Half Yearly Report

16 August 2011

Resolution Limited

Performance for the half year ended 30 June 2011

·; IFRS based operating profit before tax of £390 million (H1 2010: £151 million) (includes net benefit to in-force of £201 million from capital synergies)

·; MCEV operating profit before tax of £180 million (H1 2010: £180 million)

·; Operating free surplus generation (excluding capital synergies) of £122 million supporting full year cash target of £400 million

·; £100 million of capital synergies delivered towards £235 million 2011 target

·; Interim dividend per share of 6.47 pence up 18.5% (H1 2010: 5.46 pence per share)

Cash delivery and capital efficiency

·; Cash available to shareholders £793 million after payment of cash dividend of £141 million

·; £250 million share buy-back commenced, of which £34 million achieved by 30 June 2011 (£97 million achieved by 12 August 2011)

·; Reaffirmed intention of further £250 million cash return in the first half of 2012 and full year 2011 dividend guidance

·; Robust capital position maintained, IGCA surplus as at 30 June 2011 of £2,027 million

Strategy on-track

·; The Company remains on-track to deliver previously announced 2013 financial targets

·; Integration of acquired businesses in line with expectations, run-rate of £24 million synergies delivered as at 30 June 2011

·; Value of new business of £66 million (H1 2010: £81million), impacted by lower volumes in the non-UK businesses

·; UK new business strategy being implemented in line with February announcement

Focused on delivery of UK Life Project

·; A circular detailing the proposed changes to the Operating Agreement and other related agreements is expected to be provided to shareholders in October and will reflect previously announced confirmation that Resolution Limited does not expect to undertake any other project until after the completion of the UK Life Project

John Tiner, CEO of Resolution Operations LLP, commented:

"We announced strategic and financial objectives for Friends Life in February. Four months into this programme, the business is showing signs of delivery in a number of areas that demonstrate it is on a path to deliver against its targets in full.

Market conditions remain unsettled but the Group's robust balance sheet and disciplined risk management underpin our confidence in achieving these targets."

Enquiries:

Forward-looking statements

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

Media

There will be a conference call today for wire services at 07.30 (GMT) hosted by John Tiner, Chief Executive of Resolution Operations LLP. Dial in telephone numbers: UK National 0871 700 0345, UK Standard International+44 (0) 1452 555 566 Passcode: 87407055

Analysts/Investors

A presentation to analysts will take place at 09.30 (GMT) at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Dial in telephone numbers: UK Freephone 0800 634 5205, UK Standard International+44 (0)208 817 9301. An audio cast of the presentation and the presentation slides will be available on Resolution's website, www.resolution.gg.

Financial calendar

Chairman's statement

Overview

In the first half of 2011, the Company continued its consolidation strategy. The acquisition of Bupa Health Assurance Limited ("BHA") that was announced on 15 October 2010 was completed on 31 January 2011. The three acquisitions made to date by the Company, which include Friends Provident, the AXA UK Life Business and BHA, have a blended average acquisition price (net of external debt) of approximately 66.9% of net Market Consistent Embedded Value ("MCEV"). The net MCEV of the Group as at 30 June 2011 was £6,482 million.

On 23 February, the Company announced the details of the strategic review of the UK product propositions and businesses of the enlarged Group. The strategic review concluded that the UK Life Project was on track to achieve its target returns and that expected cost synergies could be increased from £75 million to £112 million, affirming the Company's confidence in its distributable cash target ("DCT") of £400 million per annum(i). At that time the Company provided details of its focused UK product strategies that prioritised value over volume. It also confirmed that it expected to achieve its targeted mid-teen returns on the UK Life Project without further acquisitions and that it would not contemplate acquisitions that would dilute the returns likely to emerge from the three acquisitions already made.

The Company provided a market update on 7 June 2011, in keeping with its commitment to provide an update on its cash and capital position. In the update, the Company confirmed that it expected to be a single project vehicle - namely that it would focus solely on the UK Life Project - and that there was no requirement to retain cash for other projects. A £500 million targeted cash return was announced with the first £250 million to be returned to shareholders by way of a share buy-back during 2011. The share buy-back commenced on 8 June 2011. The second £250 million targeted cash return to shareholders is expected to take place during 2012 and is subject to delivery of capital synergies and regulatory approval with the form of return yet to be determined. The capital framework and position of the Friends Life group ("FLG") was also set out in the market update.

