/ one offs (of which £19 million benefitted the life companies and £8 million was incurred in RSL and RHG). 

Investment return of £54 million comprises the £60 million return generated on the shareholder funds of the life companies, offset by £6 million of investment losses in the FPH holding companies.

Non-recurring items comprise the fees incurred in the period in respect of the proposed acquisition of the AXA UK Life Business, the recharge of expected pension scheme contributions (which is neutral across the FPH group companies and the life operating businesses) and project costs.

Interest of £25 million paid on the two step-up tier 1 insurance capital securities (STICS) and subordinated debt represents half of the £51 million annual interest charge payable on these notes.

Changes in shareholder resources required to cover capital requirements

The amount of shareholder resources required to support capital requirements of the life businesses has decreased by £195 million in the period. This primarily represents the completion of Friends Provident's 2009 ICA review, based on a detailed re-evaluation of the risks within the Group which has resulted in a lower amount of capital being required and reflects the significant management actions taken during 2009 and 2010. This is shown as a £203 million increase in available shareholder resources in the life operating businesses offset by a £8 million decrease in available shareholder resources at FPH and its group companies.

The decrease achieved in Pillar 2 capital requirements means that the Insurance Groups Directive capital requirement is the overriding capital requirement constraint at 30 June 2010.

Changes in illiquid assets and amounts required to be retained at entity level

Shareholder resources include amounts retained in life operating businesses which are not currently available to shareholders as they are either illiquid or are required to support working capital requirements. The key movement in these assets over the period is the surplus generated by the shareholder and long term funds of the life operating businesses that is in excess of capital requirements, but cannot yet be considered as available to shareholders (as this may be dependent on the performance of an actuarial valuation prior to the surpluses being transferred to shareholder funds). 

Dividends and internal loan repayments

The Friends Provident life businesses paid up a total dividend of £292 million to Friends Provident group companies in the six month period to 30 June 2010. Of this dividend, £112 million was paid back to the life businesses to settle internal loans previously established in lieu of dividends. The net dividend received by FPH group companies therefore amounted to £180 million, of which £65 million was paid to Resolution Group companies to fund the final 2009 dividend paid to shareholders of £61 million.

 

Group capital management

The Group manages its capital on an economic basis using risk-based internal models. Within each life company, capital is managed to be in excess of 125% of Pillar 2 capital including any Individual Capital Guidance.

The Group continues to focus on improving the efficiency and fungibilty of its capital and cash resources, demonstrated by the increase in available shareholder cash resources in the period of £95 million and subsequent payment of £170 million of dividends from the life operating businesses in August. Further initiatives including fund mergers and optimisation of corporate structure from a distributable reserves and capital requirements perspective are being considered as part of the integration of the AXA UK Life Businesses. 

Regulatory capital

The Group manages the statutory (Pillar 1) position of the life companies and maintains capital in excess of 150% of the Pillar 1 capital requirements. The Pillar 1 measure applies to Friends Provident Life and Pensions Limited (FPLP) and its subsidiaries and the Pillar 1 capital ratio is stated excluding the with-profits insurance capital component (WPICC). At 30 June 2010 the Pillar 1 surplus was £1,062 million (31 December 2009: £1,251 million), being £1,743 million (31 December 2009: £1,932 million) of total capital less capital requirements of £681 million (31 December 2009: £681 million). This results in a coverage ratio of 256% compared to 284% at the end of 2009. The reduced coverage is a result of the dividends paid from the life operating businesses totalling £292 million, offset by the net operational surplus generated in these businesses over the period.

Insurance Groups Directive

In addition to individual company requirements FPH, as the ultimate European Economic Area (EEA) parent insurance undertaking, is required to meet the requirements of the Insurance Groups Directive (IGD). The Group's capital policy is to maintain a ratio of broadly 150% for FPH capital resources against capital resource requirements, excluding the WPICC.

At 30 June 2010 the estimated IGD surplus, at the FPH level, remains strong. The estimated surplus of £1.0 billion (31 December 2009: £1.0 billion) is the excess of capital resources of £1.9 billion (net of WPICC) above capital requirements of £0.9 billion. The surplus represents a coverage ratio of 213% (31 December 2009: 213%).

The minimal change in IGD over the period largely reflects the impacts of the dividend payment to Resolution and coupon payments on shareholder debt offset by investment income, positive investment return and management initiatives to optimise the IGD position.

The IGD surplus is a prudent measure and excludes surplus capital not immediately available to shareholders, such as surplus capital in the long-term funds (£585 million at 30 June 2010 of which £414 million is held within the with-profits funds of FPLP and FPLA (Friends Provident Life Assurance Limited)). As the calculation is prepared to include the subsidiaries of the highest EEA parent company, the net assets of Resolution, as a Guernsey-based parent company, of £297 million are also excluded.

 

A reconciliation of the Group's IFRS net assets, regulatory capital surplus and Insurance Groups Directive position is shown below:

		30 Jun 2010 Capital resources	30 Jun 2010 Capital requirements	30 Jun 2010 Surplus	30 Jun 2010 Ratio	31 Dec 2009 Surplus
		£m	£m	£m		£m
	IFRS equity attributable to equity holders of the parent	3,423	-	3,423		3,536
	Equity attributable to STICS holders	474	-	474		483
	Subordinated debt	10	-	10		11
	Unallocated surplus	275	-	275		273
	Non-regulated entities (i)	(490)	-	(490)		(281)
	Regulatory prudence:
	- inadmissible assets and valuation differences (ii)	(1,949)	-	(1,949)		(2,090)
	Life and pensions capital requirements	-	681	(681)		(681)
	Life and pensions capital	1,743	681	1,062	256%	1,251
	FPLP with-profits fund:
	- resources calculated on a regulatory basis (iii)	1,207	844	363		318
	Long-term fund surplus (iv)	(585)	-	(585)		(436)
	Entities excluded from capital statement (v)	169	14	155		(124)
	Other	6	(5)	11		14
	Estimated FPH IGD position	2,540	1,534	1,006		1,023
	WPICC	(640)	(640)	-		-
	Surplus excluding WPICC	1,900	894	1,006	213%	1,023

 

(i) FPH and Resolution holding undertakings (on an IFRS basis).

(ii) Largely intangible assets and deferral of acquisition costs less actuarial funding (for which credit cannot be taken on an IFRS basis).

(iii) FPLP with-profits fund resources are calculated on a realistic basis under IFRS and a regulatory basis under the IGD.

(iv) Long-term fund surplus capital over and above capital requirements is excluded from capital resources on an IGD basis.

(v) Estimated FPH IGD surplus includes FPH corporate centre and IFA distribution businesses (on a regulatory basis).

 

Solvency II

The EU Solvency II Directive is expected to introduce a significant change to the capital requirements for insurers from 2012. The Group has been closely engaged in the development of the new regime for some time and is monitoring the impact on its balance sheet of the emerging rules and guidance. The Group welcomes the view of the European Commission that a number of the proposals previously being made by certain European regulators contained undue prudence that, if adopted, would have been very damaging to the European insurance industry. The Group continues to comment on proposals and various discussion papers and will be taking part in the industry-wide Quantitative Impact Study 5 later in 2010.

 

Management of the with-profits fund

Friends Provident has continued to review the operation of its main with-profits fund, with particular regard to risk appetite. This has resulted in an extension of the degree to which certain assets are hedged as well as a reduction in the fund's exposure to corporate bonds following the improved market conditions of late 2009 and early 2010.

 

Asset quality and exposure

The Group's financial assets as at 30 June 2010, excluding cash, are summarised as follows:

	Unit- linked	With- profit	Non- profit	Share- holder	30 Jun 2010 Total	31 Dec 2009 Total
	£bn	£bn	£bn	£bn	£bn	£bn
Shares, unit trusts and OEICs	28.5	2.4	0.2	-	31.1	30.4
Gilts	1.9	3.7	0.6	0.2	6.4	6.3
Corporate bonds and asset backed securities	3.4	4.1	3.0	0.4	10.9	11.0
Derivatives	-	0.3	-	-	0.3	0.1
Deposits	0.3	-	-	-	0.3	0.4
Loans	-	-	-	-	-	0.1
Total 30 June 2010	34.1	10.5	3.8	0.6	49.0
Total 31 December 2009	33.4	10.8	3.5	0.6		48.3

 

The vast majority of the Group's exposure to sovereign debt holdings is to UK gilts. The Group's non-linked and shareholder funds have immaterial exposure to the higher risk government debts of Spain, Portugal, Italy, Ireland and Greece.

Corporate bonds and asset backed securities (excluding £0.7 billion of unlisted bonds) are analysed by fund and credit rating as follows:

 

	Unit- linked	With- profit	Non- profit	Share- holder	30 June 2010 Total	30 June 2010	31 Dec 2009 Total	31 Dec 2009
	£bn	£bn	£bn	£bn	£bn		£bn
AAA	0.1	1.3	0.3	0.1	1.8	18%	1.9	18%
AA	0.3	0.6	2.0	0.1	3.0	29%	2.7	26%
A	0.3	1.3	0.5	0.1	2.2	22%	2.3	22%
BBB	0.2	0.5	0.1	0.1	0.9	9%	0.7	7%
Sub-BBB or rating not available	1.8	0.4	0.1	-	2.3	22%	2.8	27%
Total 30 June 2010	2.7	4.1	3.0	0.4	10.2	100%
Total 31 December 2009	2.9	4.4	2.7	0.4			10.4	100%

Over 97% of the corporate bond and asset backed securities held in the non-profit and shareholder funds are investment grade. The portfolio has not suffered any corporate bond or asset backed securities defaults in the first half of 2010 compared to £9 million of defaults on corporate bonds in 2009.

 

Liquidity

The liquidity of the Group remains strong. Friends Provident has an undrawn £300 million funding facility with a consortium of banks, which will increase to £500 million following the completion of the agreed AXA transaction. This facility is due to run until June 2013 but can be extended at the option of Friends Provident for a further two years.

FPLP financial strength ratings

Current ratings of Friends Provident Life and Pensions businesses are:

■ Standard & Poor's rating: A- (strong) with a negative outlook

■ Fitch's rating: A (strong) with 'rating watch positive'; and

■ Moody's rating: A3 (strong) with a positive outlook.

Rating agencies all retain a "strong" rating on Friends Provident Life and Pensions Limited. The proposed AXA transaction has been received positively by both Moody's and Fitch, who have improved their outlook on the FPLP rating, although S&P moved FPLP to a negative outlook on concerns over the adverse impact on Friends Provident should the transaction not complete combined with perceived uncertainty regarding the possible future capital management policy.

The Group targets financial strength ratings in the single A range and expects them to remain there for the foreseeable future.

Dividend policy

Following the acquisition of Friends Provident, Resolution announced that it expected to pay a dividend of 4.08 per share each year with one third payable as an interim dividend and two thirds as a final dividend commencing with a final dividend in respect of 2009. 

A final dividend in respect of 2009 of 2.72 pence per share was paid on 28 May 2010. In total £61 million of the 2009 dividend was paid in cash with the remaining £5 million (8%) taken as shares.

In the light of the proposed acquisition of the AXA UK Life Business the directors intend that the Company should continue to pay an annual dividend equivalent to 4.08 pence per share in issue as at 30 June 2010. Following the rights issue and share consolidation, the dividend policy will therefore be to pay an annual dividend of 16.39 pence per new ordinary share with one third, 5.46p, to be paid on 8 October 2010 in respect of the interim dividend for 2010. As with the 2009 final dividend, shareholders will be offered a scrip alternative in respect of the interim dividend.

As the Group progresses towards the end of the UK Life Project, the Board intends to keep under review the appropriateness of the Company moving to a growing dividend.

 

Friends Provident IFRS based operating profit

The results for Friends Provident are only reflected in the Group results from the acquisition date, 4 November 2009. The following analysis compares the IFRS based operating results of the Friends Provident group on a standalone basis for the first half of 2010 and 2009.

The Friends Provident results below are all shown excluding any acquisition accounting adjustments. The acquisition accounting adjustments, which only impact the results for the post acquisition period in 2009 and the first half of 2010, in particular result in the exclusion of any amortisation of deferred acquisition costs (DAC) held in the balance sheet at the acquisition date. All DAC at the acquisition date has been subsumed within the acquired value of in-force business intangible asset for which there is a separate amortisation charge in the income statement in the post-acquisition period.

	2010 Half year	2009 Half year(i)	2009 Full year
	£m	£m	£m
UK	128	33	269
International	19	(8)	(8)
Lombard	10	4	11
IFRS based operating profit before tax	157	29	272

 

(i) The comparative amounts have been restated to present asset management as a discontinued operation outside of operating profit.

 

UK operating profit

Details of UK operating profit are set out below.

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
New business strain	(35)	(49)	(92)
In-force surplus	91	73	140
Investment return and other items	16	13	36
Principal reserving changes and one-off items	3	(2)	5
Fixed interest investment variance including bond spreads	53	1	176
Other	-	(3)	4
IFRS based operating profit before tax	128	33	269

 

The UK business has continued to focus on the core markets of group pensions, individual protection and the provision of annuity policies to retiring pensions customers. Despite the difficult conditions in the UK life insurance industry, the business has maintained pricing discipline and remains focused on cash generation. New business on an APE basis increased by 6% from the £191 million in the first half of 2009 to £203 million in the first half of 2010. Over the same period, new business strain reduced from £49 million to £35 million, a reduction from 26% of APE to 17% of APE.

UK IFRS based operating profit before tax improved from £33 million to £128 million period on period. The results reflect the action taken to reduce expenses and the benefit of higher annual management charges on fund values which have increased as a result of improved market conditions. The results also reflect a £53 million benefit relating to fixed interest investment variances largely in respect of the annuity book.

UK new business strain and in-force surplus

Details of new business strain and in-force surplus for the main UK product areas are as follows:

	Half year 2010		Half year 2009		Full year 2009
	New business strain	In-force surplus	New business strain	In-force surplus	New business strain	In-force surplus
	£m	£m	£m	£m	£m	£m
Protection	(25)	32	(22)	22	(55)	41
Pensions	(19)	21	(30)	15	(48)	31
Annuities	11	7	5	1	14	3
Investments	(2)	6	(2)	4	(3)	3
With-profits	-	25	-	31	-	62
Total	(35)	91	(49)	73	(92)	140

 

Protection in-force surplus has increased significantly reflecting adverse experience in the first half of 2009 in addition to reduced maintenance expense levels over the period.

Pensions new business strain is down 37% on the first half of 2009 whilst volumes have grown by 9%. This improvement has been driven by a reduction in acquisition expenses some of which relate to the reallocation of expenses to the Protection business following a review of the allocation of sales and marketing infrastructure expenses at the 2009 year end.

Pensions in-force surplus is up £6 million on 2009 as a result of increased annual management charges, as improved market conditions drove growth in funds under management.

Annuity business is cash generative at the point of sale, with the improvement in the first half of 2010 reflecting both increased volumes, up 8%, and the stronger pricing levels relative to the reserving basis.

Annuities in-force surplus has also increased significantly on 2009 driven by a refinement of the calculation of expected return on fixed interest assets backing liabilities.

UK investment return and other items

This balance comprises:

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Longer-term return on life and pension shareholder funds	14	13	26
Distribution businesses	2	-	4
Non-recurring items	-	-	6
Total	16	13	36

 

UK longer-term investment returns have increased from £13 million to £14 million with the marginal increase being a result of higher longer term rates of return.

The Sesame Bankhall Group has generated operating profits of £2 million to the end of June 2010 (30 June 2009: £(1) million). Sesame acquired Bankhall, an IFA directly regulated service business, and PMS, a mortgage adviser services provider, in October 2009 and has successfully completed the integration of these businesses into the Group. First half results include £1 million in one-off integration costs related to the consolidation of offices. The 2009 half year comparative includes a contribution of £1 million from Pantheon Financial which was disposed of in March 2010.

Principal reserving changes and one-off items

Principal reserving changes and one-off items relating to modelling changes benefitted operating profit by £3 million in the period (30 June 2009: £(2) million).

Fixed interest investment variance including bond spreads

UK IFRS based operating profit before tax benefitted from £53 million (2009: £176 million) of fixed interest investment variance relating principally to the annuity portfolio. This was due to several factors including an increase in the valuation interest rate following a movement of annuity assets into credit from gilts, the unwind of the credit default margin over the half year as the portfolio suffered no defaults in the period and other small profits arising from differences in the movements between assets and liabilities. The prior year value included a significant benefit from narrowing of spreads.

UK operating expenses

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Acquisition	46	57	107
Maintenance	39	50	97
Development	8	1	15
Other	2	-	4
Total	95	108	223

 

UK operating expenses, which exclude commission payments and non-recurring costs, reduced to £95 million in the first half of 2010, down £13 million on the same period in 2009. The cost savings initiative started in early 2008 was aimed at reducing UK operating expenses in 2010 to a run-rate of £215 million. As at 30 June the business remains on target to meet this objective.

International

The International segment has continued to generate improving sales volumes with the business benefitting from improved economic activity in the majority of the markets in which it participates.

Over the period, the International segment made an operating profit of £19 million (2009: £(8) million). This improvement largely reflects the improving international investment markets and the resultant greater charges generated from the in-force book, as well as careful management of the additional cash strain from the growth in new business.

 

The analysis of the operating result is set out in the table below.

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
New business strain	(13)	(11)	(28)
In-force surplus	30	17	36
Investment return and other items	1	1	3
Principal reserving changes and one-off items	2	(15)	(30)
Share of results of AmLife Insurance Berhad	(1)	-	11
IFRS based operating profit/(loss) before tax	19	(8)	(8)

 

IFRS new business strain of £13 million is up 18% on 2009 against an increase in sales of 43% reflecting management's close scrutiny of acquisition costs.

In-force surplus has increased by 76% reflecting improved international investment markets and the resultant greater management charges generated from the growing in-force book. The surplus has also benefited from tight management of maintenance expenses and weakening of Sterling against the US and Hong Kong Dollar.

Principal reserving changes and one-off items

Principal reserving changes relating to modelling and expense changes benefited the half year profit by £2 million in total. The £15 million negative reserving change in the first half of 2009 did not recur.

AmLife Insurance Berhad

AmLife, the Friends Provident 30% Malaysian associate, has continued to grow sales, up 67%, period on period. During the period management have strengthened the reserving leading to a one-off adverse impact on profits.

International operating expenses

The International segment operating expenses, which exclude commission payments and non-recurring costs, have been maintained at the same level as the first half of 2009 at £25 million. Development expenses of £2 million relate largely to costs of developing the German business.

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Acquisition	13	13	26
Maintenance	10	10	20
Development	2	2	4
Other	-	-	1
Total	25	25	51

 

Lombard

Lombard, the international estate planning life assurer, has seen period on period sales volumes improve significantly to £135 million from £47 million in the first half of 2009.

The Lombard business traditionally generates the majority of its sales in the last quarter of the calendar year and its focus in 2010 is on spreading this historical peak in sales across the year. The increased sales volumes to date in 2010 are a result of this action, supported by the improved economic environment and greater client confidence compared to the same period of 2009.

 

 

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
New business strain	(23)	(19)	(31)
In-force surplus	35	27	50
Investment return and other items	(1)	(2)	(6)
Principal reserving changes and other one-off items	(1)	(2)	(2)
IFRS based operating profit before tax	10	4	11

 

IFRS new business strain for the period has risen to £23 million (30 June 2009: £19 million) whilst sales volumes have increased by 187%. The higher sales volumes have not translated proportionately into higher new business strain as a result of the product mix shifting towards lower commission business whilst operational acquisition costs have been held flat during the period.

In-force surplus is up £8 million on 2009 as a result of higher annual management charges on a larger in-force book of business whilst maintenance expenses, in aggregate, have remained stable. The in-force book has grown significantly over the last year, driven by the record sales in 2009 as well as improved investment markets, with this growth offset to a degree by the depreciation of the Euro against Sterling.

Lombard operating expenses

The operating expenses of Lombard, which exclude both commission payments and non-recurring costs, are set out in the table below. Operating expenses are £1 million lower than the first half of 2009 largely due to the impact of depreciation of the Euro.

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Acquisition	19	19	44
Maintenance	9	10	19
Development	1	1	3
Other	-	-	-
Total	29	30	66

 

 

Market consistent embedded value

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 year, together with the effect of updating previous assumptions on existing business with 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.

Resolution Limited is presenting the results and financial position for its life and pensions business on the market consistent embedded value (MCEV) basis and for its other businesses on the International Financial Reporting Standards basis. The MCEV basis is in compliance with the European Insurance CFO Forum MCEV Principles(i) (MCEV Principles), issued in June 2008, and re-issued in amended form in October 2009. The amendments in October 2009 primarily related to the allowance of an illiquidity premium on contracts with predictable cash flows.

Prior year comparatives are provided for the Friends Provident results. Friends Provident's embedded value results at 30 June 2009 were presented under the CFO Forum's European Embedded Value Principles (EEV Principles) published in May 2004. Those results adopted a market consistent approach in all material aspects. 

At 31 December 2009 assumption and presentational changes were made to align with the updated MCEV Principles. These changes are summarised in the supplementary information on pages 79 and 80.

 

Friends Provident MCEV results for the half year ended 30 June 2010

	2010 Half year	2010 Half year	2010 Half year	2010 Half year	2009 Half year	2009 Full year
	UK	Intl	Lombard	Total	Total	Total
	£m	£m	£m	£m	£m	£m
Value of new business	20	30	31	81	32	133
Expected existing business contribution	64	12	16	92	123	176
Operating experience variances	26	(3)	5	28	(35)	(97)
Operating assumption changes	-	-	-	-	2	(4)
Other operating variances	4	(6)	-	(2)	4	6
Development costs	(8)	(2)	(1)	(11)	(4)	(23)
Life and pensions covered business operating profit before tax	106	31	51	188	122	191
Other income and charges	-	-	-	-	(1)	15
Operating profit before tax	106	31	51	188	121	206
Economic variances				16	(134)	419
Amortisation and impairment of non-covered business intangible assets				(1)	(2)	(35)
Non-recurring items and non-operating variances				(3)	(50)	14
Profit/ (loss) from continuing operations before tax				200	(65)	604
Tax on operating profit				(46)	(37)	(53)
Tax on other activities				8	53	(105)
Profit/ (loss) from continuing operations for the period after tax				162	(49)	446
Discontinued operations (net of tax)				-	(22)	(22)
Profit/ (loss) for the period after tax				162	(71)	424

 

(i) Copyright© Stichting CFO Forum Foundation 2008

 

	Half year ended 30 June 2009
	UK	International	Lombard	Total
	£m	£m	£m	£m
Value of new business	3	20	9	32
Expected existing business contribution	97	10	16	123
Operating experience variances	(29)	(2)	(4)	(35)
Operating assumption changes	-	2	-	2
Other operating variances	4	-	-	4
Development costs	(1)	(2)	(1)	(4)
Life and pensions covered business operating profit before tax	74	28	20	122
Other income and charges	(1)	-	-	(1)
Operating profit before tax	73	28	20	121
Economic variances				(134)
Amortisation and impairment of non-covered business intangible assets				(2)
Non-recurring items and non-operating variances				(50)
Loss from continuing operations before tax				(65)
Tax on operating profit				(37)
Tax on other activities				53
Loss from continuing operations for the period after tax				(49)
Discontinued operations (net of tax)				(22)
Loss for the period after tax				(71)

 

The Friends Provident results show increased MCEV operating profit before tax of £188 million for the half year, up 55% from £121 million for the half year to 30 June 2009. This increase arises from improved contributions from all three of the underlying business segments and strong growth in International and Lombard new business.

The Group's continued focus on cost management and persistency management has seen positive experience variances overall in the period. In particular, while lapses of policies in the UK remain ahead of long-term assumptions, the impact is comfortably covered by the recessionary provision put in place at the end of 2009, while maintenance expenses were below allowances for each of the UK, International and Lombard businesses.

There have been no operating assumption changes made in the period to 30 June 2010. Operating assumption changes are ordinarily made at the end of the year.

The operating results above are segmented into UK, International and Lombard, reflecting the major distinct operations within the Group.

■ The UK segment comprises the UK life and pensions operations, the UK distribution businesses Sesame Bankhall and Pantheon Financial (until the disposal of this business in March 2010), and corporate functions and assets. The UK business operates through two trading units sharing a single platform. These units are focused on corporate and individual customers, and are known as UK corporate and UK individual.

■ The International segment comprises Friends Provident International Limited (FPIL), overseas business written in UK funds and Friends Provident's share in AmLife. International's major component is Isle of Man-based FPIL, with distribution hubs in Hong Kong, Singapore and Dubai to enable cost-effective delivery of products in local markets with more attractive returns than the UK. AmLife is the Malaysian insurance associate in which Friends Provident acquired a 30% stake in December 2008 with AmBank Berhad, a major Malaysian banking group being the main shareholder.

■ Lombard is based in Luxembourg and specialises in estate planning solutions for ultra high net worth clients throughout Europe and the rest of the world.

 

UK life and pensions operating profit

	2010 Half year	2009 (i) Half year	2009 Full year
	£m	£m	£m
Value of new business	20	3	26
Expected existing business contribution	64	97	125
Operating experience variances	26	(29)	(68)
Operating assumption changes	-	-	11
Other operating variances	4	4	8
Development costs	(8)	(1)	(16)
Life and pensions covered business operating profit before tax	106	74	86
Other income and charges	-	(1)	15
Operating profit before tax	106	73	101

 

(i) VNB on annuities has been valued assuming an average illiquidity premium of 75 bps for the half year ended 30 June 2010 (30 June 2009: nil; 31 December 2009: 100bps). The VNB for UK individual assuming an average 100 bps illiquidity premium on annuities over the first half of 2009 would have increased by £12 million.

UK contributed operating profit of £106 million in the period to 30 June 2010 (30 June 2009: £73 million). 

The UK business focuses on three core products: group pensions (UK corporate), individual protection and individual annuities. UK sales of £203 million APE are up 6% period on period (30 June 2009: £191 million).

	Value of new business			PVNBP margin
	2010 Half year	2009 Half year		2010 Half year	2009  Half year
	£m	£m		%	%
UK corporate	4	(1)		0.5	(0.1)
UK individual	16	4		4.2	1.1
UK total	20	3		1.8	0.3

 

VNB on annuity business has improved significantly due to the inclusion of an allowance for illiquidity premium on annuity business, improvements in annuity pricing margins as well as through a reduction in acquisition expenses.

The VNB generated by the UK corporate business unit is principally derived from group pensions. The market for group pensions remains challenging with levels of incremental business remaining depressed in the current UK economic climate. The value of new group pensions business grew to £4 million from £(1) million period on period as a result of reduced levels of acquisition costs. Sales volumes of £152 million APE were up 9% period on period (30 June 2009: £140 million).

For UK individual business, protection sales for the period of £18 million APE are down 10% on sales in the first half of 2009. The protection market is still subdued and reflects the poor economic conditions and low housing sales volumes and this situation is not expected to improve in the near term.

Annuity VNB is significantly higher at £15 million (30 June 2009: £(1) million) following the changes to illiquidity assumptions and an improvement in annuity market conditions, resulting in improved margin levels. Sales of £14 million APE in the period to 30 June 2010, are up 8% on the same period of 2009. Volumes prior to April were noticeably higher with a larger number of people looking to retire ahead of the change in minimum retirement age from 50 to 55, which took effect from 5 April 2010.

The expected existing business contribution for the UK has reduced compared to the same period in 2009. This is largely due to the narrowing of corporate bond spreads, the use of a one-year swap return in line with MCEV Principles and an allowance of £6 million (30 June 2009: £nil) for the unwind of the cost of non-hedgeable risks from the in-force business.

Positive operating experience variances of £26 million arose in the period, which includes:

■ Tax items of £11 million, with a £14 million benefit following the release of the final element of a prior years' tax provision offset by £(3) million from other tax variances. The prior years' provision has been held to cover potential tax exposures arising on transactions undertaken by Friends Provident. In order to recognise that the potential crystallisation of such tax liabilities reduced with each subsequent year, a staggered release of the provision over the years 2006 to 2010 was undertaken. In the first half of 2009 a release of £14 million was included.

■ Other variances, with £2 million arising because actual expenses were lower than long-term assumptions, £5 million arising from lower than assumed mortality, £4 million arising from an accumulation of small operational and processing variances and £4 million of other small net positive variances.

 

Persistency levels are in line with the business' expectations of higher lapses in the current challenging economic environment. At 31 December 2009 a provision of £45 million (net of tax) was set up to cover short-term adverse persistency. At 30 June 2010 £13 million of this provision has been utilised, reflecting persistency levels experienced in the period.

Other operating variances of £4 million (30 June 2009: £4 million) include the effects of a number of small modelling improvements.

Development expenses incurred in the UK business of £8 million relate principally to the development of the corporate investment platform and the development costs associated with the tied distribution arrangement with Tesco Bank.

International operating profit

	2010 Half year	2009 Half year	2009  Full year
	£m	£m	£m
Value of new business	30	20	47
Expected existing business contribution	12	10	23
Operating experience variances	(3)	(2)	(21)
Operating assumption changes	-	2	(8)
Other operating variances	(6)	-	(18)
Development costs	(2)	(2)	(5)
Life and pensions covered business operating profit before tax	31	28	18
Other income and charges	-	-	-
Operating profit before tax	31	28	18

 

International contributed operating profit of £31 million in the period to 30 June 2010 (30 June 2009: £28 million), driven by increased sales volumes and a tightly controlled operational cost base.

	Value of new business			PVNBP margin
	2010 Half year	2009 Half year		2010 Half year	2009 Half year
	£m	£m		%	%
International (excluding AmLife)	27	18		4.1	3.7
AmLife	3	2		7.4	10.6
International total	30	20		4.3	4.1

 

The VNB for the International business has increased by £10 million to £30 million period on period with acquisition expense levels being maintained while sales volumes have increased.

The International business has continued to show an upward trend in period on period sales. Sales to 30 June 2010 were £120 million on an APE basis, up 43% on 30 June 2009 (£84 million). The business has benefited from improving economic activity in the majority of markets with particularly strong growth in Asia. In this market, Singapore sales have doubled on 2009, whilst Hong Kong sales are returning to levels last seen in early 2008.

Development of FPI's bank assurance relationships continues, supported by the distribution agreements with ANZ Private Bank and ANZ Signature Banking in Singapore.

In Europe, the acquisition of Financial Partners Business AG (fpb), the distribution partner in Germany, in December 2009 has continued to strengthen Friends Provident's position in that IFA market and despite difficult economic conditions fpb has successfully grown sales volumes by 13% to £9 million (30 June 2009: £8 million). The fpb business generated operating profits of £1 million in the half year.

The share of AmLife VNB improved from £2 million to £3 million period on period whilst APE sales volumes grew by 67%. This business, the majority of which is owned by AmBank Berhad, has continued to perform strongly in the period with the agency and bancassurance sales channels performing well.

The expected existing business contribution of £12 million has increased as a result of growth in the value of in-force business.

Operating experience in the International segment includes a charge for adverse persistency of £5 million. This principally represents the excess of experienced premium reductions in the first half of the year over and above that provided for at the end of 2009. A recessionary provision of £6 million (net of tax) was set aside at 31 December 2009 to cover short-term adverse persistency. At 30 June 2010 £3 million of this provision has been used. Partially offsetting the adverse persistency variance is a positive expense variance of £1 million and a positive mortality variance of £2 million.

Other negative operating variances of £6 million (2009: £3 million positive) relate predominantly to modelling improvements.

 

Lombard operating profit

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Value of new business	31	9	60
Expected existing business contribution	16	16	28
Operating experience variances	5	(4)	(8)
Operating assumption changes	-	-	(7)
Other operating variances	-	-	16
Development costs	(1)	(1)	(2)
Life and pensions covered business operating profit before tax	51	20	87
Other income and charges	-	-	-
Operating profit before tax	51	20	87

Lombard contributed operating profit of £51 million in the period to 30 June 2010 (30 June 2009: £20 million). This was largely as a result of increased VNB driven by higher sales volumes in the first half of 2010, against a flat cost base.

	Value of new business			PVNBP margin
	2010 Half year	2009  Half year		2010 Half year	2009  Half year
	£m	£m		%	%
Lombard	31	9		2.3	1.9

 

Lombard historically writes the majority of its new business in the last quarter of the calendar year. Increased sales volumes in the first half of 2010 (up 187%) driven by management's action to spread sales volumes across the year, supported by the improved economic environment and client confidence compared to the same period of 2009. The Lombard business has seen strong growth in the majority of its markets especially in Belgium, Italy, UK and Germany.

The expected existing business contribution of £16 million is in line with the previous year.

Operating experience variances contribute £5 million which comprise a number of small positive variances including from expenses, mortality and the renegotiation of the third-party fees on some large policies.

Non-operating items

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Economic variances	16	(134)	419
Amortisation and impairment of non-covered business intangible assets	(1)	(2)	(35)
Non-recurring items and non-operating variances	(3)	(50)	14
Total	12	(186)	398

 

Economic variances combine the impact of changes to economic assumptions with the investment return variances over the year. In the period the total economic variances for the covered business were £16 million (30 June 2009: £(134) million). These comprised a £12 million negative variance within the UK, where the principal impact was equity market falls reducing the value of future charges on pensions business, £25 million from International business where overall favourable movement in exchange rates increased the value of future unit-linked charges on US Dollar denominated funds, and £6 million from Lombard due mainly to exchange rate movements offset by economic assumption changes. The £134 million adverse economic variance at 30 June 2009 was largely a result of falls in fixed interest and equity markets, interest rate rises and exchange rate movements, offset by a narrowing of credit spreads.

The charge of £1 million relating to the amortisation of non-covered business intangible assets is comparable with that incurred in the same period of 2009. The full year charge of £35 million included the impairment of the carrying value of Pantheon Financial.

Total non-recurring items of £3 million principally relate to the costs of work undertaken to prepare for Solvency II. The charge of £50 million in the half year to 30 June 2009 largely related to the costs associated with the implementation of the strategic review within Friends Provident.

Attribution of profit

The Company acquired Friends Provident through a limited partnership holding structure to facilitate alignment of the interests of Resolution and The Resolution Group (the separate financial services advisory group of which ROL is a part) by way of an incentive structure which rewards the founders and staff of The Resolution Group for capital value created in the limited partnership. 

Resolution is the general partner of the limited partnership and holds a 99.99% capital interest in it. The remaining 0.01% capital interest is held directly and indirectly by RCAP Guernsey LP which is ultimately owned by the founders and staff of The Resolution Group. Resolution is entitled to 100% of the profit of the limited partnership until its deployed equity capital (plus an agreed return) is returned to it. Thereafter, it is entitled to 90% of the profit.

Key performance indicators

The Group manages its business using a set of key performance indicators that are summarised below and are for the half year ended 30 June 2010 or as at 30 June 2010, as appropriate. These are discussed in detail in the business review immediately preceding this summary and defined on pages 114 and 115 under definitions.

KPI	Commentary
IFRS based operating profit before tax	£203 million (30 June 2009: loss £7 million; 31 December 2009: £20 million)
IFRS profit after tax	£72 million (30 June 2009: loss £7 million; 31 December 2009: £1,189 million)
MCEV operating profit before tax	£180 million (30 June 2009: loss £7 million; 31 December 2009: £41 million)
MCEV profit after tax	£148 million (30 June 2009: loss £7 million ; 31 December 2009: £71 million)
Group embedded value on an MCEV basis	£3,489 million (30 June 2009: £642 million; 31 December 2009: £3,488 million)
Group available shareholder cash (i)	£605 million (31 December 2009: £510 million)
Estimated FPH IGD surplus capital (i)	£1 billion (31 December 2009: £1 billion)
Pillar 1 surplus (i)	£1,062 million (31 December 2009: £1,251 million)
Asset quality (corporate debt and asset backed securities at investment grade) for shareholder related assets(i)	97% (31 December 2009: 95%)

(i) Not applicable in respect of 30 June 2009

Following the acquisition of Friends Provident, key metrics covering human resources are currently being developed and will be reported in future periods.

Principal risks and uncertainties

The Group included details of the principal risks and uncertainties related to its business in its 2009 Annual Report and Accounts. These were published under the following headings:

1) Financial markets and economic conditions;

2) Lack of target companies to acquire;

3) Reliance on ROL;

4) Legislation and regulation;

5) Future developments in the life assurance market;

6) The timing and scale of the occurrence of mixed events; and

7) Other assumptions.

All of these remain relevant and applicable for the remainder of 2010. In addition, following the acquisition of the AXA UK Life Business, which is expected to complete in September, the Group will be exposed to risks associated with the integration of this business and the achievement of contemplated synergies (a summary of which was set out in the prospectus published by the Company on 29 June 2010).

Going concern

Notwithstanding the Company's incorporation in Guernsey, 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 11 to 37.

 

Directors' responsibilities

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

■ the condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union;

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

■ the interim report includes a fair review of material related party transactions 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

 

 

Director

16 August 2010

 

 

Independent review report by Ernst & Young LLP to Resolution Limited

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of IFRS based operating profit, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and the related notes 1 to 14. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 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 half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

Ernst & Young LLP

London

16 August 2010

 

IFRS financial statements

Condensed consolidated income statement

For the half year ended 30 June 2010

		2010 Half year	2009 Half year	2009 Full year
	Notes	£m	£m	£m
Revenue
Gross earned premiums	2	426	-	133
Premiums ceded to reinsurers	2	(50)	-	(15)
Net earned premiums	2	376	-	118
Fee and commission income and income from service activities		323	-	126
Investment return		1,183	3	1,267
Total revenue		1,882	3	1,511
Other income	2	-	-	1,186
Claims, benefits and expenses
Gross claims and benefits paid		(676)	-	(211)
Amounts receivable from reinsurers		88	-	32
Net claims and benefits paid		(588)	-	(179)
Change in insurance contract liabilities		(86)	-	129
Change in investment contract liabilities		(473)	-	(1,189)
Transfer to unallocated surplus		(1)	-	(3)
Movement in net asset value attributable to unit-holders		2	-	(31)
Movement in policyholder liabilities		(558)	-	(1,094)
Acquisition expenses		(166)	-	(74)
Administrative and other expenses		(364)	(10)	(167)
Finance costs		(66)	-	(20)
Total claims, benefits and expenses		(1,742)	(10)	(1,534)
Share of (losses)/ profits of associates and joint venture		(1)	-	5
Profit/(loss) before tax from continuing operations		139	(7)	1,168
Policyholder tax	3	(61)	-	(1)
Profit/(loss) before shareholder tax from continuing operations		78	(7)	1,167
Total tax (charge)/credit	3	(67)	-	21
Policyholder tax	3	61	-	1
Shareholder tax	3	(6)	-	22
Profit/(loss) for the period		72	(7)	1,189
Attributable to:
Equity holders of the parent (i)		33	(7)	1,161
Non-controlling interests		39	-	28
Profit/(loss) for the period		72	(7)	1,189
		2010 Half year pence	2009 Half year pence	2009  Full year pence
Earnings per share restated for 21 July 2010 share consolidation:
Basic earnings per share from continuing operations	5	41.02	(33.18)	3,730.44
Diluted earnings per share from continuing operations	5	40.79	(33.18)	3,724.02
Earnings per share prior to restatement for 21 July 2010 share consolidation:
Basic earnings per share from continuing operations	5	1.37	(1.10)	124.35
Diluted earnings per share from continuing operations	5	1.36	(1.10)	124.13

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

 

 

 

Condensed consolidated statement of comprehensive income 

For the half year ended 30 June 2010

 

	Note	2010 Half year	2009 Half year	2009  Full year
		£m	£m	£m
Profit/ (loss) for the period		72	(7)	1,189
Actuarial (losses)/gains on defined benefit pension schemes	9	(78)	-	25
Foreign exchange adjustments(i)		(45)	-	(2)
Revaluation of owner occupied properties		-	-	1
Shadow accounting(ii)		(8)	-	(4)
Loss on available-for-sale financial assets		-	(1)	-
Aggregate tax effect of above items		40	-	5
Other comprehensive (loss)/income, net of tax		(91)	(1)	25
Total comprehensive (loss)/income, net of tax		(19)	(8)	1,214

 

 

Attributable to:

Equity holders of the parent		(58)	(8)	1,186
Non-controlling interests		39	-	28
		(19)	(8)	1,214

 

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

(ii) Shadow accounting relates to foreign exchange adjustments on translation of overseas subsidiaries held by the with-profits fund of Friends Provident Life & Pensions Limited.