The first half 2011 results highlight ongoing progress with separation and integration programmes across the Group. The UK business was re-launched in March 2011 under the brand "Friends Life". While Friends Life is making progress in each of its chosen product areas of corporate benefits, protection and retirement income, implementation of the new strategy is at an early stage. Profitability is expected to improve as synergies are delivered and other strategic initiatives are implemented. The Board is confident that Friends Life will meet its targeted product metrics by the end of 2013. A review of the strategy, market context and results are set out it more detail in the Operating Report by Resolution Operations LLP ("ROL") and the business review that follow.

Dividend

At the time of announcing its full year 2010 results, the directors, after due consideration, proposed an increase in the final dividend of 15%, which took the total dividend for 2010 to 18.03 pence per share. At the same time the Company also gave guidance of its intention to increase the 2011 dividend to 18.85 pence per share. On 7 June, the Company announced that the directors had reviewed the dividend policy in light of the decision to implement a share buy-back programme and had concluded that the aggregate value of dividend payable by the Company on all shares in issue should not reduce as a result of the buy-back. This means that the proposed dividend per share is expected to increase as a result of the planned £250 million buy-back in 2011.

Dividends continue to be paid one-third in respect of the interim dividend and two-thirds in respect of the final dividend. Consistent with this policy, the Board is declaring an interim dividend of 6.47 pence per share in respect of 2011. Shareholders will be offered a scrip alternative in respect of the interim dividend.

The Board will continue to keep under review the appropriateness of the Company moving to a growing dividend.

(i) The DCT is the amount that could be paid to Resolution holding companies without reducing the MCEV of FLG, excluding investment variances and non-recurring items.

Resolution Limited - scope

The Company has previously stated that the Board understands that shareholders do not wish to have the returns from the UK Life Project blended with those of other potential projects. Therefore, the Board confirmed on 7 June 2011 that the Company would not undertake additional projects until after the completion of the UK Life Project.

ROL

The Company has an Operating Agreement with ROL, which has a highly experienced team with skills in sourcing and implementing mergers and acquisitions, raising capital in the capital markets and overseeing large operational change. In light of the Company confirming that it would not undertake other projects until after completion of the UK Life Project, the Board has agreed principles with ROL which will allow ROL to sponsor restructuring projects and advise other entities which do not conflict with the UK Life Project. These principles will drive changes to the Operating Agreement and other related agreements with the ROL team and continue to ensure the ongoing commitment of the ROL team to securing a successful outcome for shareholders for the UK Life Project. A circular to shareholders setting out the detail of the proposals, and convening a general meeting to enable shareholders to vote on them, is expected to be published in October.

M&A

The Board continues to believe that value can be created from further consolidation in the UK life sector. This value will be a function of the specific factors in respect of each transaction and could include, the price paid, the strategic logic, the quantum of synergies and the risks around integration. The Company has confirmed that it will not undertake further acquisitions if they would dilute the returns expected to emerge from the three acquisitions undertaken to date.

ROL continues to research the opportunities for the Company to add value to its existing portfolio of assets.

Recent investment market volatility

Since the end of July 2011, global investment markets have been increasingly volatile. Having traded in a range broadly between 5,700 and 6,100 for the first seven months of the year, the FTSE 100 index has fallen by 13% from a closing value of 5,815 on 29 July 2011 to a closing value as low as 5,069 on 8 August 2011. Whilst this will inevitably have had an impact on the embedded value of the Company, it has also had a material impact on the value placed on listed life companies by investors. As measured by the FTSE 350 Life Insurance Index(ii), the market value of the UK listed life sector has fallen by 15% since the end of July.

Outlook

The Board remains confident that Friends Life will achieve the financial metrics which the Company has set by the end of 2013. The Board also remains confident that, on the basis that market valuations of UK life companies are restored to levels prevailing prior to the recent extreme volatility, the Company should achieve its targeted mid-teens returns on the UK Life Project.

Michael BiggsChairman

(ii) The FTSE 350 Life Insurance Index is a capitalisation-weighted index of all stocks designed to measure the performance of the life insurance sector of the broader FTSE 350 Index. It is comprised of eight members namely, Prudential plc, St James's Place plc, Legal and General Group plc, Standard Life plc, Phoenix Group Holdings, Aviva plc, Old Mutual plc and Resolution Limited.