 

 

 

 

Condensed consolidated statement of IFRS based operating profit

For the half year ended 30 June 2010

		2010 Half year	2009 Half year	2009 Full year
	Notes	£m	£m	£m
Profit/ (loss) before tax from continuing operations		139	(7)	1,168
Policyholder tax	3	(61)	-	(1)
Returns on Group-controlled funds attributable to third parties		(23)	-	(23)
Profit/ (loss) before tax excluding return generated within policy holder funds		55	(7)	1,144
Non-recurring items	2	9	-	(1,190)
Amortisation of acquired present value of in-force business		142	-	59
Amortisation of other acquired intangible assets		25	-	10
Interest payable on step-up tier one insurance capital securities (STICS)	4	(16)	-	(5)
Short-term fluctuations in investment return		(12)	-	2
Operating profit/(loss) before tax		203	(7)	20
Tax on operating (profit)/loss		(35)	-	10
Operating profit/(loss) after tax attributable to ordinary shareholders of the parent(i)		168	(7)	30
Earnings per share		2010 Half year pence	2009  Half year pence	2009 Full year pence
Operating earnings per share restated for 21 July 2010 share consolidation		208.82	(33.18)	96.39
Operating earnings per share prior to restatement for 21 July 2010 share consolidation	5	6.96	(1.10)	3.21

 

(i) IFRS based operating profit is from continuing operations and is based on longer-term investment return but excludes: (a) policyholder tax; (b) returns attributable to non-controlling interests in policyholder funds; (c) significant non-recurring items; and (d) amortisation and impairment of present value of acquired in-force business and other acquired intangible assets and is stated after deducting interest payable on STICS. 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

At 30 June 2010

		30 Jun 2010	30 Jun 2009	31 Dec  2009
	Notes	£m	£m	£m
Assets
Pension scheme surplus		-	-	38
Intangible assets	6	3,021	-	3,251
Property and equipment		45	-	47
Investment properties		857	-	1,546
Investments in associates and joint venture		33	-	30
Deferred tax assets		8	-	12
Financial assets	7	49,053	645	48,315
Deferred acquisition costs		180	-	46
Reinsurance assets		1,926	-	1,972
Current tax assets		4	-	4
Insurance and other receivables		646	-	444
Cash and cash equivalents		5,260	-	5,386
Total assets		61,033	645	61,091
Liabilities
Insurance contracts		12,146	-	12,107
Unallocated surplus		275	-	273
Financial liabilities:
- investment contracts		40,877	-	40,495
- loans and borrowings	8	282	-	590
- amounts due to reinsurers		1,713	-	1,610
Net asset value attributable to unit-holders		697	-	668
Provisions		56	-	72
Pension scheme deficit	9	35	-	-
Deferred tax liabilities		468	-	489
Current tax liabilities		19	-	15
Insurance payables, other payables and deferred income		564	3	456
Total liabilities		57,132	3	56,775
Equity attributable to equity holders
of the parent
- Share capital		2,354	650	2,349
- Other reserves	10	1,069	(8)	1,187
		3,423	642	3,536
Attributable to non-controlling interests		478	-	780
Total equity		3,901	642	4,316
Total equity and liabilities		61,033	645	61,091

 

Condensed consolidated statement of changes in equity

For the half year ended 30 June 2010

	Attributable to equity holders of the parent
	Share  capital	Other reserves	Total	Non-controlling interests	Total
	£m	£m	£m	£m	£m
At 1 January 2010	2,349	1,187	3,536	780	4,316
Profit for the period	-	33	33	39	72
Other comprehensive loss	-	(91)	(91)	-	(91)
Total comprehensive loss	-	(58)	(58)	39	(19)
Interest paid on STICS	-	-	-	(25)	(25)
Dividends paid	-	(66)	(66)	(7)	(73)
Appropriations of profit	-	(66)	(66)	(32)	(98)
Tax relief on STICS interest	-	5	5	-	5
Shares issued in lieu of dividend	5	-	5	-	5
Acquired/disposed of through business combinations	-	-	-	(309)	(309)
Share based payments	-	1	1	-	1
At 30 June 2010	2,354	1,069	3,423	478	3,901

 

For the half year ended 30 June 2009

	Attributable to equity holders of the parent
	Share capital	Other reserves	Total	Non-controlling interests	Total
	£m	£m	£m	£m	£m
At 1 January 2009	650	-	650	-	650
Loss for the period	-	(7)	(7)	-	(7)
Other comprehensive loss	-	(1)	(1)	-	(1)
Total comprehensive loss	-	(8)	(8)	-	(8)
Issue of share capital	-	-	-	-	-
At 30 June 2009	650	(8)	642	-	642

 

For the year ended 31 December 2009

	Attributable to equity holders of the parent
	Share  capital	Other reserves	Total	Non-controlling interests	Total
	£m	£m	£m	£m	£m
At 1 January 2009	650	-	650	-	650
Profit for the period	-	1,161	1,161	28	1,189
Other comprehensive income	-	25	25	-	25
Total comprehensive income	-	1,186	1,186	28	1,214
Interest paid on STICS	-	-	-	(7)	(7)
Dividends paid to non-controlling interests	-	-	-	(4)	(4)
Appropriations of profit	-	-	-	(11)	(11)
Tax relief on STICS interest	-	1	1	-	1
Issue of share capital	1,699	-	1,699	-	1,699
Acquired through business combinations	-	-	-	763	763
At 31 December 2009	2,349	1,187	3,536	780	4,316

 

Condensed consolidated cash flow statement

For the half year ended 30 June 2010

	2010 Half year	2009 Half year	2009 Full year
	£m	£m	£m
Operating activities
Profit/(loss) for the period	72	(7)	1,189
Adjusted for:
- other income, net of related costs	-	-	(1,186)
- net realised and unrealised gains on assets at fair value	(133)	-	(810)
- finance costs	66	-	20
- amortisation of intangible assets	171	-	69
- depreciation of property and equipment	3	-	1
- movement in deferred acquisition costs	(136)	-	(46)
- total tax charge/(credit)	67	-	(21)
- sale/ (purchase) of shares and other variable yield securities	552	-	(1,111)
- sale/ (purchase) of loans, debt securities and other fixed income securities	170	-	(331)
- (purchase)/ sale of investment properties	(34)	-	46
- increase/ (decrease) in insurance contract liabilities	40	-	(158)
- (decrease)/ increase in investment contract liabilities	(7)	-	2,936
- increase in unallocated surplus	2	-	2
- increase/ (decrease) in provisions	21	-	(17)
- net (decrease)/ increase in receivables and payables	(660)	3	(50)
Pre-tax cash inflow/ (outflow) from operating activities	194	(4)	533
Tax received	-	-	11
Net cash inflow/ (outflow) from operating activities	194	(4)	544
Investing activities
Acquisition of subsidiaries, net of cash acquired	-	-	4,271
Disposal of investment securities	-	7	652
Other income net of related costs	1	-	4
Additions to internally generated intangible assets	(2)	-	(1)
Net (additions)/ disposals of property and equipment	(1)	-	3
Net cash (outflow)/ inflow from investing activities	(2)	7	4,929
Financing activities
Proceeds from issue of ordinary share capital, net of transactions costs	-	(4)	(4)
Repayment of long-term debt	(128)	-	-
Finance costs	(63)	-	(17)
STICS interest	(25)	-	(7)
Net movement in other borrowings, net of expenses	47	-	(45)
Dividends paid to equity holders of the parent	(61)	-	-
Dividends paid to non-controlling interest	(7)	-	(3)
Net cash outflow from financing activities	(237)	(4)	(76)
(Decrease)/ increase in cash and cash equivalents	(45)	(1)	5,397
Balance at beginning of period	5,386	1	1
Exchange adjustments on the translation of foreign operations	(81)	-	(12)
Balance at end of period	5,260	-	5,386

Notes to the consolidated accounts

1. Basis of preparation

The condensed consolidated interim financial statements for the half year ended 30 June 2010 have been prepared in accordance with IAS 34 "Interim Financial Reporting". This interim financial information has been prepared in accordance with accounting policies adopted in respect of the financial statements for the year ended 31 December 2009, as updated by changes that are intended to be made in the full year 2010 financial statements as a result of changes to International Financial Reporting Standards. 

The presentation currency of the Group is £million Sterling.

The IASB has issued the following revisions to standards and interpretations which are effective for periods beginning on 1 July 2009. The Group has adopted these standards and interpretations but there is no material financial impact on these interim financial statements.

IAS 39: Financial instruments: recognition and measurement - Eligible hedged items (amendment)

The amendment is effective for financial years beginning on or after 1 July 2009. The amendment clarifies which risks associated with a portion of the cash flows or fair value of a financial instrument an entity is permitted to designate as a hedge item.

IAS 28: Investment in associates and IAS 31: Interests in Joint Ventures have been revised and are effective for financial years beginning on or after 1 July 2009. IAS 28 requires that when significant influence is lost, the cost of the retained investment is measured at fair value at the date that significant influence is lost. IAS 31 similarly requires that any retained interest in an investment in a joint venture, following a partial disposal, is to be measured at fair value, and that this shall be used as deemed cost for subsequent accounting.

The comparative figures for the period to 31 December 2009 are derived from the statutory accounts for that period. The auditors' report on those accounts was (i) unqualified, (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 263 (2) or (3) of the Companies (Guernsey) Law, 2008.

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 interim financial statements.

Emergency Budget 2010

The provisions of the 22 June 2010 Emergency Budget do not impact the IFRS figures reported at interim 2010, as they were not substantively enacted by 30 June 2010. The reductions in Corporation Tax rates announced in the Budget would have reduced the deferred tax liability held at 30 June 2010 by £14 million, had they been applied.

2. Segmental information

a) Summary

Segmental information is presented on the same basis as internal financial information used by the Group to evaluate operating performance. The segmental information as at 30 June 2010 and 31 December 2009 includes the Friends Provident balances as at those period ends. Segmental information relating to revenue, net income, products and services for the year ended 31 December 2009 includes Friends Provident balances from 5 November 2009. No segmental information is presented in respect of the half year ended 30 June 2009 as the Group only had a corporate segment for the period from incorporation to the acquisition of Friends Provident.

The Group's management and internal reporting structure is based on the following operating segments which have been established subsequent to the acquisition of Friends Provident:

■ UK comprising UK life and pensions business and including Sesame and, for the period prior to its disposal, Pantheon;

■ International comprising Friends Provident International Limited, the overseas life assurance business within the UK life and pensions subsidiaries and the Group's share of AmLife Berhad; and

■ Lombard International Assurance SA (Lombard).

 

Corporate functions are not strictly an operating segment, but are reported to management and are provided in the analysis below to reconcile the Group's reportable segments to total profit.

In presenting geographical segment information, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. The Group has defined two geographical areas: UK and the rest of the world.

b) Operating segment information

Operating profit

	UK	Int'l	Lombard	Corporate	Total
Half year ended 30 June 2010	£m	£m	£m	£m	£m
Life and pensions operating profit	144	38	14	-	196
Longer-term return on shareholders' funds	15	1	(1)	-	15
Other income and charges	1	(1)	-	(8)	(8)
Operating profit before tax	160	38	13	(8)	203
Tax on operating profit					(35)
Operating profit after tax attributable to ordinary shareholders of the parent					168
Operating earnings per share pre share consolidation (pence)					6.96
Operating earnings per share post share consolidation (pence)					208.82

 

 

	UK	Int'l	Lombard	Corporate	Total
Full year ended 31 December 2009	£m	£m	£m	£m	£m
Life and pensions operating profit	21	9	4	-	34
Longer-term return on shareholders' funds	4	-	-	-	4
Other income and charges	(5)	-	-	(13)	(18)
Operating profit before tax	20	9	4	(13)	20
Tax on operating profit					10
Operating profit after tax attributable to ordinary shareholders of the parent					30
Operating earnings per share pre share consolidation (pence)					3.21
Operating earnings per share post share consolidation (pence)					96.39

 

 

Reconciliation of operating profit before tax to profit before tax

	UK	Int'l	Lombard	Corporate	Total
Half year ended 30 June 2010	£m	£m	£m	£m	£m
Operating profit/ (loss) before tax	160	38	13	(8)	203
Non-recurring items(i)	3	(6)	-	(6)	(9)
Amortisation of acquired present value of in-force business	(44)	(62)	(36)	-	(142)
Amortisation of other acquired intangible assets	(11)	(3)	(11)	-	(25)
Interest payable on STICS	16	-	-	-	16
Short-term fluctuations in investment return	10	-	2	-	12
Profit/(loss) before tax excluding profit generated within policyholder funds	134	(33)	(32)	(14)	55
Policyholder tax	61	-	-	-	61
Returns on Group-controlled funds attributable to third parties	23	-	-	-	23
Profit/(loss) before tax	218	(33)	(32)	(14)	139

 

	UK	Int'l	Lombard	Corporate	Total
Full year ended 31 December 2009	£m	£m	£m	£m	£m
Operating profit/ (loss) before tax	20	9	4	(13)	20
Non-recurring items (i)	4	-	-	1,186	1,190
Amortisation of acquired present value of in-force business	(27)	(9)	(23)	-	(59)
Amortisation of other acquired intangible assets	(5)	(1)	(4)	-	(10)
Interest payable on STICS	5	-	-	-	5
Short-term fluctuations in investment return	(1)	(1)	-	-	(2)
Profit/(loss) before tax excluding profit generated within policyholder funds	(4)	(2)	(23)	1,173	1,144
Policyholder tax	1	-	-	-	1
Returns on Group-controlled funds attributable to third parties	23	-	-	-	23
Profit/(loss) before tax	20	(2)	(23)	1,173	1,168

 

(i) Non recurring items in 2010 comprise £3 million of UK project costs, £6 million recharge between UK and International in respect of pension scheme funding and £6 million of corporate costs associated with the acquisition of the AXA UK Life Business.

In 2009, the corporate non-recurring item of £1,186 million was in respect of the gain on acquisition of Friends Provident Group, being the excess of the interest in the fair value of assets acquired over cost, net of acquisition costs of £16 million.

 

Revenue and expenses

	UK	Int'l	Lombard	Corporate	Elimination of inter-segment amounts (ii)	Total
Half year ended 30 June 2010	£m	£m	£m	£m	£m	£m
Gross earned premiums on insurance and investment contracts	1,354	495	1,347	-	-	3,196
Investment contract premiums (i)	(934)	(489)	(1,347)	-	-	(2,770)
Gross earned premiums	420	6	-	-	-	426
Premiums ceded to reinsurers	(49)	-	-	-	(1)	(50)
Net earned premiums	371	6	-	-	(1)	376
Fee and commission income	173	105	46	-	(1)	323
Investment return:					-
- interest income	358	2	42	1	(13)	390
- other	412	133	248	-	-	793
Total revenue	1,314	246	336	1	(15)	1,882
Inter-segment revenue	11	-	4	-	(15)	-
Total external revenue	1,303	246	332	1	-	1,882
Net claims and benefits paid	(586)	(2)	-	-	-	(588)
Movement in insurance and investment contract liabilities	(135)	(173)	(251)	-	-	(559)
Transfer to unallocated surplus	(1)	-	-	-	-	(1)
Movement in net assets attributable to unit-holders	2	-	-	-	-	2
Acquisition expenses	(136)	(14)	(16)	-	-	(166)
Administrative and other expenses	(169)	(87)	(100)	(15)	7	(364)
Finance costs	(71)	(2)	(1)	-	8	(66)
Total claims, benefits  and expenses	(1,096)	(278)	(368)	(15)	15	(1,742)
Inter-segment expenses	(14)	-	(1)	-	15	-
Total external claims,  benefits and expenses	(1,082)	(278)	(367)	(15)	-	(1,742)
Share of losses of associates and joint venture	-	(1)	-	-	-	(1)
Profit/(loss) before tax from continuing operations	218	(33)	(32)	(14)	-	139
Policyholder tax	(61)	-	-	-	-	(61)
Shareholder tax	(21)	3	12	-	-	(6)
Segmental result after tax	136	(30)	(20)	(14)	-	72

(i) Accounted for as deposits under IFRS.

(ii) Eliminations include inter-segment fee income and loan interest. Inter-segment transactions are undertaken on an arm's-length basis.

	UK	Int'l	Lombard	Corporate	Elimination of inter-segment amounts (ii)	Total
Year ended 31 Dec 2009	£m	£m	£m	£m	£m	£m
Gross earned premiums on insurance and investment contracts	746	150	1,935	-	-	2,831
Investment contract premiums (i)	(615)	(148)	(1,935)	-	-	(2,698)
Gross earned premiums	131	2	-	-	-	133
Premiums ceded to reinsurers	(15)	-		-	-	(15)
Net earned premiums	116	2	-	-	-	118
Fee and commission income	63	46	18	-	(1)	126
Investment return:
- interest income	124	1	24	4	(9)	144
- other	594	173	356	-	-	1,123
Total revenue	897	222	398	4	(10)	1,511
Other income(iii)	-	-	-	1,186	-	1,186
Inter-segment revenue	5	-	5	-	(10)	-
Total external revenue	892	222	393	4	-	1,511
Net claims and benefits paid	(178)	(1)	-	-	-	(179)
Movement in insurance and investment contract liabilities	(512)	(197)	(351)	-	-	(1,060)
Transfer to unallocated surplus	(3)	-	-	-	-	(3)
Movement in net assets attributable to unit-holders	(31)	-	-	-	-	(31)
Acquisition expenses	(55)	(14)	(5)	-	-	(74)
Administrative and other expenses	(75)	(17)	(65)	(17)	7	(167)
Finance costs	(23)	-	-	-	3	(20)
Total claims, benefits  and expenses	(877)	(229)	(421)	(17)	10	(1,534)
Inter-segment expenses	(10)	-	-	-	10	-
Total external claims,  benefits and expenses	(867)	(229)	(421)	(17)	-	(1,534)
Share of profits of associates and joint venture	-	5	-	-	-	5
Profit before tax from continuing operations	20	(2)	(23)	1,173	-	1,168
Policyholder tax	(1)	-	-	-	-	(1)
Shareholder tax	11	3	8	-	-	22
Segmental result after tax	30	1	(15)	1,173	-	1,189

(i) Accounted for as deposits under IFRS.

(ii) Eliminations include inter-segment fee income and loan interest. Inter-segment transactions are undertaken on an arm's-length basis.

(iii) £1,186 million in respect of the gain on acquisition, being the excess of the interest in the fair value of assets acquired over cost arising on the acquisition of Friends Provident Group, net of acquisition costs of £16 million.

 

 

Products and services

Half year ended 30 June 2010	Protection	Investment	Annuities	Individual pensions	Group pensions	Other(i)	Total
	£m	£m	£m	£m	£m	£m	£m
Gross earned premiums	165	95	156	5	5	-	426
Net earned premiums	117	94	156	5	5	(1)	376
Fee and commission income	-	167	-	20	40	96	323
Total external revenue	117	261	156	25	45	95	699

(i) Other includes revenue streams from Sesame and, for the period prior to its disposal, Pantheon.

 

Year ended 31 Dec 2009	Protection	Investment	Annuities	Individual pensions	Group pensions	Other(i)	Total
	£m	£m	£m	£m	£m	£m	£m
Gross earned premiums	51	37	42	2	1	-	133
Net earned premiums	37	36	42	2	1	-	118
Fee and commission income	-	54	-	19	-	53	126
Total external revenue	37	90	42	21	1	53	244

(i) Other includes revenue streams from Sesame and Pantheon.

 

Assets and liabilities

	UK	Int'l	Lombard	Corporate	Elimination of inter-segment amounts (i)	Total
At 30 June 2010	£m	£m	£m	£m	£m	£m
Segment assets	39,312	6,167	15,627	305	(411)	61,000
Investments in associates and joint venture	8	25	-	-	-	33
Total assets	39,320	6,192	15,627	305	(411)	61,033
Total liabilities	36,628	5,723	15,183	9	(411)	57,132

(i) Eliminations mainly comprise intercompany loans

 

	UK	Int'l	Lombard	Corporate	Elimination of inter-segment amounts (i)	Total
At 31 Dec 2009	£m	£m	£m	£m	£m	£m
Segment assets	40,065	5,858	15,367	315	(544)	61,061
Investments in associates and joint venture	7	23	-	-	-	30
Total assets	40,072	5,881	15,367	315	(544)	61,091
Total liabilities	37,060	5,386	14,865	8	(544)	56,775

(i) Eliminations mainly comprise intercompany loans

 

 

c) Geographical segmental information

	UK	Rest of the world	Total
Half year ended 30 June 2010	£m	£m	£m
Gross earned premiums	420	6	426
Fee and commission income	186	137	323
Revenue from external customers	606	143	749
Investment return			1,183
Premiums ceded to reinsurers			(50)
Total revenue			1,882

 

	UK	Rest of the world	Total
Year ended 31 Dec 2009	£m	£m	£m
Gross earned premiums	131	2	133
Fee and commission income	85	41	126
Revenue from external customers	216	43	259
Investment return			1,267
Premiums ceded to reinsurers			(15)
Total revenue			1,511

 

3. Taxation

Tax recognised in the income statement

	2010 Half year	2009 Full year
	£m	£m
Current tax
UK corporation tax at 28%	44	(8)
Adjustments in respect of prior periods	(5)	-
Overseas taxation	4	-
Total current tax charge/(credit)	43	(8)
Deferred tax
Origination and reversal of temporary differences	27	(13)
Adjustments in respect of prior periods	(3)	-
Total deferred tax charge/(credit)	24	(13)
Total tax charge/ (credit)	67	(21)
Analysis:
- policyholder tax	61	1
- shareholder tax	6	(22)
Total tax charge/ (credit)	67	(21)

 

Policyholders' tax is tax on the income and investment returns charged to policyholders of linked and with-profits funds. Shareholders' tax is tax charged to shareholders on the profits of the Group. There was no tax charge in respect of the half year ended 30 June 2009.

 

Factors affecting tax charge for period

Half year ended 30 June 2010	Shareholder profit	Policyholder tax	Profit before tax
	£m	£m	£m
Profit before tax from continuing operations	78	61	139
Tax from continuing operations multiplied by the standard rate of corporation tax in the UK of 28%	22	17	39
Effects of:
- non-taxable income	(19)	(17)	(36)
- deductions not allowable for tax purposes	2	-	2
- with-profits minority interest	(7)	-	(7)
- adjustments in respect of prior periods	(8)	-	(8)
- utilisation of excess expenses brought forward	(6)	-	(6)
- valuations of tax losses	12	-	12
- valuation of unrealised capital losses	6	-	6
- non-taxable result of Resolution holding companies	4	-	4
- policyholder tax	-	61	61
Total tax charge	6	61	67

 

Full year ended 31 Dec 2009	Shareholder profit	Policyholder tax	Profit before tax
	£m	£m	£m
Profit before tax from continuing operations	1,167	1	1,168
Tax from continuing operations multiplied by the standard rate of corporation tax in the UK of 28%	327	-	327
Effects of:
- non-taxable income	(9)	-	(9)
- deductions not allowable for tax purposes	1	-	1
- overseas tax	(1)	-	(1)
- tax relief for share based payments	3	-	3
- utilisation of excess expenses brought forward	5	-	5
- valuations of tax losses	(14)	-	(14)
- with-profits minority interest	(6)	-	(6)
- non-taxable gain on acquisition	(336)	-	(336)
- non-taxable result of Resolution holding companies	8	-	8
- policyholder tax	-	1	1
Total tax credit	(22)	1	(21)

 

 

 

4. Appropriations of profit

a) Dividends paid on ordinary shares

A final dividend in respect of 2009 of 2.72 pence per ordinary share was paid on 28 May 2010 comprising £61 million of cash and £5 million of shares issued in lieu of dividends. As required by IAS 10: Events after the balance sheet date, dividends declared after the balance sheet date are not accrued in these accounts. An interim dividend of 5.46 pence per new ordinary share (after the share consolidation and rights issue described in note 14) will be paid to shareholders on the register at the close of business on 8 September 2010 amounting in total to £79 million if all dividends were to be taken in cash. Accordingly this amount is not reflected in these financial statements.

b) STICS interest

The STICS are accounted for as equity instruments under IFRS and consequently the interest on the STICS is recorded in the financial statements as though it were a dividend.

Interest on the 2003 STICS is paid in equal instalments in May and November each year at a rate of 6.875%. Interest of £7 million was paid on 21 May 2010 and interest of £7 million was paid in November 2009.

Interest on the 2005 STICS is paid annually in June at a rate of 6.292%, and interest of £18 million was paid on 30 June 2010.

These interest payments are shown as movements in reserves in these financial statements together with the related tax relief.

5. Earnings per share

Basic and operating earnings per share from continuing operations

Earnings per share have been calculated based on the profit after tax and on the operating profit after tax, attributable to ordinary equity holders of the parent and the weighted average number of shares in issue. The directors consider that operating earnings per share provides a better indication of operating performance.

As described in note 14, post balance sheet events, in connection with the acquisition of the AXA UK Life Business, the Company undertook a rights issue and share consolidation after the end of the reporting period. The rights issue, as a post balance sheet event that results in a change in resources, has no impact on the earnings per share calculations at the half year. However, the 1 for 30 share consolidation is required under IAS 33: Earnings per share to be reflected in the earnings per share calculations. Accordingly, earnings per share information is presented on a pre and post share consolidation basis.

	2010 Half year Earnings £m	2010 Half year Pence per share		2009 Half year Earnings £m	2009 Half year Pence per share
		Pre share consolidation	Post share consolidation		Pre share consolidation	Post share consolidation
Profit/(loss) after tax attributable to ordinary equity holders of the parent	33	1.37	41.02	(7)	(1.10)	(33.18)
Short-term fluctuations in investment return	(12)	(0.50)	(14.92)	-	-	-
Non-recurring items	9	0.37	11.19	-	-	-
Amortisation of acquired intangible assets	167	6.92	207.58	-	-	-
Tax credit on items excluded from operating profit/(loss)	(29)	(1.20)	(36.05)	-	-	-
Operating profit/(loss) after tax attributable to ordinary equity holders of the parent	168	6.96	208.82	(7)	(1.10)	(33.18)

 

 

	2009 Full year Earnings £m	2009 Full year Pence per share
		Pre share consolidation	Post share consolidation
Profit after tax attributable to ordinary equity holders of the parent	1,161	124.35	3,730.44
Short-term fluctuations in investment return	2	0.21	6.43
Non-recurring items	(1,190)	(127.45)	(3,823.63)
Amortisation of acquired intangible assets	69	7.39	221.71
Tax credit on items excluded from operating profit	(12)	(1.29)	(38.56)
Operating profit after tax attributable to ordinary equity holders of the parent	30	3.21	96.39

 

Diluted earnings per share from continuing operations

Dilutive factors comprise the expected impact of the Lombard management incentive scheme. Awards made under the Friends Provident Holdings executive long-term incentive plan introduced in March 2010 had no dilutive impact at 30 June 2010. There were no dilutive factors for the half year ended 30 June 2009 and as such the table below excludes the calculation for that period.

 

Half year ended 30 June 2010	Earnings	Pence per share
	£m	Pre share consolidation	Post share consolidation
Profit after tax attributable to ordinary equity holders of the parent	33	1.37	41.02
Dilution	-	(0.01)	(0.23)
Diluted profit after tax attributable to ordinary equity holders of the parent	33	1.36	40.79

 

 

Full year ended 31 Dec 2009	Earnings	Pence per share
	£m	Pre share consolidation	Post share consolidation
Profit after tax attributable to ordinary equity holders of the parent	1,161	124.35	3,730.44
Dilution	-	(0.22)	(6.42)
Diluted profit after tax attributable to ordinary equity holders of the parent	1,161	124.13	3,724.02

 

Weighted average number of ordinary shares

Before share consolidation

	2010 Half year		2009 Half year	2009 Full year
	Actual	Weighted	Actual/weighted	Actual	Weighted
Issued ordinary shares at beginning of period	2,412,451,145	2,412,451,145	660,000,000	660,000,000	660,000,000
Effect of ordinary shares issued	5,753,268	1,080,724	-	1,752,451,145	273,670,453
Ordinary shares at end of period	2,418,204,413	2,413,531,869	660,000,000	2,412,451,145	933,670,453
Dilutive shares		13,819,790			1,608,435
Total diluted shares		2,427,351,659			935,278,888

After share consolidation

	2010 Half year		2009 Half year	2009 Full year
	Actual	Weighted	Actual/weighted	Actual	Weighted
Issued ordinary shares at beginning of period	80,415,038	80,415,038	22,000,000	22,000,000	22,000,000
Effect of ordinary shares issued	191,776	36,024	-	58,415,038	9,122,348
Ordinary shares at end of period	80,606,814	80,451,062	22,000,000	80,415,038	31,122,348
Dilutive shares		460,660			53,615
Total diluted shares		80,911,722			31,175,963

 

6. Intangible assets

Movements in intangible assets were as follows:

Half year ended 30 June 2010	AVIF(i) £m	Other £m	Total £m
Cost
1 January 2010	2,938	382	3,320
Additions	-	2	2
Disposals	-	-	-
Foreign exchange adjustments	(50)	(13)	(63)
At 30 June 2010	2,888	371	3,259
Amortisation
At 1 January 2010	59	10	69
Amortisation charge	142	29	171
Foreign exchange adjustments	(3)	1	(2)
At 30 June 2010	198	40	238
Carrying amounts at 30 June 2010	2,690	331	3,021

(i) Acquired Value of In-Force business

Year ended 31 December 2009	AVIF £m	Other £m	Total £m
Cost
1 January 2009	-	-	-
Acquisition of Friends Provident	2,943	363	3,306
Other additions	-	19	19
Disposals	-	-	-
Foreign exchange adjustments	(5)	-	(5)
At 31 December 2009	2,938	382	3,320
Amortisation
At 1 January 2009	-	-	-
Amortisation charge from date of acquisition of Friends Provident	59	10	69
Foreign exchange adjustments	-	-	-
At 31 December 2009	59	10	69
Carrying amounts at 31 December 2009	2,879	372	3,251

 

The Group had no intangible assets at 30 June 2009.

 

An analysis of intangible assets by significant cash generating unit (CGU) is set out below:

	Cost	Amortisation	Net book value
30 June 2010	£m	£m	£m
UK (life and pensions including Sesame)	1,457	86	1,371
International (including FPI and AmLife Berhad)	1,056	76	980
Lombard	746	76	670
Total	3,259	238	3,021

(i) UK

 

An analysis of the intangible assets in respect of UK is as follows:

 

	Cost	Amortisation	Net book value
30 June 2010	£m	£m	£m
AVIF	1,304	71	1,233
Distribution relationships	111	11	100
Brand	28	3	25
Other	14	1	13
Total	1,457	86	1,371

(ii) International

 

An analysis of the intangible assets in respect of International is as follows:

 

	Cost	Amortisation	Net book value
30 June 2010	£m	£m	£m
AVIF	995	71	924
Distribution relationships	35	4	31
Brand	14	1	13
Other	12	-	12
Total	1,056	76	980

 

(iii) Lombard

An analysis of the intangible assets in respect of Lombard is as follows:

 

	Cost	Amortisation	Net book value
30 June 2010	£m	£m	£m
AVIF	589	56	533
Distribution relationships	130	15	115
Brand	12	-	12
Other	15	5	10
Total	746	76	670

 

 

7. Financial assets

The Group's financial assets are summarised by measurement category as follows:

	30 June 2010	30 June 2009	31 Dec 2009
	£m	£m	£m
Fair value through the income statement	49,041	-	48,235
Available-for-sale(i)	-	645	-
Loans at amortised cost(ii)	12	-	80
Total financial assets	49,053	645	48,315

 

(i) Invested cash held by the parent company, Resolution Limited, was classified as available-for-sale at 30 June 2009 but from 31 December 2009 qualified as cash equivalents.

(ii) Includes £nil due from the Friends Provident Pension Scheme (31 December 2009: £68 million).

 

a) Analysis of financial assets at fair value through the income statement

	With-profits	Unit-linked	Non-linked annuities	Other	Shareholder	30 Jun 2010 Total	31 Dec 2009 Total
	£m	£m	£m	£m	£m	£m	£m
Shares and other variable yield securities	2,351	28,526	-	222	7	31,106	30,372
Debt securities and other fixed-income securities:
- government securities	3,752	1,906	347	247	183	6,435	6,310
- corporate bonds	4,085	3,380	2,526	525	361	10,877	10,971
(including ABS)
Derivative financial instruments	278	8	-	4	(4)	286	181
Deposits with credit institutions	-	337	-	-	-	337	401
30 June 2010 total	10,466	34,157	2,873	998	547	49,041
31 December 2009 total	10,840	33,350	2,624	887	534		48,235

 

The above unit-linked column includes £602 million of financial assets (£122 million of shares and £480 million of corporate bonds) relating to the non-controlling interests in the OEICs that have been consolidated as the Group holding is not less than 50%.

For unit-linked funds, the policyholder bears the investment risk and any change in net asset value is matched by a broadly equivalent change in the liability.

Asset-backed securities (ABS) directly held by the UK life and pensions business (excluding those held by the linked funds) amount to £929 million, and 95% of these are at investment grade.

 

b) Creditworthiness of financial assets

The following table gives an indication of the level of creditworthiness of those categories of assets which are neither past due nor impaired and are most exposed to credit risk using principally ratings prescribed by Standard & Poor's and Moody's. Assets held within unit-linked funds have been excluded from the tables below as the credit risk on these assets is borne by the policyholders rather than the shareholders.

	AAA	AA	A	BBB	BB	B	Not rated	30 June 2010	31 Dec 2009 Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Corporate bonds	1,408	2,439	1,746	506	186	19	264	6,568	6,333
Asset-backed securities	246	262	222	148	5	3	43	929	1,167
Derivative financial instruments	-	-	278	-	-	-	-	278	173
Reinsurance assets	-	1,926	-	-	-	-	-	1,926	1,972
Deposits with credit institutions	-	-	-	-	-	-	-	-	26
Cash and cash equivalents	702	916	838	-	-	-	131	2,587	1,792
Total at 30 June 2010	2,356	5,543	3,084	654	191	22	438	12,288
%	19%	45%	25%	5%	2%	-	4%	100%
Total at 31 Dec 2009	2,884	4,539	2,700	535	90	291	424		11,463
%	25%	40%	23%	5%	1%	2%	4%		100%

 

c) Loans

	30 June 2010	31 Dec 2009
	£m	£m
Mortgage loans	3	3
Other loans	9	77
Total loans	12	80

Other loans include £nil due from the Friends Provident Pension Scheme (31 December 2009: £68 million). The fair value of loans is considered to be the same as their carrying value. The Group had no loans at 30 June 2009.

 

d) Unit-linked net assets

The amounts included in the balance sheet in respect of net assets held within unit-linked funds are as follows:

	30 June 2010	31 Dec 2009
	£m	£m
Investment properties	548	506
Shares and other variable yield securities	28,404	27,341
Debt securities and other fixed-income securities	4,806	5,042
Derivative financial instruments	8	8
Deposits with credit institutions	337	375
Other receivables	173	120
Cash and cash equivalents	2,527	3,126
Total assets	36,803	36,518
Other payables	(126)	(141)
Total unit-linked net assets	36,677	36,377

 

The impact of consolidating OEICs in which the Group has a holding in excess of 50% has been excluded from the above analysis of unit-linked net assets. The Group had no unit-linked net assets at 30 June 2009.

 

8. Loans and borrowings

The Group's loans and borrowings are as follows (there were no loans and borrowings as at 30 June 2009):

	Coupon %	30 June 2010	31 Dec 2009
		£m	£m
Subordinated liabilities
Lombard undated subordinated loans	Various	4	4
£162m FP Group plc subordinated debt due 2021	12.00	187	189
Debenture loans:
Box Hill Life Finance plc securitisation notes - class A-1 due 2016 (i)	3m LIBOR +0.20	-	15
Box Hill Life Finance plc securitisation notes - class A-2 due 2019 (i)	3m LIBOR +0.23	-	100
F&C Commercial Property Trust secured bonds due 2017 (ii)	5.23	-	219
Reinsurance:
Lombard financial reinsurance treaty	EURIBOR +2.12	20	27
Friends Provident financial reinsurance treaty	3m EURIBOR +1.75	2	4
Friends Provident financial reinsurance treaty (iii)	3m EURIBOR +3.35	10	-
Other:
Amounts owed to credit institutions (overdrafts)		59	32
Total loans and borrowings		282	590

 

(i) On 16 December 2004 Friends Provident Life and Pensions Limited (FPLP) raised £380 million of core regulatory capital in the form of floating rate secured notes through a securitisation of the cash flows expected to emerge from a book of life insurance policies. Sufficient surplus emerging at 31 December 2009 allowed the notes to be repaid in full on 15 April 2010.

(ii) Following the reduction in the Group's investment in the F&C Commercial Property Trust on 23 April 2010 the entity is no longer consolidated by the Group (see note 11). The retained holding is accounted for as a financial investment at fair value through the income statement.

(iii) On 30 June 2010, FPLP entered into a financial reinsurance agreement with Munich Reinsurance Company UK Life Branch (Munich Re). Munich Re has advanced €12.5 million (£10.2 million) to finance new German unit-linked pension business written since 1 January 2010.

9. Staff pension scheme

On an IAS 19 basis, a gross deficit of £10 million has been recognised in respect of the Friends Provident Pension Scheme (FPPS) at 30 June 2010 (gross surplus of £59 million at 31 December 2009). The last triennial actuarial valuation as at 30 September 2008 showed a deficit on a funding basis of £65 million. To meet the deficit, a revised funding agreement was entered into in June 2010 whereby deficit reduction contributions of £20 million per annum will be made over the next four years, commencing in July 2010. Under IFRIC 14, deficit reduction contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available after they are paid into the scheme, a liability is recognised when the obligation arises. An additional liability of £25 million has been recognised, reflecting a charge on authorised payments surplus in respect of any refund of the resultant IAS 19 surplus of £70 million (£80 million contributions less current deficit of £10 million). A deferred tax asset of £22 million has also been recognised to reflect tax relief at a rate of 28% that is expected to be available on the contributions, once paid into the scheme.

	30 June 2010	31 Dec 2009
	£m	£m
IAS 19 pension (deficit)/surplus	(10)	59
Authorised payments surplus charge at 35% of available surplus following deficit reduction contributions	(25)	(21)
Net pension (deficit)/surplus	(35)	38

 

Movement in IAS 19 pension (deficit)/surplus

	£m
Pension surplus at 1 January 2010	59
Service cost(i)	(7)
Interest cost (i)	3
Augmentations and termination benefits (i)	(3)
Contributions	12
Actuarial losses	(74)
Pension deficit at 30 June 2010 (excluding authorised payments surplus charge)	(10)
Deficit reduction contributions	80
Available surplus subject to authorised payments surplus charge	70

 

(i) Recognised in the condensed consolidated income statement

 

Analysis of net pension deficit and related deferred tax asset

	Pension liability	Deferred tax
	£m	£m
Gross IAS 19 pension deficit and related deferred tax asset	(10)	3
Irrecoverable element of deficit reduction contributions (authorised payments surplus charge on available surplus)	(25)	-
Reversal of deferred tax asset due to pension surplus arising	-	(3)
Tax relief available on deficit reduction contributions	-	22
Net pension deficit and related deferred tax asset	(35)	22

 

Amounts recognised in the condensed consolidated statement of comprehensive income

		£m
Actuarial losses		(74)
Reverse authorised payments surplus charge on opening surplus		21
Irrecoverable element of deficit reduction contributions (authorised payments surplus charge on available surplus)		(25)
Actuarial losses on defined benefit schemes		(78)
Taxation		24
Actuarial losses on defined benefit schemes after tax		(54)

 

Tax relief of £22 million available on deficit reduction contributions and £2 million in respect of other movements in the pension scheme are included in the aggregate tax line of the consolidated statement of comprehensive income.

 

10. Other reserves

Other reserves included in equity attributable to equity holders of the parent are as follows:

Half year ended 30 June 2010	Capital reserve	Retained earnings	Foreign currency translation reserve	Total
	£m	£m	£m	£m
At 1 January 2010	1	1,191	(5)	1,187
Profit for the period	-	33	-	33
Actuarial loss on defined benefit schemes (net of tax)	-	(54)	-	(54)
Tax relief on STICS interest	-	5	-	5
Foreign exchange adjustments (net of tax)	-	-	(37)	(37)
Share based payments	-	1	-	1
Dividends	-	(66)	-	(66)
At 30 June 2010	1	1,110	(42)	1,069

 

 

 

Half year ended 30 June 2009	Capital reserve	Retained earnings	Foreign currency  translation reserve	Total
	£m	£m	£m	£m
At 1 January 2009	1	(1)	-	-
Loss for the period	-	(7)	-	(7)
Loss on available-for-sale financial assets	(1)	-	-	(1)
At 30 June 2009	-	(8)	-	(8)

 

Year ended 31 December 2009	Capital reserve	Retained earnings	Foreign currency  translation reserve	Total
	£m	£m	£m	£m
At 1 January 2009	1	(1)	-	-
Profit for the period	-	1,161	-	1,161
Actuarial gain on defined benefit schemes	-	30	-	30
Tax relief on STICS interest	-	1	-	1
Foreign exchange adjustments	-	-	(5)	(5)
At 31 December 2009	1	1,191	(5)	1,187

 

 

 

11. Disposals of subsidiaries

a) Disposal of Pantheon Financial Limited

On 19 March 2010 the Group disposed of its entire holding in 100% of the share capital of Pantheon Financial Limited. Details of the transaction are as follows:

	£m
Assets and liabilities in disposal:
- Cash and cash equivalents	3
- Other net assets and liabilities	(3)
	-
Gain included in profit from continuing operations	-
Consideration received	-
Cash and cash equivalents in disposal	(3)
Cash flow from disposal of subsidiary, net of cash disposed	(3)

b) Reduction in holding in F&C Commercial Property Trust plc (F&C CPT)

On 23 April 2010 the Group reduced its holding in F&C CPT from 50.3% to 34.15%. The retained holding has been recognised as a financial asset at fair value through the income statement. Details of the transaction are as follows:

	£m
Assets and liabilities in disposal:
- Investment properties	767
- Financial assets	6
- Cash and cash equivalents	97
- Insurance and other receivables	(4)
- Interest-bearing loans and borrowings	(219)
- Insurance payables, other payables and deferred income	(23)
	624
Non-controlling interest in assets and liabilities in disposal	(310)
Fair value of investment retained	(214)
Gain included in profit from continuing operations	-
Consideration received (all cash)	100
Cash and cash equivalents in disposal	(97)
Cash flow from disposal of subsidiary, net of cash disposed	3

 

12. Related party transactions

Transactions made between the Group and related parties were made in the normal course of business. Loans from related parties are made on normal arm's length commercial terms.

The Company has entered into certain contracts with related parties as described below.

■ An operating agreement with Resolution Operations LLP (ROL), as a result of which the Company has outsourced most of its operating functions to ROL. This agreement has, subject to certain conditions, a minimum term of five years. Resolution Holdco No 1 LP pays the annual fee which is based on the value of the Company (subject to a minimum payment of £10 million) to ROL. An amount of £5 million has been included in administrative expenses in the financial statements in respect of amounts charged by ROL for the period. Trade creditors and other payables includes an amount of £1 million due to ROL at 30 June 2010;

■ RCAP Guernsey LP, a partnership in which the members of ROL are limited partners, acquired shares in the Company for a consideration of £20 million in the initial public offering. The Company has entered into a lock-up deed with RCAP GP Limited, acting in its capacity as general partner of RCAP Guernsey LP, restricting the sale of the shares acquired in the initial public offering, held by RCAP Guernsey LP for a period of three years. Following the Company's announcement of the proposed acquisition of AXA UK Life Business, a further £8 million was invested by RCAP Guernsey LP as part of the rights issue. The sale of these shares will not be restricted by the lock-up deed.

■ A Guernsey limited partnership agreement in relation to the limited partnership Resolution Holdco No 1 LP (RH1), in which the Company has a 99.99% interest, and of which it is both the general partner and a limited partner. The other limited partners in this partnership are RCAP Guernsey LP and RCAP Investments SARL. The Company has entered into the partnership agreement with these parties for the purpose of making acquisitions of financial services businesses. Resolution Limited is entitled to 100% of the profit of RH1 until its deployed equity capital (plus an agreed return) is returned to it. Thereafter, RCAP Guernsey LP and RCAP Investments SARL are entitled to 100% of the profit of RH1 until their deployed equity capital (plus an agreed return) is returned to them. After this point, the Company is entitled to 90% of the profit of RH1. The agreed return is the higher of 4% per annum and the annualised gross redemption yield on three-year UK gilts (calculated on the date on which Resolution Limited made its first equity capital contribution to RH1 and reset on the same basis on each three-year anniversary of such date). The current agreed return is 4% per annum. In accordance with the terms of the limited partnership agreement, the Company will make a further equity investment in RH1 in connection with the acquisition of the AXA UK Life Business by Friends Provident Holdings (UK) Limited announced on 24 June 2010, alongside RCAP Guernsey LP and RCAP Investments SARL.

■ A trade mark licence agreement with Resolution (Brands) Limited, a company wholly owned by Clive Cowdery, a shareholder of Resolution Capital Limited, under which Resolution Limited has paid a fee of £50,000 in respect of the six months ended 30 June 2010, with the fee increasing each year in line with any increase in the UK Retail Prices Index.

■ On 24 June 2010 the Company announced that it had agreed the terms of a recommended acquisition of AXA UK Life Business by Friends Provident Holdings (UK) Limited, a subsidiary undertaking of the Company. Under the acquisition agreements, the Company guarantees certain financial obligations of FPH.

■ In connection with the issue of deferred consideration notes by the Company to the seller of the AXA UK Life Business, a debt instrument whereby RH1 assumes a back-to-back indebtedness to the Company. While this agreement has been newly entered into for the purpose of the acquisition of the AXA UK Life Business by Friends Provident Holdings (UK) Limited, the debt between the Company and RH1 will be on normal commercial terms.

■ A letter of appointment for the provision of certain capital raising services to the Company by ROL in connection with the financing of the acquisition of the AXA UK Life Business. In consideration for these services the Company will pay ROL a fee of up to £4.5 million. The fee is no more than the usual commercial consideration payable to a third-party for provision of the same or substantially similar services.