Operating report by Resolution Operations LLP

Introduction

ROL is pleased to report that in the first half of 2011 the Company continued to make good progress in executing its objectives for the UK Life Project. The Company is focused on the development of a sustainable UK life business and delivery of the value from the UK Life Project.

This operating report provides an update on four matters: strategy; current market environment; performance of the UK Life Project; and the outlook.

Strategy

At the core of the strategic aims of the Company is the creation of a sustainable business that wins customers with products that meet their needs while also delivering strong cash returns to shareholders. ROL expects that Friends Life's new and improved product mix, focused distribution, integration synergies and efficient platforms will contribute to increased returns.

In the UK, Friends Life is seeking to build on its position in individual protection; leverage both its comprehensive range of product solutions and its platform to improve the returns in corporate benefits; and invest with the shorter term objective of increasing the retention of vesting amounts in annuities. In combination with the non-UK businesses of International and Lombard, with their leading positions in high margin specialist markets, the Company is confident that Friends Life will meet its financial targets.

Market environment

The first half of 2011 was characterised by continuing volatility in financial markets. Uncertainty about the strength and sustainability of global growth, a European and US debt crisis and geopolitical unrest in North Africa and the Middle East, negatively impacted investor sentiment. The Group is managed for low market risk exposures and remains robustly capitalised for the current volatile environment. The Group is vigilant about the risks facing the sector from volatile markets and believes its exposures in these areas are limited and manageable. This will be covered in more detail in the business review that follows.

The UK life assurance sector continues to face regulatory uncertainty with the expected implementation of Solvency II, the introduction of auto-enrolment, and the Retail Distribution Review ("RDR").

The new capital regime under Solvency II is expected to present insurers with a changing capital framework. Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed. We are supportive of the principle of having a risk-based capital framework.

The introduction of auto-enrolment in the second half of 2012, under which employees will automatically be enrolled into a qualifying scheme, will also impact the corporate pension landscape. The Company currently expects auto-enrolment to fuel market growth, with a good uplift in pension scheme membership. Friends Life will continue to develop its corporate pension proposition, segment the customer base and optimise the development of profitable business. Friends Life believes that auto-enrolment represents a considerable opportunity for the business to generate a significant increase in new members from both new and existing schemes. It will be used as an opportunity to develop a market leading proposition for clients, supporting employers with the heavy compliance requirements imposed on them as a result of pensions reform.

The RDR will drive significant change in the distribution landscape, with many advisers expected to either retire or retrench to a much more limited panel-based advice proposition. Friends Life expects the individual wealth market, particularly single premium bond sales, to be adversely affected as this market has historically been driven by the higher levels of commission that can be paid as compared with mutual funds. Friends Life closed its IFA single premium bond proposition following the UK strategic review and therefore the Group does not expect a significant impact from this. Protection is outside the RDR regime and the Group's focus in the corporate pensions market is on the nil commission/funded commission segment of the market.

In summary, Friends Life is well placed to deal with the regulatory uncertainty facing the UK life sector.

UK Life Project

The UK Life Project is broadly comprised of three overlapping phases: acquisition; integration; and value delivery.

Acquisition

As the Company has said in reports in the 2010 financial year, its aim since the launch of the UK Life Project, with the acquisition of Friends Provident Group plc in November 2009, has been to acquire companies well; focus the business on sustainable and profitable value delivery; extract synergies to generate cash for shareholders; and deliver the targeted returns on the project.

The Company has said that it will only undertake further acquisitions if they are expected to be accretive to the project returns expected to emerge from the three acquisitions already made.

Integration

The separation and integration programmes for the AXA UK Life Business and BHA remain on track to deliver a fully integrated Friends Life business from the end of 2013.

The joint separation plans have been agreed and exits from the transitional service agreements remain in line with expectations. The Group has engaged with external technology partners to ensure the separation of the IT infrastructure and the migration of certain blocks of customer policies.

The integration of the three acquired businesses are expected to deliver synergy benefits of £112 million by the end of 2013, of which £39 million are due to be realised by the end of 2011 on a run-rate basis. As at 30 June 2011, a total of £24 million of run-rate cost savings have been delivered through:

·; creating a streamlined sales capability for a targeted and rationalised individual protection proposition;

·; integrating the sales and marketing model for corporate benefits;

·; rationalising brand budgets;

·; improving third-party supplier terms; and

·; restructuring the central functions.

Product strategy

The update provided to the market in February 2011 on UK new business strategy identified corporate benefits, protection and retirement income as the product areas the UK business would focus on. The following subsections will briefly review the market and the plans to achieve the strategic aims for each of the product propositions.

Corporate benefits

Market

The outlook for the corporate benefits market will be driven by changes in product mix, legislation and demographic factors. The UK defined contribution market currently has in excess of £300 billion of assets under management. Strong growth is expected over the next decade as:

·; schemes enrol current and future members in defined contribution schemes;

·; pension reform, in particular auto-enrolment, is expected to support market growth;

·; the RDR should increase customer engagement and provide an opportunity for workplace distribution; and

·; the UK working population grows, ages and saves.

Implementation of strategy

Friends Life currently has one of the largest corporate benefits business in the UK market with approximately £18 billion of assets under management and over 17,000 corporate clients.

The strategy will be implemented by:

·; retaining and growing the existing customer base;

·; participating selectively in new business focused on the nil commission and the fee-based market segments; and

·; extracting synergies from the acquired businesses.

Friends Life expects to launch its corporate platform in the second half of 2011. This will allow it to expand into the wider workplace savings market and provide enhanced functionality to Friends Life's unbundled investment proposition.

Friends Life expects an improved pipeline of new business as it progresses with the integration of the sales and marketing teams and the migration to the more efficient New Generation Platform. The business is expected to expand its footprint from a pension savings proposition to include a wider range of individual products accessed through the workplace.

It is expected that the RDR will focus more business in Friends Life's target market segment and remove the major driver for advisors to "re-broke" schemes; this is expected to aid customer retention. Fee-based business, which is Friends Life's main focus, is not directly affected by the ban on commissions. It is expected that the removal of upfront commissions in the IFA market will lead to more rational competition and likely re-open that channel to Friends Life. The "advice gap" in the retail market is expected to present opportunities for worksite marketing.

Auto-enrolment also represents an opportunity for the business to increase its members from both new and existing business. Friends Life intends to use auto-enrolment as an opportunity to further develop its proposition for clients and also segment the customer base for profitable growth.

Protection

Market

As the protection market has been excluded from the RDR, Friends Life expects that intermediaries are likely to focus on protection sales in the short term.

Implementation of strategy

The unified individual protection business will provide life, critical illness and income protection to individuals and corporations. These products are distributed through IFAs, banks, estate agents and leading brands like Tesco, Virgin and AA.

The strategy will be implemented by:

·; leveraging the efficient BHA platform;

·; improving the product and distribution mix with a focus on profitability;

·; reducing operating costs through the delivery of synergy targets;

·; building market leading propositions in critical illness and income protection; and

·; focusing on exclusive and mutually beneficial distribution arrangements.

The BHA platform is a low cost operating platform that will provide the required functionality for the business going forward, utilising the best features of the acquired businesses. The enhanced proposition is expected to be delivered in October. Friends Life will ensure an effective transition to the new platform through 2011 and 2012.

The impact of the RDR on the individual protection business is expected to be neutral to slightly positive. Some reduction in the number of IFAs is anticipated; however, as the costs of serving clients' investment needs rise, advisers are expected to put more focus on the business protection, family protection and mortgage market for business.

The Company also expects that with respect to group protection, the BHA sales and administrative platform will act as the base for the integrated business. It is expected that by the last quarter of 2011, all group protection new business will be offered and written on the BHA platform.

Retirement income

Market

The prospects for future market growth in this segment remain strong as the baby boomer generation approaches retirement age, and as the market moves from defined benefit to defined contribution pension products. The removal of compulsory annuitisation is expected to have a limited initial impact other than for those individuals with large retirement funds as there is a minimum income requirement to avail of the flexible drawdown options. The open market option segment of the annuity market continues to benefit from the drive by the industry and the regulator to publicise its benefits. Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins.

Implementation of strategy

As previously announced, Friends Life's immediate objective in the annuity market is to retain a larger proportion of vesting pension funds while keeping the option to enter the open market.