 

13. Contingent liabilities

In the normal course of its business, the Group is subject to matters of litigation or dispute. While there can be no assurances, at this time the Directors believe, based on the information currently available to them, that it is not probable that the ultimate outcome of any of these matters will have a material adverse effect on the financial condition of the Group.

 

14. Post balance sheet events

a) Acquisition of the AXA UK Life Business

On 24 June 2010 the Company announced that it had agreed the terms of a recommended acquisition of the AXA UK Life Business by Friends Provident Holdings (UK) Limited, a subsidiary undertaking of the Company. Under the acquisition agreements, the Company guarantees certain financial obligations of FPH.

The acquisition is subject to a number of conditions, including regulatory consents, customary for a transaction of this nature.

The acquisition values the AXA UK Life Business at 31 December 2009, on a Resolution Group MCEV basis, at £3,446 million. 

The total consideration payable is up to £2,750 million, comprising:

■ £2,224 million to be paid in cash;

■ £26 million net (plus interest) to be paid in cash on completion of certain steps in an agreed post-completion reorganisation; and

■ Up to £500 million, consisting of deferred consideration notes.

The consideration will be reduced if less than £1,000 million of the AXA reattributed inherited estate is available for release in 2011. If none of the estate is available, the consideration will fall to £2,600 million. The consideration could also be increased by up to £50 million if the seller is required to inject further capital into the AXA UK Life Business for regulatory reasons prior to completion.

The acquisition is being financed by:

■ a fully underwritten rights issue of £2,055 million (gross), which successfully completed on 6 August 2010 when the new ordinary shares issued by the Company pursuant to the rights issue commenced trading on the London Stock Exchange;

■ a certain funds acquisition finance facility of £400 million where the borrower is Resolution Holdings (Guernsey) Limited; and

■ existing funds of the Group.

 

The Company has also undertaken a share consolidation to ensure that, following the rights issue, the number of shares in issue and the likely share price is appropriate for a company of its size in the UK market. The share consolidation was undertaken on the basis that shareholders received one consolidated ordinary share for every 30 existing ordinary shares held by them at the share consolidation record date. Following the share consolidation and the rights issue the issued share capital of the Company is 1,450,922,649 ordinary shares of nil par value.

Due to the value of the consideration payable in respect of the acquisition in relation to the aggregate market value of the existing ordinary shares, the acquisition is classified under the Listing Rules as a reverse takeover. Accordingly, following the announcement by the Company that it was in discussions relating to the acquisition, listing of the existing ordinary shares on the Official List and dealings in the existing ordinary shares on the London Stock Exchange were suspended on 14 June 2010. The listing of, and dealings in, the existing ordinary shares were restored at 8.00 am on 30 June, following publication of a prospectus in connection with the acquisition and the rights issue.

b) Interim dividend in respect of 2010

An interim dividend of 5.46 pence per new ordinary share (after the share consolidation and rights issue described in a) above) will be paid to shareholders on the register at the close of business on 8 September 2010 amounting in total to £79 million if all dividends were to be taken in cash.

 

 

 

Statement of directors' responsibilities in respect of the market consistent embedded value (MCEV) basis

The directors of Resolution Limited have chosen to prepare supplementary information in accordance with European Insurance CFO Forum (MCEV Principles), issued in October 2009. When compliance with the MCEV Principles is stated, those principles require the directors to prepare supplementary information in accordance with the methodology contained in the MCEV Principles and to disclose and explain any non-compliance in the guidance included in the MCEV Principles.

In preparing the MCEV supplementary information, the directors have:

■ done so in accordance with the MCEV Principles and fully complied with the guidance included therein;

■ determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently;

■ made estimates that are reasonable and consistent; and

■ described the basis on which business that is non-covered has been included in the supplementary information, including any material departures from the accounting framework applicable to the Group condensed consolidated IFRS financial statements.

 

By order of the Board

16 August 2010

 

Independent review report to the Directors of Resolution Limited

Introduction

We have been engaged by the Company to review the MCEV financial statements in the half-yearly financial report for the six months ended 30 June 2010 which comprise the Consolidated Income Statement - MCEV Basis, the Consolidated Statement of Comprehensive Income - MCEV Basis, the Consolidated Statement of Changes in Equity - MCEV Basis, the Consolidated Statement of Financial Position - MCEV Basis, the Group MCEV Analysis of Earnings and the related notes 1 to 12. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the MCEV financial statements.

We have reported separately on the condensed IFRS financial statements of Resolution Limited for the six months ended 30 June 2010. The information contained in the MCEV financial statements should be read in conjunction with the condensed set of financial statements prepared on an IFRS basis.

This report is made solely to the Company in accordance with guidance contained in International Standards 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 (ISRE 2410). 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 MCEV financial statements in the half-yearly financial report are the responsibility of, and have been, approved by, the directors. The directors are responsible for preparing the MCEV financial statements in the half-yearly financial report in accordance with the Basis of Preparation set out on pages 79 to 84.

Our responsibility

Our responsibilities, as independent auditors, in relation to the MCEV financial statements in the half-yearly financial report are set out in our engagement letter with you dated 25 January 2010. We report to you our opinion as to whether the MCEV set of financial statements in the half-yearly financial report have been properly prepared, in all material respects, in accordance with the Basis of Preparation set out on pages 79 to 84.

Scope of review

We conducted our review in accordance with ISRE 2410. 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 MCEV financial statements in the half-yearly financial report for the six months ended 30 June 2010 are not prepared, in all material respects, in accordance with the Basis of Preparation set out on pages 79 to 84.

Ernst & Young LLP

London

16 August 2010

Consolidated income statement - MCEV basis

For the half year ended 30 June 2010

				Resolution Limited	Resolution Limited	Resolution Limited		FPH	Restated FPG
				2010 Half year	2009 Half year	2009 Full year		2010 Half year	2009 Half year
			Notes	£m	£m	£m		£m	£m
Life and pensions
Value of new business			6	81	-	52		81	32
Expected existing business contribution				92	-	28		92	123
Operating experience variances				28	-	(25)		28	(35)
Operating assumption changes				-	-	1		-	2
Other operating variances				(2)	-	-		(2)	4
Development costs			9	(11)	-	(5)		(11)	(4)
Life and pensions covered business operating profit before tax			3	188	-	51		188	122
Other income and charges				-	-	3		-	(1)
					-
Life and pensions operating profit before tax				188	-	54		188	121
Corporate income and charges				(8)	(7)	(13)		-	-
Operating profit/(loss) before tax				180	(7)	41		188	121
Economic variances				16	-	40		16	(134)
Amortisation and impairment of non-covered business acquired intangible assets				(1)	-	(1)		(1)	(2)
Non-recurring items and non-operating variances				(9)	-	5		(3)	(50)
Profit /(loss) from continuing operations before tax				186	(7)	85		200	(65)
Tax on operating profit				(46)	-	(15)		(46)	(37)
Tax on other activities				8	-	1		8	53
Profit /(loss) from continuing operations after tax				148	(7)	71		162	(49)
Discontinued operations (net of tax)				-	-	-		-	(22)
Profit/(loss) for the period				148	(7)	71		162	(71)
Attributable to:
Equity holders of the parent				148	(7)	71		162	(67)
Non-controlling interests				-	-	-		-	(4)
Profit/(loss) for the period				148	(7)	71		162	(71)

 

 

Earnings per share - MCEV basis

				Resolution Limited		Resolution Limited	Resolution Limited
				2010 Half year		2009 Half year	2009 Full year
			Notes	pence		pence	pence
Earnings per share restated for 21 July 2010 share consolidation:
Operating earnings per share on MCEV basis after tax, attributable to equity holders of the parent
- Basic			4	166.56		(33.18)	83.54
- Diluted				165.61		(33.18)	83.40
Earnings per share on MCEV basis after tax, attributable to equity holders of the parent
- Basic			4	183.96		(33.18)	228.13
- Diluted			4	182.92		(33.18)	227.74
Earnings per share prior to restatement for 21 July 2010 share consolidation:
Operating earnings per share on MCEV basis after tax, attributable to equity holders of the parent
- Basic			4	5.55		(1.10)	2.78
- Diluted				5.52		(1.10)	2.78
Earnings per share on MCEV basis after tax, attributable to equity holders of the parent
- Basic			4	6.13		(1.10)	7.60
- Diluted			4	6.10		(1.10)	7.59

MCEV operating profit is from continuing operations and is based on expected investment return and excludes: (i) amortisation and impairment of non-covered business acquired intangible assets (ii) effect of economic variances (including the impact of economic assumption changes) (iii) significant non-recurring items; and is stated after deducting interest payable on STICS. 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 MCEV results.

Consolidated statement of comprehensive income - MCEV basis

For the half year ended 30 June 2010

		Resolution Limited	Resolution Limited	Resolution Limited	FPH	Restated FPG
		2010 Half year	2009 Half year	2009 Full year	2010 Half year	2009 Half year
		£m	£m	£m	£m	£m
Profit/(loss) for the period		148	(7)	71	162	(71)
- Actuarial gains/(losses) on defined benefit pension schemes net of tax		(54)	-	29	(54)	(94)
- Foreign exchange adjustments		(32)	-	(3)	(32)	(68)
- Loss on available-for-sale assets		-	(1)	-	-	-
Other comprehensive income/(loss) for the period, net of tax		(86)	(1)	26	(86)	(162)
Total comprehensive income/loss for the period		62	(8)	97	76	(233)
Attributable to:
Equity holders of the parent		62	(8)	97	76	(210)
Non-controlling interests		-	-	-	-	(23)

 

 

Consolidated statement of changes in equity - MCEV basis

For the half year ended 30 June 2010

		Resolution Limited	Resolution Limited	Resolution Limited	FPH	Restated FPG
		2010 Half year	2009 Half year	2009 Full year	2010 Half year	2009 Half year
		£m	£m	£m	£m	£m
Opening ordinary shareholders' equity		3,488	650	650	3,181	3,039
Acquired value of Friends Provident as at 4 November 2009		-	-	3,070	-	-
Cost of acquisition of Friends Provident		-	-	(2,012)	-	-
Transaction costs		-	-	(16)	-	-
Total comprehensive income/(expense) for the period		62	(8)	97	76	(210)
Issue of share capital		5	-	1,699	-	-
Dividends on equity shares		(66)	-	-	(65)	-
Share based payments (impact on MCEV reserves)		-	-	-	-	3
Increase/(decrease) in MCEV reserves for the period		1	(8)	2,838	11	(207)
Closing ordinary shareholders' equity		3,489	642	3,488	3,192	2,832

 

 

Consolidated statement of financial position - MCEV basis

At 30 June 2010

			Resolution Limited	Resolution Limited	Resolution Limited	FPH	FPH
			30 Jun 2010	30 Jun 2009	31 Dec 2009	30 Jun 2010	31 Dec 2009
		Notes	£m	£m	£m	£m	£m
Assets
Pension scheme surplus			-	-	38	-	38
Value of in-force covered business		7	1,895	-	1,916	1,895	1,916
Intangible assets			42	-	43	42	43
Property and equipment			45	-	47	45	47
Investment properties			857	-	1,546	857	1,546
Investment in associates and joint venture			25	-	22	25	22
Deferred tax assets			24	-	12	24	12
Financial assets			49,053	645	48,315	49,053	48,315
Reinsurance assets			1,926	-	1,972	1,926	1,972
Current tax assets			4	-	4	4	4
Insurance and other receivables			696	-	494	696	514
Cash and cash equivalents			5,260	-	5,386	4,955	5,073
Total assets			59,827	645	59,795	59,522	59,502
Liabilities
Insurance contracts			12,146	-	12,098	12,146	12,098
Unallocated surplus			275	-	295	275	295
Financial liabilities
- Investment contracts			40,197	-	39,848	40,197	39,848
- Loans and borrowings			629	-	917	629	917
- Amounts due to reinsurers			1,713	-	1,610	1,713	1,610
Net asset value attributable to unit holders			697	-	668	697	668
Provisions			56	-	72	56	72
Pension scheme deficit			35	-	-	35	-
Deferred tax liabilities			-	-	37	-	23
Current tax liabilities			19	-	15	19	15
Insurance payables, other payables and deferred income			567	3	450	559	478
Total liabilities			56,334	3	56,010	56,326	56,024
Equity attributable to:
Equity holders of the parent		7	3,489	642	3,488	3,192	3,181
Non-controlling interests			4	-	297	4	297
Total equity			3,493	642	3,785	3,196	3,478
Total equity and liabilities			59,827	645	59,795	59,522	59,502

 

 

 

 

 

 

Group MCEV analysis of earnings

For the half year ended 30 June 2010

Resolution Limited

			Resolution Limited	Resolution Limited	Resolution Limited
	Covered business	Non-covered business	2010 Half year Total business	2009 Half year Total business	2009 Full year Total business
	£m	£m	£m	£m	£m
Opening Group MCEV	3,028	460	3,488	650	650
Opening adjustments:
- Acquired/divested businesses
- Acquired value of Friends Provident	-	-	-	-	3,070
- Cost of acquisition	-	-	-	-	(2,012)
- Transaction costs	-	-	-	-	(16)
Adjusted opening Group MCEV	3,028	460	3,488	650	1,692
Operating MCEV earnings	142	(8)	134	(7)	26
Non-operating MCEV earnings	(30)	44	14	-	45
Total MCEV earnings	112	36	148	(7)	71
Other movements in IFRS net equity	-	(54)	(54)	(1)	29
Closing adjustments:
- Capital and dividend flows	(288)	227	(61)	-	1,699
- Foreign exchange variances	(34)	2	(32)	-	(3)
- Acquired/divested businesses	(1)	1	-	-	-
Closing Group MCEV	2,817	672	3,489	642	3,488

 

 

For the half year ended 30 June 2010

Friends Provident

		Covered business	Non-covered business	2010 Half year Total	Covered business	Non-covered business	2009 Half year Total
		£m	£m	£m	£m	£m	£m
Opening Group MCEV		3,028	153	3,181	2,495	544	3,039
Opening adjustments		-	-	-	-	-	-
Adjusted opening Group MCEV		3,028	153	3,181	2,495	544	3,039
Operating MCEV earnings		142	-	142	85	(1)	84
Non-operating MCEV earnings		(30)	50	20	(129)	(26)	(155)
Total MCEV earnings		112	50	162	(44)	(27)	(71)
Other movements in IFRS net equity		-	(54)	(54)	-	(94)	(94)
Closing adjustments:
- Capital and dividend flows		(288)	223	(65)	51	(25)	26
- Foreign exchange variances		(34)	2	(32)	(45)	(23)	(68)
- Acquired/ divested businesses		(1)	1	-	1	(1)	-
Closing Group MCEV		2,817	375	3,192	2,458	374	2,832

 

 

Notes to the MCEV results

 

1. Basis of preparation

Introduction

Resolution Limited is presenting the results and financial position for its life and pensions business on the market consistent embedded value (MCEV) basis and for its other businesses on the International Financial Reporting Standards (IFRS) basis. The MCEV basis is in compliance with the European Insurance CFO Forum MCEV Principles(i) (MCEV Principles), issued in June 2008, and re-issued in amended form in October 2009. The amendments in October 2009 primarily related to the allowance of an illiquidity premium on contracts with predictable cash flows.

Prior year comparatives for the Friends Provident results

The Group acquired Friends Provident on 4 November 2009 and so results for the half year to 30 June 2010 include the results of the Friends Provident business.

In order to provide comparability the results of Friends Provident Holdings (FPH) are shown as well as prior year results for the half year to 30 June 2009 for Friends Provident Group (FPG). FPG was the parent company of Friends Provident before its acquisition by Resolution.

Friends Provident's embedded value results for the half year to 30 June 2009 were presented under the CFO Forum's European Embedded Value Principles (EEV Principles) published in May 2004. Those results adopted a market consistent approach in all material aspects. 

At 31 December 2009 assumption and presentational changes were made to align with the updated MCEV Principles. Details of these changes are summarised below.

Reference rates

Under the MCEV Principles, the reference rate is based on the swap yield curve for liquid liabilities and on the swap yield curve plus an illiquidity premium for illiquid liabilities. Under the market consistent approach used by Friends Provident prior to 31 December 2009 the reference rate was based on the gilt yield curve with a nil allowance for an illiquidity premium. 

Following the re-issue of the updated MCEV Principles in October 2009, the Group reviewed its embedded value assumptions and elected to include an illiquidity premium for its UK immediate annuity business. The level of illiquidity premium included is 75bps for in-force annuity business at 30 June 2010 (31 December 2009: 75bps) and an average of 75bps for the value of new annuity business written during the first six months of 2010 (full year 2009: 100bps).

The impact of including an illiquidity premium on the value of annuity new business for the half year to 30 June 2009 is provided on page 96.

Further details of the illiquidity premium can be found in note 9.

Cost of residual non-hedgeable risks

The MCEV Principles require that an allowance is made for the cost of non-hedgeable risks not already allowed for elsewhere in the MCEV. Under the market consistent approach used by Friends Provident prior to 31 December 2009 the allowance for the cost of non-market risk was similar to the allowance for non-hedgeable risk under the MCEV Principles and the difference in costs under the two approaches was not significant.

 

(i) Copyright© Stichting CFO Forum Foundation 2008

Holding companies' operating expenses

Under the MCEV Principles, holding companies' operating expenses relating to the existing covered business are allocated to the expense assumptions for the covered business. Prior to 31 December 2009 Friends Provident held a provision for capitalised future costs in the corporate business segment. Since 31 December 2009 these costs are included in the life and pensions covered business and the 30 June 2009 comparatives have been adjusted to show the provision as a deduction from the value of in-force covered business.

Segmental analysis

Following the acquisition of Friends Provident and in line with IFRS 8: Operating segments, the Group reviewed its segmental analysis under IFRS and MCEV reporting bases. This review resulted in certain changes to the segmental analysis, which are described in note 11. 

Where material, comparative figures for the half year to 30 June 2009 have been amended to reflect the revised segmentation.

Application of IFRIC 14

At 31 December 2009 a review was undertaken of the application of IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', in the context of the Friends Provident Pension Scheme. In addressing the circumstances under which a pension surplus should be recognised it was concluded that the previous interpretation was not consistent with generally accepted practice and consequently the Friends Provident comparatives for previous reporting periods were restated.

The impact of the change in treatment is that the items set out below in respect of the first half of 2009, and reported in the Friends Provident accounts for that period, have been restated as follows:

(i) recognition of a net pension surplus of £2 million in the consolidated statement of financial position and a corresponding increase in other reserves; and

(ii) an increase of £(72) million in actuarial gains/(losses) on defined benefit schemes and related tax in the consolidated statement of comprehensive income.

The economic benefit available is recognised net of tax at a rate of 35%. The amendment to the 2009 comparative information has no impact on profit for the period.

MCEV methodology

Overview

The MCEV basis of reporting is designed to recognise profit as it is earned over the term of a life insurance policy. The total profit recognised over the lifetime of the policy is the same as that recognised under the IFRS basis of reporting, but the timing of recognition is different.

Covered business

Covered business comprises the following:

■ all life and pensions business written by Friends Provident's life insurance subsidiaries; and

■ Friends Provident's 30% share in AmLife Insurance Berhad, a Malaysian based life insurance business.

These businesses are collectively referred to as ‛life and pensions covered business'. 

The STICS and lower tier 2 subordinated debt are formally allocated to covered business on the basis that all obligations to make payments in respect of this debt are guaranteed by FPLP. The STICS and lower tier 2 subordinated debt are included within the MCEV at market value, based on listed bid price.

Non-covered business

The Group's non-covered business includes the IFA distribution businesses, the management services businesses, the net pension asset of Friends Provident Pension Scheme (FPPS) on an IAS 19 basis and the corporate net assets. Until the demerger of F&C in July 2009, Friends Provident non-covered business included asset management business.

Segmental reporting under MCEV

The covered business within Friends Provident has been split into the following segments in line with IFRS reporting:

■ UK, which includes the life and pensions businesses within the UK and the STICS and lower tier 2 subordinated debt;

■ International, which includes Friends Provident International Limited, the Overseas Life Assurance Business within the UK life and pensions subsidiaries and Friends Provident's share in AmLife; and

■ Lombard.

A reconciliation between the segmentation shown under MCEV and IFRS reporting is shown in note 11.

New business

New business within the life and pensions covered business includes:

■ premiums from the sale of new policies;

■ payments on recurring single premium policies, including Department for Work and Pensions rebate premiums, except existing stakeholder-style pensions business where, if a regular pattern in the receipt of premiums for individuals has been established, the regular payment is treated as a renewal of an existing policy and not new business;

■ non-contractual increments on existing policies; and

■ new entrants to existing schemes in the group pensions business.

The MCEV new business definition is consistent with the quarterly new business disclosures.

Calculation of embedded value

The MCEV provides an estimate of the value of shareholders' interest in the covered business, excluding any value that may be generated from future new business. The MCEV comprises the sum of the shareholders' net worth of the life and pensions covered business and the value of in-force covered business. The shareholders' net worth of the life and pensions covered business includes the listed debt of the STICS and lower tier 2 subordinated debt at market value.

The reported Group MCEV provides an estimate of the total consolidated MCEV of the Group and comprises the MCEV in respect of the life and pensions covered business, plus the IFRS net assets in respect of the non-covered business, excluding certain intangible assets relating to future new business.

 

a) Shareholders' net worth

The shareholders' net worth of the life and pensions covered business consists of free surplus and required capital. 

Free surplus is the market value of any assets allocated, but not required to support, the in-force covered business at the valuation date.

Required capital is the market value of assets, attributed to the covered business over and above that required to back liabilities for covered business, whose distribution to shareholders is restricted. The Group's required capital is set at the greater of regulatory capital and requirements arising from internal capital management policies, which include economic risk capital objectives. The economic risk capital is determined from internal models, based on the Group's risk appetite. The level of required capital is shown in note 9.

b) Value of in-force covered business (VIF)

The value of in-force covered business consists of:

■ present value of future profits; less

■ time value of financial options and guarantees;

■ frictional costs of required capital; and

■ cost of residual non-hedgeable risks.

Present value of future profits (PVFP)

The value of existing business is the present value of the future distributable profits available to shareholders from the in-force covered business. Future profits are projected using best estimate non-economic assumptions and market consistent economic assumptions.

The non-economic assumptions include: the behaviour of customers (eg persistency), mortality, the level of expenses required to maintain the book of business, tax and the regulatory environment. The assumptions are a reflection of best estimates of the likely behaviours, outcomes, or circumstances in the future. The estimates are made, typically, on an annual basis following experience investigations based on the data available at the time, both from the book of business and externally sourced information. The aim is to set assumptions at a level that reflects recent or current experience.

The economic assumptions are market consistent whereby, in principle, each cash flow is valued in line with the price of similar cash flows that are traded in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate, and a bond cash flow is valued using a bond risk discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate.

In practice, for liabilities where the payouts are either independent or move linearly with market movements, a method known as the 'certainty equivalent approach' has been applied whereby all assets are assumed to earn the reference rate and all cash flows are discounted using the reference rate. This gives the same result as applying the method in the previous paragraph.

Time value of financial options and guarantees (TVOG)

The PVFP is based on a single deterministic projection of future economic assumptions. However, a single projection does not fully reflect the potential for extreme events and the resulting impact of options and guarantees on the shareholder cash flows. While the PVFP allows for the intrinsic value of an option or guarantee under a single set of economic assumptions, it does not reflect the potential range of future economic scenarios on the shareholder cash flows. Stochastic modelling techniques are used to assess the impact of potential future economic scenarios on an option or guarantee and to determine the average value of shareholder cash flows under a number of market consistent scenarios. 

The TVOG is calculated as the difference between the average value of shareholder cash flows under a number of market consistent scenarios, and the intrinsic value under a single projection within the PVFP.

The material financial options and guarantees are those in the FPLP with-profits fund, in the form of the benefits guaranteed to policyholders and the guaranteed annuity rates associated with certain policies. The risk to shareholders is that the assets of the with-profits fund are insufficient to meet these guarantees. While shareholders are entitled to only a small share of profits in the with-profits fund (via one ninth of the cost of bonus), they can potentially be exposed to the full cost of fund assets being insufficient to meet policyholder guarantees. The TVOG has been assessed using a stochastic model derived from the current Realistic Balance Sheet (RBS) model. This model has been calibrated to market conditions at the valuation date. Allowance has been made under the different scenarios for management actions, such as altered investment strategy, consistent with the RBS model. The TVOG would be markedly higher without the hedging activities and management actions currently undertaken.

Only modest amounts of new with-profits business are written and the guarantee levels offered are lower, hence there is no material impact in respect of the TVOG on the value of new business.

Frictional costs of required capital

The value of in-force covered business includes a deduction for the additional costs to an investor of holding the assets backing required capital through investment in a life company, rather than investing in the asset directly. These additional frictional costs comprise taxation and investment expenses on the assets backing the required capital. 

The frictional costs of required capital are calculated as the difference between the market value of assets backing required capital and the present value of future releases of that capital allowing for future investment return (net of frictional costs) on that capital. The calculation allows for the run-off of the required capital over time using projections of the run-off of the underlying risks and regulatory requirements.

Details of the level of required capital are set out in note 9.

Cost of residual non-hedgeable risks (CNHR)

The main area of non-hedgeable risk relates to non-financial risks, such as insurance and operational risks, where no deep, liquid market exists to fully mitigate the risk. Allowance for non-financial risk is made directly within:

■ the PVFP via an appropriate choice of best estimate assumptions and with the impact of variability of the risk on the level, and hence cost, of required capital; and

■ the TVOG for the impact of variations of non-financial risks on the possibility of shareholders needing to meet the guarantees within the FPLP with-profits fund.

The CNHR covers those non-hedgeable risks not already allowed for fully in the PVFP or in the TVOG. The most significant of these risks are those for which the impact of fluctuations in experience is asymmetric; where adverse experience has a higher impact on shareholder value than favourable experience and the best estimate assumptions do not reflect this asymmetry. The areas identified as having the potential for material asymmetry are operational risk, persistency risk and reinsurance counterparty default risk.

The CNHR has been calculated by considering the financial cost to shareholders of the impact of asymmetric risks and with regard to the results of risk-based capital modelling. The risk-based capital is calculated using internal models, consistent with those used in the Group's Individual Capital Assessment, with:

■ a 99.5% confidence level over one year;

■ allowance for diversification between non-hedgeable risks;

■ no allowance for diversification between non-hedgeable and hedgeable risks; and

■ no allowance for diversification between covered and non-covered business.

 

The CNHR impacts both the value of existing business and new business. 

Participating business

Future regular bonuses on participating business are projected in a manner consistent with current bonus rates and expected future market consistent returns on assets deemed to back the policies.

Future terminal bonuses are assumed to be set at a level to exhaust all the assets deemed to back the policies over the future lifetime of the in-force with-profits policies.

The PVFP includes the shareholders' share of future profits from the FPLP with-profits fund, based on the assumed bonus rates.

There may be some extreme future economic scenarios in which total assets in the FPLP with-profits fund are not sufficient to pay all policyholder claims and the resulting shortfall would be met by shareholders. Stochastic modelling techniques are used to assess the impact of future economic scenarios on the with-profits funds' ability to pay all policyholder claims and to determine the average additional cost to shareholders arising from future projected shortfalls. This cost to shareholders has been included in the TVOG.

Consolidation adjustments

The effect of transactions and reinsurance arrangements between life insurance subsidiary companies has been included in the results split by segment in a consistent manner. No elimination is required on consolidation.

Goodwill and intangibles

Goodwill and intangible assets relating to the non-covered business are included on the IFRS basis. Intangible assets relating to the value of future new business, such as distribution relationships and brand value, have been excluded from the Group MCEV.

Exchange rates

The results and cash flows have been translated at the average exchange rates for the period and are recognised in the income statement. Foreign exchange differences arising from the translation of results from average exchange rates to period end rates are reported in the statement of comprehensive income.

The assets and liabilities have been translated at the period end rates and foreign exchange differences arising are reported in the statement of comprehensive income.

Details of the exchange rates used are shown in note 9.

 

2. Analysis of MCEV earnings

This section provides an analysis of the movement in the MCEV. 

The following tables show the movement in the MCEV of Resolution Limited for the half year ended 30 June 2010, and for the covered business for the half year ended 30 June 2009. All of the Group's covered business is wholly contained within Friends Provident. The analysis is shown separately for free surplus, required capital and the value of the in-force covered business. All figures are shown net of attributed tax.

Resolution Limited

For the half year ended 30 June 2010

	Covered business
	Free surplus	Required capital	VIF	MCEV	Non-covered business	Resolution Limited
Net of tax	£m	£m	£m	£m	£m	£m
Opening MCEV	286	826	1,916	3,028	460	3,488
Value of new business	(135)	21	177	63	-	63
Expected existing business contribution:
- Expected existing business contribution (reference rate)	(3)	3	11	11	-	11
- Expected existing business contribution (in excess of reference rate)	3	(3)	56	56	-	56
Transfers from VIF and required capital to free surplus	154	(10)	(144)	-	-	-
Experience variances	15	-	(2)	13	-	13
Operating assumption changes	-	-	-	-	-	-
Other operating variances	2	-	(3)	(1)	-	(1)
Corporate income and charges	-	-	-	-	(8)	(8)
Operating MCEV earnings	36	11	95	142	(8)	134
Economic variances	72	27	(75)	24	(2)	22
Other non-operating variances	(54)	-	-	(54)	46	(8)
Total MCEV earnings	54	38	20	112	36	148
Other movements in IFRS net equity	-	-	-	-	(54)	(54)
Closing adjustments:
- Capital and dividend flows	(288)	-	-	(288)	227	(61)
- Foreign exchange variances	10	(3)	(41)	(34)	2	(32)
- Acquired/divested businesses	(1)	-	-	(1)	1	-
Closing MCEV	61	861	1,895	2,817	672	3,489

 

Non-covered business includes the IFA distribution businesses, the management services businesses, the net pension asset of FPPS and the corporate net assets. Corporate net assets include assets held at FPH level and assets held by Resolution holding companies.

For the half year to 30 June 2010, Resolution holding companies contributed operating MCEV earnings of £(8) million, and non-operating MCEV earnings of £(6) million.

 

Friends Provident covered business

For the half year ended 30 June 2009

 

	Covered business
	Free surplus	Required capital	VIF	MCEV
Net of tax	£m	£m	£m	£m
Opening MCEV	(46)	907	1,634	2,495
Value of new business	(100)	9	115	24
Expected existing business contribution:
- Expected existing business contribution (reference rate)	(1)	20	37	56
- Expected existing business contribution (in excess of reference rate)	(4)	(10)	45	31
Transfers from VIF and required capital to free surplus	125	(6)	(119)	-
Experience variances	(19)	(12)	1	(30)
Operating assumption changes	1	-	-	1
Other operating variances	7	-	(4)	3
Operating MCEV earnings	9	1	75	85
Economic variances	15	(6)	(103)	(94)
Other non-operating variances	(35)	-	-	(35)
Total MCEV earnings	(11)	(5)	(28)	(44)
Closing adjustments:
- Capital and dividend flows	51	-	-	51
- Foreign exchange variances	11	(5)	(51)	(45)
- Acquired/divested businesses	1	-	-	1
Closing MCEV	6	897	1,555	2,458

 

Further details of the calculation and analysis of the value of new business are discussed in note 6.

The expected existing business contribution is the sum of two components:

■ the expected earnings over the period assuming the opening assets earn the beginning of period reference rate; and

■ the additional expected earnings (in excess of the beginning of period reference rate) consistent with management's expectation for the business.

The reference rate is based on the one year swap return plus, for UK immediate annuity business only, an illiquidity premium.

The additional earnings are the excess over the reference rate and reflect management's long-term expectation of asset returns, based on an assumed asset mix.

Detailed business commentary relating to the analysis of MCEV earnings is shown in note 3. Note 3 shows the analysis of MCEV earnings by business segment and on a gross of tax basis, with attributed tax shown separately. This presentation is consistent with the presentation of the IFRS results and the internal management reporting used to monitor the Group's MCEV earnings.

 

3. Segmental analysis of life and pensions MCEV earnings

The table below shows a further breakdown of the MCEV earnings for the life and pensions covered business. All of the Group's covered business is wholly contained within Friends Provident.

All earnings are shown on a gross of tax basis with attributed tax shown separately.

Life and pensions covered business

	FPH				FPG
	2010 Half year				2009 Half year
	UK	Int'l	Lombard	Total	UK	Int'l	Lombard	Total
Gross of tax	£m	£m	£m	£m	£m	£m	£m	£m
Value of new business	20	30	31	81	3	20	9	32
Expected existing business contribution	64	12	16	92	97	10	16	123
Operating experience variances	26	(3)	5	28	(29)	(2)	(4)	(35)
Operating assumption changes	-	-	-	-	-	2	-	2
Other operating variances	4	(6)	-	(2)	4	-	-	4
Development costs	(8)	(2)	(1)	(11)	(1)	(2)	(1)	(4)
Life and pensions covered business operating profit before tax	106	31	51	188	74	28	20	122
Economic variances	(12)	25	6	19	(77)	(65)	11	(131)
Other non-operating items	(70)	(6)	-	(76)	(48)	-	-	(48)
Life and pensions covered business profit/(loss) before tax	24	50	57	131	(51)	(37)	31	(57)
Attributed tax on operating profit	(32)	-	(14)	(46)	(24)	(7)	(6)	(37)
Attributed tax on other activities	27	2	(2)	27	35	18	(3)	50
Life and pensions covered business profit/(loss) after tax	19	52	41	112	(40)	(26)	22	(44)

 

UK

The life and pensions covered business operating profit before tax for the UK was £106 million in the period to 30 June 2010 (30 June 2009: £74 million).

Value of new business

Details and further analysis of the value of new business are set out in note 6.

Expected existing business contribution

The expected contribution on the value of in-force was £62 million (30 June 2009: £87 million) and the reduction is primarily a result of the narrowing of corporate bond spreads and also reflects the use of a one year swap return in line with MCEV Principles. It also includes an allowance of £6 million (30 June 2009: £nil) for the unwind of the cost of non-hedgeable risks from the in-force business.

The UK expected contribution on shareholders' net worth of £2 million (30 June 2009: £10 million) includes offsetting items for the expected income on shareholder investments, including the use of a one year best estimate return on fixed interest assets rather than a long-term average yield, and best estimate returns on debt instruments.

Operating experience variances

Operating experience variances relate to variances between actual experience and that anticipated in the projection assumptions. UK operating experience variances totalled £26 million (30 June 2009: £(29) million) and comprise the following items:

■ A £14 million benefit following the release of the final element of a prior years' tax provision offset by £(3) million from other tax variances. The prior years' tax provision has been held in the non-profit fund of FPLP to cover potential tax exposures arising on transactions undertaken by Friends Provident. In order to recognise that the potential crystallisation of such tax liabilities reduced with each subsequent year, a staggered release of the provision over the years 2006 to 2010 was undertaken. In the first half of 2009 a release of £14 million was included.

■ A benefit of £2 million comprising £4 million from actual expenses being lower than the long-term expense assumptions, and £(2) million from exceptional operating expenses.

■ A £5 million benefit from lower than assumed mortality on life protection business.

■ A £4 million benefit from an accumulation of small operational and processing variances.

■ £4 million of other small net positive variances.

Persistency levels are in line with expectations of a period of higher lapses compared with long-term assumptions given the current challenging economic environment. At 31 December 2009 a provision of £45 million (net of tax) was set up to cover short-term adverse persistency. At 30 June 2010 £13 million of this provision was used to meet the adverse variance over the first half of the year. 

Operating assumption changes

In line with previous interim results, there have been no operating assumption changes made in the period to 30 June 2010.

Other operating variances

Other operating variances of £4 million (30 June 2009: £4 million) include the effects of a number of small modelling improvements.

Development costs

The development costs in the period to 30 June 2010 of £8 million (30 June 2009: £1 million) relate principally to the development of the corporate investment platform and the development costs associated with the tied distribution arrangement with Tesco Bank.

International

The life and pensions operating profit for International was £31 million in the period to 30 June 2010 (30 June 2009: £28 million) the improvement being due principally to improved Value of New Business (VNB) resulting from increased sales volumes and controlled operational costs.

Value of new business

Details and further analysis of the value of new business are set out in note 6.

Existing business contribution

The expected contribution of £12 million (30 June 2009: £10 million) has increased as a result of growth in the value of in-force business over 2009 and subsequently higher opening value.

Operating experience variance

Operating experience variances of £(3) million (30 June 2009: £(2) million) comprise:

■ A £(5) million charge for adverse persistency. This principally represents the excess premium reductions experienced in the first half of the year over that provided for at the end of 2009. A recessionary provision of £6 million (net of tax) was set aside at 31 December 2009 to cover short-term adverse persistency. At 30 June 2010 £3 million of this provision has been used.

■ A £1 million benefit from actual expenses being lower than the long-term expense assumptions

■ A £2 million benefit from mortality experience

■ A number of other small variances totalling £(1) million.

Operating assumption changes

There have been no operating assumption changes in the period to 30 June 2010. In the period to 30 June 2009 there were £2 million of operating assumption changes relating to AmLife.

Other operating variances

Other operating variances of £(6) million (30 June 2009: £nil) relate predominantly to modelling improvements.

Development costs

Development costs of £2 million have been incurred in the period with the largest single element relating to development of German business.

Lombard

The life and pensions operating profit for Lombard was £51 million, up from £20 million in the same period in 2009. This improvement is largely a result of increased VNB which has been generated on the back of significantly higher sales volumes in the first half of 2010, against a flat cost base.

Value of new business

Details and further analysis of the value of new business are set out in note 6.

Existing business contribution

The expected existing business contribution of £16 million (30 June 2009: £16 million) is in line with the previous year.

Operating experience variances

Operating experience variances contribute £5 million which comprise a number of small positive variances including from expenses, mortality and the renegotiation of the third-party fees on some large policies.

Operating assumption changes

In line with previous interim results there have been no operating assumption changes made in the period to 30 June 2010.

Economic variances

Economic variances combine the impact of changes to economic assumptions with the investment return variances over the year. The total economic variances were £19 million (30 June 2009: £(131) million) and these comprised:

■ £(12) million within UK, where the principal impact was equity market falls reducing the value of future charges on unit-linked pensions business.

■ £25 million from International business where overall favourable movements in exchange rates increased the value of future unit-linked charges on US Dollar denominated funds.

■ £6 million from Lombard due mainly to exchange rate movements offset by economic assumption changes.

■ A number of small variances on non-covered business totalling £(3) million.

The £(131) million economic variance at 30 June 2009 was largely a result of falls in fixed interest and equity markets, interest rate rises and exchange rate movements, offset by a narrowing of credit spreads.

Other non-operating items

Total Other non-operating items of £(76) million (30 June 2009: £(48) million) relates to the cost recharged from the non-covered to the covered businesses of the scheduled additional pension scheme contributions over the next four years.

In the half year to 30 June 2009, the non-operating item of £(48) million related to the costs associated with the implementation of the strategic review within Friends Provident.

 

4. Earnings per share

Basic and operating earnings per share from continuing operations

Earnings per share have been calculated based on the MCEV profit after tax and on the operating profit after tax, attributable to ordinary equity holders of the parent and the weighted average number of shares in issue. The directors consider that operating earnings per share provides a better indication of operating performance.

As described in note 14 of the IFRS financial statements, in connection with the acquisition of the AXA UK Life Business, the Company undertook a rights issue and share consolidation after the end of the reporting period. The rights issue, as a post balance sheet event that results in a change in resources, has no impact on the earnings per share calculations at the half year. However, the 1 for 30 share consolidation is required under IAS 33: Earnings per share to be reflected in the earnings per share calculations. Accordingly, MCEV earnings per share information is presented on a pre and post share consolidation basis.

	2010 Half year Earnings £m	2010 Half year Pence per share		2009 Half year Earnings £m	2009 Half year Pence per share
		Pre share consolidation	Post share consolidation		Pre share consolidation	Post share consolidation
Profit/(loss) after tax attributable to ordinary equity holders of the parent	148	6.13	183.96	(7)	(1.10)	(33.18)
Economic variances	(16)	(0.66)	(19.89)	-	-	-
Amortisation of non-covered business acquired intangible assets	1	0.04	1.24	-	-	-
Non-recurring items and non operating variances	9	0.37	11.19	-	-	-
Tax credit on items excluded from operating profit/(loss)	(8)	(0.33)	(9.94)	-	-	-
Operating profit/(loss) after tax attributable to ordinary equity holders of the parent	134	5.55	166.56	(7)	(1.10)	(33.18)

 

 

	2009 Full year Earnings £m	2009 Full year Pence per share
		Pre share consolidation	Post share consolidation
Profit/(loss) after tax attributable to ordinary equity holders of the parent	71	7.60	228.13
Economic variances	(40)	(4.28)	(128.53)
Amortisation of non-covered business acquired intangible assets	1	0.11	3.21
Non-recurring items and non-operating variances	(5)	(0.54)	(16.06)
Tax credit on items excluded from operating profit/(loss)	(1)	(0.11)	(3.21)
Operating profit after tax attributable to ordinary equity holders of the parent	26	2.78	83.54

 

Diluted earnings per share from continuing operations

Dilutive factors comprise the expected impact of the Lombard management incentive scheme. Awards made under the Friends Provident Holdings executive long-term incentive plan introduced in March 2010 had no dilutive impact at 30 June 2010. There were no dilutive factors for the half year ended 30 June 2009 and as such the table below excludes the calculation for that period.

 

Half year ended 30 June 2010	Earnings	Pence per share
	£m	Pre share consolidation	Post share consolidation
Profit after tax attributable to ordinary equity holders of the parent	148	6.13	183.96
Dilution	-	(0.03)	(1.04)
Diluted profit after tax attributable to ordinary equity holders of the parent	148	6.10	182.92

 

 

Full year ended 31 Dec 2009	Earnings	Pence per share
	£m	Pre share consolidation	Post share consolidation
Profit after tax attributable to ordinary equity holders of the parent	71	7.60	228.13
Dilution	-	(0.01)	(0.39)
Diluted profit after tax attributable to ordinary equity holders of the parent	71	7.59	227.74

 

Weighted average number of ordinary shares

Before share consolidation

	2010 Half year		2009 Half year	2009 Full year
	Actual	Weighted	Actual/weighted	Actual	Weighted
Issued ordinary shares at beginning of period	2,412,451,145	2,412,451,145	660,000,000	660,000,000	660,000,000
Effect of ordinary shares issued	5,753,268	1,080,724	-	1,752,451,145	273,670,453
Ordinary shares at end of period	2,418,204,413	2,413,531,869	660,000,000	2,412,451,145	933,670,453
Dilutive shares	-	13,819,790	-	-	1,608,435
Total diluted shares		2,427,351,659			935,278,888

After share consolidation

	2010 Half year		2009 Half year	2009 Full year
	Actual	Weighted	Actual/weighted	Actual	Weighted
Issued ordinary shares at beginning of period	80,415,038	80,415,038	22,000,000	22,000,000	22,000,000
Effect of ordinary shares issued	191,776	36,024	-	58,415,038	9,122,348
Ordinary shares at end of period	80,606,814	80,451,062	22,000,000	80,415,038	31,122,348
Dilutive shares	-	460,660	-	-	53,615
Total diluted shares		80,911,722			31,175,963

 

5. Reconciliation of equity attributable to ordinary shareholders

Ordinary shareholders' equity on a MCEV basis reconciles to equity attributable to ordinary shareholders on an IFRS basis as follows:

	Resolution Limited	Resolution Limited	Resolution Limited	FPH	FPG
	30 Jun  2010	30 Jun  2009	31 Dec 2009	30 Jun 2010	30 Jun 2009
	£m	£m	£m	£m	£m
Equity attributable to ordinary shareholders on an IFRS basis	3,423	642	3,536	3,126	2,298
Less items only included on an IFRS basis:
- IFRS reserving and other IFRS adjustments	603	-	485	603	585
- deferred front end fees	14	-	8	14	116
- deferred acquisition costs	(180)	-	(46)	(180)	(1,215)
- acquired PVIF (net of tax)	(2,141)	-	(2,285)	(2,141)	(234)
- other intangible assets (net of tax)	(216)	-	(244)	(216)	(63)
- goodwill on covered business	-	-	-	-	(379)
Add items only included on a MCEV basis:
Adjustment for long-term debt to market value (net of tax)	91	-	118	91	169
Net worth on a MCEV basis	1,594	642	1,572	1,297	1,277
- Value of in-force covered business	1,895	-	1,916	1,895	1,555
Equity attributable to ordinary shareholders on a MCEV basis	3,489	642	3,488	3,192	2,832

 

6. New business

The tables below set out the analysis of new business in terms of volumes and profitability.

New business volumes have been shown using two measures:

■ Present Value of New Business Premiums (PVNBP). PVNBP is equal to the total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the lifetime of new contracts, and is expressed at point of sale.

■ Annual Premium Equivalent (APE). APE is calculated as the new regular premium per annum plus 10% of single premiums.

The MCEV new business definition is consistent with the quarterly new business disclosures.

The premium volumes and projection assumptions used to calculate the present value of regular premiums within PVNBP are the same as those used to calculate the value of new business.

The value of new business is calculated using economic assumptions at the beginning of the period for all products except immediate annuities. For annuity business, as the contribution is sensitive to the interest rate at outset, the appropriate rate for each month's new business is used. The value of new business for annuities has been valued assuming an average illiquidity premium of 75 bps for the half year ended 30 June 2010 (30 June 2009: nil; 31 December 2009: 100 bps).

The value of new business is calculated using operating assumptions at the end of period for all products. The operating assumptions are consistent with those used to determine the embedded value.

The value of new business is shown after the effects of the frictional costs of holding required capital and share based payments, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.

 

 

Friends Provident new business value for the half year ended 30 June 2010

	New business premiums		APE	Average annual premium multiplier (i)	PVNBP	Post-tax Value of new business	Pre-tax Value of new business	New business margin (ii)
	Single	Regular
	£m	£m	£m		£m	£m	£m	%
UK corporate
- Group pensions	120	140	152	4.0	676	3	4	0.6
- Group protection	-	2	2	5.9	15	-	-	(2.0)
UK individual
- Individual protection	-	18	18	5.8	105	(3)	(4)	(4.2)
- Individual pensions	116	4	15	3.7	128	4	6	4.7
Annuities	135	-	14	-	135	11	15	11.3
Investments	17	-	2	-	17	(1)	(1)	(4.9)
UK total	388	164	203	4.2	1,076	14	20	1.8
International	232	97	120	4.8	696	27	30	4.3
Lombard	1,348	-	135	-	1,348	22	31	2.3
Non-UK total	1,580	97	255	4.8	2,044	49	61	3.0
Total	1,968	261	458	4.4	3,120	63	81	2.6

 

(i) Defined as (PVNBP less total amount of single premiums)/ (total annualised amount of regular premiums)

(ii) Defined as (pre-tax VNB)/ PVNBP

 

Friends Provident new business value for the half year ended 30 June 2009

	New business premiums		APE	Average annual premium multiplier (i)	PVNBP	Post-tax value of new business	Pre-tax value of new business	New business margin(ii)
	Single	Regular
	£m	£m	£m		£m	£m	£m	%
UK corporate
- Group pensions	125	128	140	4.1	652	(1)	(1)	(0.1)
- Group protection	-	4	4	3.5	14	-	-	-
UK individual
- Individual protection	-	20	20	6.3	125	1	1	0.8
- Individual pensions	99	3	13	3.8	110	4	5	4.5
Annuities	125	-	13	-	125	(1)	(1)	(0.8)
Investments	12	-	1	-	13	(1)	(1)	(7.7)
UK total	361	155	191	4.4	1,039	2	3	0.3
International	124	72	84	5.3	504	15	20	4.0
Lombard	466	-	47	-	466	6	9	1.9
Non-UK total	590	72	131	5.3	970	21	29	3.0
Total	951	227	322	4.7	2,009	23	32	1.6

 

(i) Defined as (PVNBP less total amount of single premiums) / (total annualised amount of regular premiums)

(ii) Defined as (pre-tax VNB)/PVNBP

The value of new business for annuities has been valued assuming an average illiquidity premium of 75bps for the half year ended 30 June 2010 (30 June 2009: nil; 31 December 2009: 100 bps). The pre-tax value of new business for annuities assuming an average 100 bps illiquidity premium over the first half of 2009 would have been £11 million.

UK

UK sales of £203 million APE are up 6% period on period (30 June 2009: £191 million), with VNB and PVNBP margins improving on the previous year, driven mainly by annuity and group pensions business.

The market for group pensions remains challenging with levels of incremental business remaining depressed in the current UK economic climate. The value of new group pensions business grew to £4 million from £(1) million period on period as a result of reduced levels of acquisition costs. Sales volumes of £152 million APE were up 9% period on period (30 June 2009: £140 million).

Individual protection sales for the period of £18 million APE are down 10% on those seen in the first half of 2009. The protection market is still subdued and reflects the poor economic conditions and low housing sales volumes and this situation is not expected to improve in the near term.

Annuity VNB is significantly higher at £15 million (30 June 2009: £(1) million) following the changes to illiquidity assumptions and an improvement in annuity market conditions resulting in improved margin levels. Sales of £14 million APE in the period to 30 June 2010 are up 8% on the same period in 2009. Volumes prior to April were noticeably higher with a larger number of people looking to retire ahead of the change in minimum retirement age from 50 to 55, which took effect from 5 April 2010.

International

The VNB for International has increased by £10 million to £30 million period on period with acquisition expense levels being maintained while sales volumes have increased.

The International segment has continued to show an upward trend in period on period sales. Sales to 30 June 2010 were £120 million on an APE basis, up 43% on 30 June 2009 (£84 million). The business has benefited from improving economic activity in the majority of markets with strong growth in Asia. In this market, Singapore sales have doubled on 2009, whilst Hong Kong sales are returning to levels last seen in early 2008.

Development of FPI's bank assurance relationships continues, supported by the distribution agreements with ANZ Private Bank and ANZ Signature Banking in Singapore.

In Europe, the acquisition of Financial Partners Business AG (fpb), the distribution partner in Germany, in December 2009 has continued to strengthen Friends Providents' position in that IFA market and despite difficult economic conditions fpb has successfully grown sales volumes by 19% to £9 million (30 June 2009: £8 million).

The share of AmLife VNB improved from £2 million to £3 million period on period whilst APE sales volumes grew by 74%. This business, the majority of which is owned by AmBank Berhad, has continued to perform strongly in the period with the agency and bancassurance sales channels performing well.

Lombard

Lombard VNB has increased by 244% in the period with sales volumes up by 187% and the cost base flat. In APE terms, sales were £135 million against £47 million for the same period of last year.

Lombard historically writes the majority of its new business in the last quarter of the calendar year as a consequence of many European States' tax year ending on 31 December. Following the record sales in the last quarter of 2010 Lombard's focus in 2010 is on spreading this historical peak in sales across the year. The increased sales volumes to date in 2010 are a direct result of this action, supported by the improved economic environment and client confidence compared to the same period of 2009.

The Lombard business has seen strong growth in the majority of its markets especially in Belgium, Italy, UK and Germany.

New business key performance metrics

New business written requires an initial capital investment to meet the set-up costs and capital requirements.

The internal rate of return (IRR) provides a measure of the return to shareholders on this initial capital investment. It is equivalent to the discount rate at which the present value of the after-tax cash flows expected to be earned over the lifetime of the business written is equal to the initial capital invested, including setting aside the required capital to support the writing of the business.

The cash payback on new business is the time elapsed until the total of expected (undiscounted) cash flows is sufficient to recoup the initial capital invested, including the release of the required capital, to support the writing of new business.

The value of new business is shown after the effects of the frictional costs of holding required capital, and after the effect of the costs of residual non-hedgeable risks on the same basis as for the in-force covered business.

New business key performance metrics

	For the half year ended 30 June 2010			For the half year ended 30 June 2009
	Pre-tax value of new business	IRR on new business	Cash payback on new business	Pre-tax value of new business	IRR on new business	Cash payback on new business
	£m	%	yrs	£m	%	yrs
UK corporate
- Group pensions	4	8.2	13	(1)	6.0	15
- Group protection	-	4.0	17	-	1.1	15
UK individual
- Individual protection	(4)	2.1	19	1	4.3	14
- Individual pensions	6	45.6	3	5	19.9	6
Annuities	15	n/a	n/a	(1)	n/a	n/a
Investments	(1)	(0.7)	n/a	(1)	n/a	n/a
UK total	20	10.8	10	3	9.9	10
International	30	18.3	5	20	14.5	5
Lombard	31	23.1	5	9	10.0	8
Non-UK total	61	20.0	5	29	12.3	6
Total	81	15.1	7	32	10.7	9

 

The Group is achieving an IRR of 15% on new business, up from 11% in 2009 and the overall cash payback term has reduced from 9 years to 7 years. This reflects the increased proportion of higher- margin sales from International and Lombard.

7. Segmental analysis of Group MCEV

Resolution Limited half year ended 30 June 2010

	30 June 2010									31 December 2009
	Free surplus	Required capital	Total net worth	PVFP	TVOG	Frictional costs	CNHR	Total VIF	Total	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK	638	788	1,426	1,116	(33)	(67)	(64)	952	2,378	2,618
International	50	33	83	482	-	(1)	(27)	454	537	475
Lombard	(86)	40	(46)	519	-	(7)	(23)	489	443	440
Gross MCEV L&P covered businesses	602	861	1,463	2,117	(33)	(75)	(114)	1,895	3,358	3,533
STICS	(344)	-	(344)	-	-	-	-	-	(344)	(318)
Lower tier 2 subordinated debt	(197)	-	(197)	-	-	-	-	-	(197)	(187)
Net MCEV of L&P covered business	61	861	922	2,117	(33)	(75)	(114)	1,895	2,817	3,028
IFA and distribution	19	-	19	-	-	-	-	-	19	33
Management services	42	-	42	-	-	-	-	-	42	(1)
Holding company net assets	314	-	314	-	-	-	-	-	314	121
Net MCEV of FPH	436	861	1,297	2,117	(33)	(75)	(114)	1,895	3,192	3,181
Resolution Limited net assets	297	-	297	-	-	-	-	-	297	307
Net Group MCEV of Resolution Limited attributable to equity holders of parent	733	861	1,594	2,117	(33)	(75)	(114)	1,895	3,489	3,488

 

a) Net worth

The STICS and lower tier 2 subordinated debt are included within the MCEV at market value, as detailed in note 9.

b) Present Value of Future Profits (PVFP)

The PVFP includes a deduction of £32 million from the UK (31 December 2009: £64 million) and £3 million (31 December 2009: £6 million) from International, as a provision against worsening 2010 persistency experience arising from recessionary conditions.

c) Time Value of financial Options and Guarantees (TVOG)

The TVOG at 30 June 2010 of £33 million (31 December 2009: £41 million), is split £15 million (31 December 2009: £14 million) market risk and £18 million (31 December 2009: £27 million) non-market risk. The non-market risks include lapses, annuitant longevity and operational risk within the FPLP with-profits fund. The allowance for non-market risks is made by considering the impact of extreme scenarios from the Group's economic capital model.

d) Frictional costs of holding required capital

The projected required capital is derived from the Group's capital management policy which is to hold the greater of 150% of the EU minimum required margin and 125% of the Individual Capital Assessment. At 30 June 2009 the required capital was set at 100% of the EU minimum required margin plus £400 million.

e) Cost of residual non-hedgeable risks (CNHR)

The cost of residual non-hedgeable risk of £114 million (31 December 2009: £113 million) is presented as an equivalent annual cost of capital charge of 2% on projected risk-based Group required capital for all non-hedgeable risk. In line with management's view of the business, no allowance has been made for diversification benefits within the non-hedgeable risks of the covered business.

 

8. Segmental analysis of Group MCEV earnings

The tables below show a further breakdown of the Group MCEV earnings for each of Resolution Limited and Friends Provident respectively, comprising the MCEV earnings for the life and pensions covered business and the IFRS earnings for the respective non-covered businesses.

All figures are shown net of attributed tax.

Resolution Limited

For the half year ended 30 June 2010

	Covered business			Non-covered business	Resolution Limited 2010 Half year Total business	Resolution Limited 2009 Half year  Total business	Resolution Limited  2009 Full year Total business
	UK	Int'l	Lombard
	£m	£m	£m	£m	£m	£m	£m
Opening Group MCEV	2,113	475	440	460	3,488	650	650
Opening adjustments:
- Acquired value of Friends Provident	-	-	-	-	-	-	3,070
- Cost of acquisition	-	-	-	-	-	-	(2,012)
- Transaction costs	-	-	-	-	-	-	(16)
Adjusted opening Group MCEV	2,113	475	440	460	3,488	650	1,692
Operating MCEV earnings	74	31	37	(8)	134	(7)	26
Non-operating MCEV earnings	(55)	21	4	44	14	-	45
Total MCEV earnings	19	52	41	36	148	(7)	71
Other movements in IFRS net equity	-	-	-	(54)	(54)	(1)	29
Closing adjustments:
- Capital and dividend flows	(295)	7	-	227	(61)	-	1,699
- Foreign exchange variances	-	3	(37)	2	(32)	-	(3)
- Acquired/divested businesses	-	-	(1)	1	-	-	-
Closing Group MCEV	1,837	537	443	672	3,489	642	3,488

 

 

Friends Provident

 

	FPH Half Year to 30 June 2010					FPG Half Year to 30 June 2009
	Covered business			Non-covered business		Covered business			Non-covered business
	UK	Int'l	Lombard		Total	UK	Int'l	Lombard		Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening Group MCEV	2,113	475	440	153	3,181	1,751	363	381	544	3,039
Operating MCEV earnings	74	31	37	-	142	50	21	14	(1)	84
Non-operating MCEV earnings	(55)	21	4	50	20	(90)	(47)	8	(26)	(155)
Total MCEV earnings	19	52	41	50	162	(40)	(26)	22	(27)	(71)
Other movements in IFRS net equity	-	-	-	(54)	(54)	-	-	-	(94)	(94)
Closing adjustments:
- Capital and dividend flows	(295)	7	-	223	(65)	41	7	3	(25)	26
- Foreign exchange variances	-	3	(37)	2	(32)	-	(1)	(44)	(23)	(68)
- Acquired/divested businesses	-	-	(1)	1	-	-	-	1	(1)	-
Closing Group MCEV	1,837	537	443	375	3,192	1,752	343	363	374	2,832

 

 

9. MCEV Assumptions

9.1 Economic assumptions - deterministic calculations

Economic assumptions are derived actively, based on market yields on risk free fixed interest assets at the end of each reporting period.

Reference rates - risk free

The risk free reference rates for 31 December 2009 and 30 June 2010 have been determined with reference to the swap yield curve appropriate to the currency of the cash flows.

For annuity business the swap yield curve is extrapolated where necessary to provide rates appropriate to the duration of the liabilities.

The risk free reference rates used for 30 June 2009 were determined with reference to the gilt yield curve appropriate to the currency of the cash flows.

		Reference rate - risk free
		30 June 2010	30 June 2009	31 December 2009
UK
Non-annuity business		3.50%	4.10%	4.30%
Annuity business
- Term 1 year		1.14%	0.88%	1.01%
- Term 5 years		2.50%	2.74%	3.48%
- Term 10 years		3.54%	3.47%	4.26%
- Term 15 years		3.99%	3.92%	4.59%
- Term 20 years		4.07%	4.15%	4.54%
International		3.50%	4.10%	4.30%
Lombard		3.00%	4.60%	3.72%

 

Reference rate - Illiquidity premium adjustment

The updated MCEV Principles recognise that the inclusion of an illiquidity premium within the reference rate is appropriate where the liabilities are not liquid.

In this regard, the methodology adopted for the valuation of immediate annuities in the UK uses a reference rate that has been increased above the swap yield curve to allow for an illiquidity premium. This reflects the fact that, for these products, the backing asset portfolio can be held to maturity and earns risk-free returns in excess of swaps. Any illiquidity premia in respect of assets backing other product types are recognised within the MCEV as and when they are earned.

The illiquidity premium has been evaluated by considering a number of different sources of information and methodologies. There are two main approaches being commonly used to determine the illiquidity premium within the life insurance industry:

■ a 'negative basis trade', which attributes a component of the difference between the spread on a corporate bond and a credit default swap (for the same issuing entity, maturity, seniority and currency) as being the illiquidity premium; and

■ structural models - such as that used by the Bank of England in their analysis of corporate bond spreads - that use option pricing techniques to decompose the spread into its constituent parts including default risk, credit-risk premium and a residual illiquidity premium.

Both of these methods have been used to help inform the extent of the illiquidity premium within the asset portfolios backing immediate annuity business.

No illiquidity premium has been applied for any other covered business.

The reference rate has been adjusted for immediate annuities as set out in the table below.

 

	Illiquidity premium adjustment p.a.
	Embedded value				New business
	30 June 2010	30 June 2009	31 December 2009		2010 Half year	2009 Half Year	2009 Full year
UK immediate annuities	75 bps	0bps	75bps		75 bps	0bps	100bps

 

Expected asset returns in excess of reference rates

Margins are added to the reference rates to obtain investment return assumptions for equity, property and corporate bonds. These risk premia reflect management's long-term expectations of asset returns in excess of the reference rate from investing in different asset classes. No risk premia are added for cash or government bonds.

As a market consistent approach has been followed, these investment return assumptions affect the expected existing business contribution and the economic variances within the analysis of MCEV earnings, but do not affect the opening or closing embedded values. In addition, they will affect the additional disclosures of the implied discount rates and payback periods.

For equities and property, the long-term rate of return is derived using a ten year swap rate plus a risk premium of 3% p.a. for equities (30 June 2009: 3% p.a.; 31 December 2009: 3% p.a.) and 2% p.a. for property (30 June 2009: 2% p.a.; 31 December 2009: 2% p.a.). 

For corporate bonds, the return is based on the excess of actual corporate bond spreads on the reporting date, less an allowance for defaults, over the one year reference rate.

Expense inflation

Maintenance expenses for UK and International business (excluding Lombard) are assumed to increase in the future at a rate of 1% p.a. in excess of the assumed long-term rate of inflation. This is derived from the difference between the risk-free rate of return based on FT Actuaries 15 year gilt index and the average of the FTSE Actuaries over five-year index-linked gilt yield at 5% and 0% inflation.

Maintenance expenses for Lombard are assumed to increase in the future at a rate of 0.75% p.a. in excess of the assumed long-term rate of inflation. This is derived from an inflation swap curve based on a Euro-zone price index taking into account the run-off profile of the business.

	Expense inflation p.a.
	30 June 2010	30 June 2009	31 December  2009
UK	4.2%	4.2%	4.7%
International	4.2%	4.2%	4.7%
Lombard	3.0%	3.3%	3.3%

 

Required capital

Required capital under MCEV amounted to £861 million (30 June 2009: £897 million; 31 December 2009: £826 million).The projected required capital is derived from the Group's capital management policy which is to hold the greater of 150% of the EU minimum required margin and 125% of the Individual Capital Assessment and any Individual Capital Guidance. At 30 June 2009 the required capital was equivalent to 100% of the EU minimum capital requirement plus £400 million.

 

Taxation

The opening and closing embedded values in respect of covered business are determined on an after tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. The attributable tax charge and profit before tax are derived by grossing up the profit after tax at the appropriate tax rates for each of the UK, Isle of Man, Luxembourg and Malaysia. Deferred tax is provided on the mark-to-market revaluation of the STICS and lower tier 2 subordinated debt allocated to the life and pensions covered business. 

For non-covered business, attributed tax is consistent with the IFRS financial statements.

		Tax rates
	30 June 2010	30 June 2009	31 December  2009
UK	28.0%	28.0%	28.0%
International
- OLAB (UK)	28.0%	28.0%	28.0%
- FPIL (Isle of Man)	0.0%	28.0%	0.0%
- AmLife (Malaysia)	25.0%	25.0%	25.0%
Lombard	28.6%	28.6%	28.6%

For the Isle of Man business, it is assumed that all distributable profits will be remitted as dividends to the UK. Following the enactment of the Finance Act 2009 in July 2009, the assumed tax rate relating to Isle of Man business was reduced to 0% (30 June 2009: 28%; 31 December 2009: 0%).

No changes have been made to taxation assumptions as a result of the Emergency Budget in June 2010. The overall impact of the proposed future changes to VAT and Corporation Tax on the MCEV is expected to be immaterial.

Exchange rates

The results and cash flows of all businesses, except Lombard and AmLife, are calculated in Sterling. The results and cash flows for Lombard are calculated in Euros, and those of AmLife in Malaysian Ringgits, and converted to Sterling at the following rates:

	Exchange rates
	30 June  2010	30 June  2009	31 December  2009
Closing Exchange Rate
- Euro	£0.819	£0.852	£0.888
- Malaysian Ringgit	£0.206	£0.172	£0.180
Average Exchange Rate
- Euro	£0.868	£0.900	£0.896
- Malaysian Ringgit	£0.192	£0.188	£0.189

 

 

 

Other economic assumptions

Bonus rates on participating business have been set at levels consistent with the economic assumptions.

The distribution of profit between the policyholders and shareholders within the FPLP with-profits fund assumes that the shareholder interest in conventional with-profits business continues at the current rate of one-ninth of the cost of bonus, and that the shareholder interest in the non-profit business within that fund continues at the current rate of 60% of future profits.

9.2 Economic assumptions - stochastic calculations

Model

The time value of financial options and guarantees is determined using The Smith Model Plus economic scenario generator and is calculated using 6,300 simulations. The model is consistent with the model used for the Realistic Balance Sheet and is calibrated to market conditions at the valuation date using the gilt risk-free curve (extrapolated to a long-term assumption of 4% above 35 years) and implied volatilities in the market. Correlations between the asset classes are derived from historic data.

Swaption implied volatilities

	30 June 2010 Swap term					30 June 2009 Swap term					31 December 2009 Swap term
Option term	10 yrs %	15 yrs %	20 yrs %	25 yrs %		10yrs %	15 yrs %	20 yrs %	25 yrs %		10 yrs %	15 yrs %	20 yrs %	25 yrs %
UK Sterling
10 years	13.0	12.6	12.2	11.9		13.1	12.5	12.2	11.9		15.4	14.9	14.2	13.9
15 years	12.9	12.4	11.7	11.4		13.1	12.6	12.0	11.8		15.7	15.0	14.0	13.6
20 years	13.4	12.6	11.6	11.1		13.6	12.9	12.0	11.7		16.3	15.2	13.9	13.3
25 years	13.4	12.3	11.1	10.6		14.2	13.3	12.1	11.7		15.7	14.3	12.9	12.3

 

Equity and property implied volatilities

Equity volatility is calibrated to market implied volatility and is a reasonable fit to the implied volatility of the FTSE 100 put options held by the FPLP with-profits fund. Property holdings are modelled assuming an initial volatility of 15% and a running yield of 4.9% p.a. Sample implied volatilities are shown in the table below.

 

	30 June 2010			30 June 2009			31 December 2009
Option term	Equity%	Property %		Equity %	Property %		Equity %	Property %
5 years	25.3	16.1		26.2	16.6		25.0	15.9
10 years	26.9	17.1		27.9	18.5		27.0	17.0
15 years	28.4	18.8		30.0	20.5		29.0	18.4

 

9.3 Other assumptions

Demographic assumptions

Other assumptions (e.g. mortality, morbidity and persistency) are a reflection of the best estimate of the likely behaviours, outcomes or circumstances in the future. Typically the estimates are made on an annual basis following experience investigations based on the data available at the time both from the book of business and externally sourced information. The aim is to set assumptions at a level that reflects recent experience, unless there are reliable indicators that suggest their adoption would result in a significant variance compared to these assumptions in the future. In some instances, there may be little or no direct experience to use in setting assumptions and the future outcome is therefore uncertain.

In line with previous interim results the demographic assumptions used at 30 June 2010, remain unchanged from those used at 31 December 2009.

Future improvements in annuitant mortality have been assumed to be in accordance with the 'medium cohort' projections (with certain amendments) published by the Continuous Mortality Investigation in 2002. The amendments are to use 75% of these projections for females and to introduce a minimum annual rate of improvement in future mortality - for males this is assumed to be 1% pa and for females 0.75% pa.

Expense assumptions

The management expenses (including those relating to holding companies) attributable to the covered businesses have been analysed between expenses relating to the acquisition of new business, maintenance of in-force business (including investment management expenses) and development expenses.

Future maintenance expense assumptions reflect the expected ongoing expense levels required to manage the in-force business. Productivity gains have only been included to the extent they have been achieved by the end of the reporting period.

Future projected short-term expense overruns in the International and Lombard businesses have been allowed for by reducing the PVFP for these businesses. The International PVFP has been reduced by £3 million (30 June 2009: £nil, 31 December 2009: £4 million) for a projected overrun to 2012, and the Lombard PVFP has been reduced by £5 million (30 June 2009: £12 million, 31 December 2009: £6 million) for a projected overrun to 2013.

Development costs of £11 million (30 June 2009: £4 million, 31 December 2009: £23 million) have been excluded from the calculation of unit costs and have been recognised in experience variances. Development costs reported in 2009 relate to investment in activities expected to create value in the future, but where that expected value cannot be anticipated within the current year's financial results until the value is realised. The development costs reported in the first half of 2009 included costs in relation to development of wholly new products or entry into wholly new markets. Following the acquisition by Resolution, a review of development costs was undertaken which resulted in changes to the assessment and allocation of development costs. 

 

Development costs

		FPH 2010  Half year	FPG 2009 Half year	FPG 2009 Full year
		£m	£m	£m
UK		8	1	16
International		2	2	5
Lombard		1	1	2
Total		11	4	23

 

Non-hedgeable risks

A charge equivalent to 2% has been applied to the projected risk-based group required capital for all non-hedgeable risks over the remaining lifetime of in-force business.

In line with management's view of the business, no allowance has been made for diversification benefits within the non-hedgeable risks of the covered business.

Other assumptions

The STICS and lower tier 2 subordinated debt are included within the MCEV at market value, based on listed bid price. The IFRS value of the STICS is the principal less capitalised issue costs plus accrued interest. 

		Resolution Limited For the half year ended 30 June 2010
		Principal	IFRS value	MCEV at market value	Mark to market value adjustment (net of tax)
		£m	£m	£m	£m
STICS 2003		210	208	150	(43)
STICS 2005		268	266	194	(54)
Lower tier 2 subordinated debt		162	187	197	6
Total		640	661	541	(91)

 

		FPG For the half year ended 30 June 2009
		Principal	IFRS value	MCEV at market value	Mark to market value adjustment (net of tax)
		£m	£m	£m	£m
STICS 2003		210	209	105	(76)
STICS 2005		268	266	139	(92)
Lower tier 2 subordinated debt		162	162	161	(1)
Total		640	637	405	(169)

 

		Resolution Limited For the year ended 31 December 2009
		Principal	IFRS value	MCEV at market value	Mark to market value adjustment (net of tax)
		£m	£m	£m	£m
STICS 2003		210	209	140	(50)
STICS 2005		268	274	178	(66)
Lower tier 2 subordinated debt		162	189	187	(2)
Total		640	672	505	(118)

10. Implied discount rates

For presentational purposes, a set of risk discount rates has been derived for each product line, and for in-force and new business, by calculating the implied discount rate under a traditional embedded value approach that gives the same value as that from the market consistent embedded value determined above. These implied discount rates are a function of the assumptions used (eg equity risk premium and corporate bond spreads). However, as the market consistent approach is used, these assumptions do not impact the level of embedded value: a higher equity risk premium results in a compensating higher risk discount rate.

Average implied discount rates are shown below for the embedded value and the value of new business. The average implied discount rates for the in-force business have decreased over 2010, primarily as a result of the reduction in the reference rates.

Detailed splits of the implied discount rates are given in the following tables.

		30 June 2010
			UK			Non-UK
Embedded value		UK with-profits business	Other UK	Annuities	Average UK	Int'l	Lombard
		%	%	%	%	%	%
Reference rate		3.5	3.5	n/a	3.5	3.5	3.0
Market risks (non-options)		3.2	2.8	n/a	2.8	1.9	2.7
Options - market risks		2.9	-	n/a	0.4	-	-
Options - non-market risks		3.6	-	-	0.5	-	-
Other non-market risks		0.6	0.6	n/a	0.6	1.0	0.7
Implied discount rate		13.8	6.9	n/a	7.8	6.4	6.4

 

		30 June 2009
			UK			Non-UK
		UK with-profits business	Other UK	Annuities	Average UK	Int'l	Lombard
Embedded value		%	%	%	%	%	%
Reference rate		4.1	4.1	n/a	4.1	4.1	4.6
Market risks (non-options)		4.4	3.1	n/a	3.3	1.2	1.2
Options - market risks		7.9	-	n/a	0.8	-	-
Options - non-market risks		15.0	-	-	1.5	-	-
Other non-market risks		0.4	0.4	n/a	0.4	0.8	0.8
Implied discount rate		31.8	7.6	n/a	10.1	6.1	6.6

 

		31 December 2009
			UK			Non-UK
		UK with-profits business	Other UK	Annuities	Average UK	Int'l	Lombard
Embedded value		%	%	%	%	%	%
Reference rate		4.3	4.3	5.0	4.3	4.3	3.7
Market risks (non-options)		3.5	2.7	3.7	2.9	1.9	2.3
Options - market risks		3.7	-	-	0.4	-	-
Options - non-market risks		7.0	-	-	0.8	-	-
Other non-market risks		0.6	0.6	0.6	0.6	1.2	0.5
Implied discount rate		19.1	7.6	9.3	9.0	7.4	6.5

 

Annuities are excluded from the 30 June 2009 and 30 June 2010 tables given the allowance for the illiquidity premium in the respective statutory valuations resulted in a negative value of in-force business under MCEV and hence meaningless derived risk discount rates.

 

The reference rate for annuities includes an illiquidity premium of 75 bps at 30 June 2010 (30 June 2009: nil, 31 December 2009: 75bps).

 

Implied discount rates for new business have been based on end-of-period economic assumptions.

 

	30 Jun 2010				30 Jun 2009				31 Dec 2009
	UK	Int'l	Lombard		UK	Int'l	Lombard		UK	Int'l	Lombard
Value of new business	%	%	%		%	%	%		%	%	%
Reference rate	3.5	3.5	3.0		4.1	4.1	4.6		4.5	4.3	3.7
Market risks	2.8	1.2	2.3		1.7	1.0	1.1		2.9	1.3	1.8
Non-market risks	0.7	0.5	0.8		0.4	0.8	0.8		0.8	0.4	0.7
Implied discount rate	7.0	5.2	6.1		6.2	5.9	6.5		8.2	6.0	6.2

 

 

11. Segmental analysis

Changes to prior year segmental analysis

At 30 June 2009 Friends Provident presented EEV results using four life and pensions segments - UK life and pensions, FPI and Lombard as well as Corporate and Other segments.

Following the acquisition by Resolution and in line with IFRS 8, a review of the segmental analysis under IFRS and MCEV reporting bases at 31 December 2009 was conducted. In order to reflect the revised segmental reporting adopted by the Group, the following changes are required to the segmental analysis used by Friends Provident at 30 June 2009:

■ the International life and pensions segment now includes the FPI segment reported at 30 June 2009. In addition the International segment now includes Friends Provident's 30% share of AmLife, which was previously included in the Corporate and Other segment at 30 June 2009.

■ the provision for future corporate costs was previously included in the Corporate and Other segment and has now been allocated to the covered business of the UK segment.

■ the mark to market adjustment for the STICS was previously included in the Corporate and Other segment and has now been allocated to the covered business of the UK segment.

The following table shows the amendments required to the previously published embedded value figures for Friends Provident for the half year ended 30 June 2009 in order to reflect the revised segmental reporting adopted by the Group.

 

30 June 2009	MCEV classification
	Covered business			Non -covered business	Total
	UK	Int'l	Lombard		MCEV
Net of tax	£m	£m	£m	£m	£m
EEV Classification
UK life and pensions business	1,537	-	-	-	1,537
FPI	-	326	-	-	326
Lombard	-	-	363	-	363
Corporate and Other	-	17	-	587	604
Closing MCEV at 30 June 2009	1,537	343	363	587	2,830
- Provision for corporate costs	(97)	-	-	97	-
- Allocation of STICS mark to market adjustment and accrued interest liability	312	-	-	(312)	-
Opening MCEV at 1 July 2009	1,752	343	363	372	2,830
Additional pension scheme asset recognised	-	-	-	2	2
Restated opening MCEV	1,752	343	363	374	2,832

 

Reconciliation of MCEV and IFRS segmentation

The covered business segments within MCEV are consistent with the IFRS business segments.

The split of the MCEV by IFRS business segment for Friends Provident is shown in the tables below:

 

 

Comparison of MCEV and IFRS classification and segments

Friends Provident Holdings at 30 June 2010

	MCEV classification
	Covered business			Non-covered business	Total MCEV by IFRS segments
30 June 2010	UK	Int'l	Lombard
	£m	£m	£m	£m	£m
IFRS segment
UK	1,837	-	-	372	2,209
International	-	537	-	-	537
Lombard	-	-	443	3	446
Total MCEV (by MCEV segments)	1,837	537	443	375	3,192

 

Friends Provident Group at 30 June 2009

	MCEV classification
	Covered business			Non-covered business	Total MCEV by IFRS segments
30 June 2009	UK	Int'l	Lombard
	£m	£m	£m	£m	£m
IFRS segment
UK	1,752	-	-	370	2,122
International	-	343	-	-	343
Lombard	-	-	363	4	367
Total MCEV (by MCEV segments)	1,752	343	363	374	2,832

 

Friends Provident Holdings at 31 December 2009

	MCEV classification
	Covered business			Non-covered business	Total MCEV by IFRS segments
31 December 2009	UK	Int'l	Lombard
	£m	£m	£m	£m	£m
IFRS segment
UK	2,113	-	-	146	2,259
International	-	475	-	1	476
Lombard	-	-	440	6	446
Total MCEV (by MCEV segments)	2,113	475	440	153	3,181

 

 

 

12. FPH annualised operating return on embedded value

 

	Half year 2010 % pa	Half year 2009 % pa
Value of new business	4.4	1.8
Expected existing business contribution (i)	5.9	8.5
Operating experience variances	1.5	(2.0)
Operating assumption changes	0.0	0.1
Other operating variance	(0.1)	0.2
Development costs	(0.6)	(0.2)
Other income and charges	0.0	(0.1)
MCEV operating return before tax and financing	11.1	8.3
Impact of financing	0.9	(0.3)
Attributed tax charge on MCEV operating profit	(2.9)	(2.4)
MCEV operating return after tax	9.1	5.6

(i) excludes expected impact of external financing of £(15) million for half year 2010 and £(25) million for half year 2009.

The annualised operating return on embedded value is the annualised rate of MCEV operating profit after tax divided by the start of period net embedded value.

The table above provides an analysis of the operating return on embedded value for the half year ended 30 June 2010. The starting embedded value for half year 2010 is £3,181 million, net of the market-consistent value of debt instruments of £505 million at 31 December 2009. The starting embedded value for half year 2009 is £3,039 million, net of the market-consistent value of debt instruments of £449 million.

The MCEV operating return before tax and financing is based on the gross MCEV (i.e. before the market-consistent value of debt). The return includes both covered and non-covered business. The impact of the financing item reflects the leverage on the return on embedded value created within FPH through the use of debt instruments, net of the cost of financing these instruments.

The half year rates have been annualised.

 

Definitions

Annual premium equivalent (APE) represents annualised new regular premiums plus 10% of single premiums.

Annualised operating return on embedded value is calculated as the MCEV operating profit after tax over the period divided by the net embedded value at the start of the period. Where the period is not a full year, the calculated rate is then annualised.

Asset quality is the percentage of corporate bonds and asset backed securities in the shareholder and non-profit funds at investment grade compared to the total of such assets in these funds.

AXA UK Life Business means the traditional and protection businesses, most of the corporate benefits business and a minority part of the wealth management business carried on by the AXA UK Life and Savings business which are to be acquired by Resolution.

Board denotes Resolution Limited board.

Cash payback on new business is the time at which the value of the expected cash flows, after tax, is sufficient to have recouped the capital invested to support the writing of the business. The cash flows are calculated on the same assumptions and expense basis as those used for the contribution from new business.

Company or Resolution denotes Resolution Limited.

Company Secretary Northern Trust International Fund Administration Services (Guernsey) Limited.

Contribution from new business is the present value of future cash flows expected to arise from the new business sold during the year. It is calculated using economic assumptions at the beginning of the period, and is quoted after the cost of required capital, share based payments and including an apportionment of fixed acquisition expenses across products.

Group denotes Resolution Limited and its subsidiary undertakings, which do not include any member of The Resolution Group.

Group embedded value on an MCEV basis is the equity attributable to equity holders of the parent as shown in the consolidated statement of financial position - MCEV basis.

IGD surplus capital resources are the Insurance Groups Directive surplus capital as defined by the FSA. It is calculated as the surplus of the available resources over the capital resources requirement. It excludes the surplus capital held within the long-term funds except to the extent that they cover that fund's own capital resource requirements.

IFRS based operating profit is the profit (or loss) based on longer-term investment return excluding: (i) policyholder tax, (ii) returns attributable to minority interests in policyholder funds, (iii) non-recurring items, (iv) amortisation and impairment of acquired intangible assets and present value of acquired in-force business; and is stated after deducting interest payable on STICS.

IFRS profit/(loss) after tax is the profit/(loss) after tax as shown in the consolidated income statement.

Internal rate of return on new business (IRR) is equivalent to the discount rate at which the present value of the after tax cash flows expected to be earned over the lifetime of the business written is equal to the capital invested to support the writing of the business. With the exception of investment return, all assumptions and expenses are consistent with those used for calculating Contribution from new business. IRR assumes best estimate investment returns after an allowance for default risk, whereas Contribution from new business assumes (market consistent) risk-free rates. IRR also takes into account the funding and release of regulatory capital requirements.

Margins are defined as the pre-tax contribution from new business generated by each product type, divided by the new business volume for that product.

MCEV operating profit is the MCEV profit (or loss) based on expected investment return excluding: (i) amortisation and impairment of non-covered business acquired intangible assets, (ii) effect of economic variances including economic assumption changes, (iii) significant non-recurring items; and is stated after deducting interest payable on STICS.

MCEV profit after tax is the MCEV profit (or loss) after tax as shown in the consolidated income statement - MCEV basis.

Pillar 1 surplus is the excess of capital resources over capital resource requirements calculated in accordance with regulatory requirements.

Pillar 2 surplus is the excess of capital resources over the capital calculated on an economic basis required to ensure that the regulated entities can meet their liabilities, with a high likelihood, as they fall due. The result is reviewed and may be modified by the FSA. Pillar 2 requirements are not generally disclosed.

Present value of new business premiums (PVNBP) represents new single premiums plus the expected present value of new business regular premiums.

Pro forma MCEV is the shareholders' equity on a MCEV basis, including the pre-acquisition period.

Shareholder resources are a measure of the tangible assets available to the life and pensions business and attributable to shareholders. The movement in shareholder resources therefore provides a view of the sustainability of the business model. Shareholder resources are based on shareholders' invested net assets included within the embedded value, but adjusted to include securitisation and financial reinsurance balances and to exclude intangible assets.

The Resolution Group means Resolution Operations LLP, Resolution Financial Markets LLP, RCAP Guernsey LP, Resolution Capital Limited and their respective subsidiary undertakings. For the avoidance of doubt, neither the Group nor the Company are part of The Resolution Group.

UK Life Project denotes the Company's restructuring project in respect of companies and/or business which have substantial operations consisting of life assurance and/or asset management activities and which are listed in, or undertake a significant part of their business in UK and/or Western Europe.

 

 

 

 

 

 

ABBREVIATIONS

ABI	Association of British Insurers
ABS	Asset-Backed Securities
ACC	Audit and Compliance Committee
ACSM	Alternative Coupon Satisfaction Mechanism
AGM	Annual General Meeting
APE	Annual Premium Equivalent
AVIF	Acquired Value of In-Force
BCM	Resolution Limited Board Control Manual
BRCC	FPH Board Risk and Compliance Committee
CEO	Chief Executive Officer
CFO	Chief Financial Officer
CGU	Cash Generating Unit
CNHR	Cost of Non-Hedgeable Risk
CRO	Chief Risk Officer
CSR	Corporate Social Responsibility
DAC	Deferred Acquisition Costs
DPF	Discretionary Participation Features
EEA	European Economic Area
EEV	European Embedded Value
EPS	Earnings Per Share
EU	European Union
EURIBOR	Euro Interbank Offered Rate
F&C	F&C Asset Management plc
FPG	Friends Provident Group plc (including MCEV disclosures, all subsidiary undertakings)
FPH	Friends Provident Holdings (UK) Limited (including, for MCEV disclosures, all subsidiary undertakings in the period post-acquisition)
FPIL	Friends Provident International Limited
FPLA	Friends Provident Life Assurance Limited
FPLP	Friends Provident Life and Pensions Limited
FPP	Friends Provident Pensions Limited
FPPS	Friends Provident Pension Scheme
FRC	Financial Risk Committee
FRS	Financial Reporting Standards
FSA	Financial Services Authority
IAS	International Accounting Standards
ICA	Individual Capital Assessment
ICG	Individual Capital Guidance
IFA	Independent Financial Adviser
IFRS	International Financial Reporting Standards
IRR	Internal Rate of Return
IASB	International Accounting Standards Board
LDI	Liability Driven Investment
LIBOR	London Interbank Offered Rate
LTIP	Friends Provident Long-Term Incentive Plan
MCEV	Market Consistent Embedded Value
MVR	Market Value Reduction
OLAB	Overseas Life Assurance Business
ORC	Operational Risk Committee
PHI	Permanent Health Insurance
PPFM	Principles and Practices of Financial Management
PVIF	Present Value of In-force
PVNBP	Present Value of New Business Premiums
PVFP	Present Value of Future Profits
RBS	Realistic Balance Sheet
RCM	Risk Capital Margin
RH1	Resolution Holdco No 1 LP
RHG	Resolution Holdings (Guernsey) Limited
ROEV	Return on Embedded Value
ROL	Resolution Operations LLP
RPI	Retail Prices Index
STICS	Step-up Tier one Insurance Capital Securities
TCF	Treating Customers Fairly
TSR	Total Shareholder Return
TVOG	Time Value of financial Options and Guarantees
UKLA	UK Listing Authority
VIF	Value of In-Force
VNB	Value of New Business
WPC	With Profits Committee
WPICC	With Profits Insurance Capital Component