The strategy will be implemented by:

·; building enhanced capability to retain vesting pensions and enter the open market by developing sophisticated mortality analysis to inform a targeted pricing approach;

·; developing new customer management systems to support improved engagement with customers and distributors; and

·; building capability to support more sophisticated investment strategies.

It is expected that these enhanced capabilities will be delivered over 12-18 months, and will increase volumes and profitability materially during 2013. Senior hires in this team have already been made with the appointment of David Still, as Managing Director of Retirement Income and Richard Willets as Director of Longevity.

Friends Life is currently well positioned for the impact of the RDR on annuities. Friends Life currently has no exposure to the segment likely to be affected. It is building capability to selectively enter the market. It also expects that the "advice gap" due to the RDR will expand opportunities for its strong internal vesting propositions, and for non-advised, simplified distribution models.

Cash and capital management

In June, the Company communicated the results of its work on the cash and capital position of Friends Life. The Company announced that as a principle it would return excess cash released from the UK Life Project to shareholders to the extent that it was not required for further M&A opportunities in the short to medium term.

Whilst the requirements of Solvency II are uncertain, the Company's current expectation is that Solvency II will lead to an increase in Friends Life group's capital surplus relative to that under current Pillar 1 solvency requirements.

Business leadership

Andy Briggs was appointed as Chief Executive Officer ("CEO") of Friends Life in June 2011. Andy joined from Lloyds Banking Group, where he was CEO of General Insurance, having previously been CEO of Scottish Widows.

Under Andy Briggs's leadership, Friends Life will establish a new business unit to manage the requirements of customers with products that are no longer actively marketed to new customers. This UK Heritage Business will be led by Evelyn Bourke who has been appointed Chief Commercial Officer. The Friends Life Chief Commercial Officer role includes responsibility for Friends Life's strategy and capital. The risk functions will now report directly to the Friends Life CEO.

As a result of the strategy and subsequent related decisions announced in February, a number of business lines are no longer being actively marketed. These lines will be managed in the UK Heritage Business alongside customers with legacy products that have previously been closed to new business. The creation of the UK Heritage Business to run alongside the corporate benefits, protection and retirement income business units will enable Friends Life to focus on the distinct value drivers for all of its products and ensure that the Group meets the needs of all customers.

Business performance

The business review following this report sets out in detail the performance of the Group for the first half of 2011 on both an IFRS and MCEV bases. The period on period comparisons are complicated as 2011 half year results include six months for Friends Provident, six months for the AXA UK Life Business and five months for BHA whereas prior periods included only the Friends Provident results in full and a partial inclusion for the AXA UK Life Business from September 2010.

The IFRS based operating profit before tax was £390 million and includes a net benefit to in-force of £201 million from capital synergies. The underlying result is in line with previous guidance provided in June. The IFRS based operating profit before tax for the first half of 2010 was £151 million. The MCEV operating profit before tax was £180 million reflecting lower economic returns.

The key highlights of this half's results include:

·; operating free surplus generation of £283 million;

·; integration of acquired businesses in line with expectations and run-rate of £24 million expense synergies delivered as at 30 June 2011; and

·; UK new business strategy being implemented in line with February announcement.

Outlook

ROL believes that Friends Life is on a clear path to creating a sustainable UK business that is focused on shareholder returns. The implementation of the strategy will continue while maintaining discipline in the allocation of capital and managing risk.

The outlook for the UK product areas where Friends Life will participate is good. Friends Life has existing advantages of scale and respected customer service in its chosen product areas. This along with appropriate capital allocation and financial discipline, that includes a focus on value over volume, should allow Friends Life to differentiate itself and generate strong returns for shareholders.

John TinerChief Executive, Resolution Operations LLP

Key performance indicators

The Group uses the following key performance indicators. These include the post acquisition results of the acquired businesses and are therefore not currently directly comparable from period to period. The Group has also set a number of targets for the life operating businesses which are detailed in the following sections.

·; IFRS based operating profit before tax up from £151 million to £390 million reflecting the inclusion of the acquired businesses and a £221 million one-off benefit following the release of negative reserves in the acquired AXA UK Life Business and Bupa Health Assurance Limited ("BHA"). IFRS profit after tax of £45 million reflects higher amortisation of intangible assets (arising from the acquisitions and an accelerated charge to offset the negative reserves release), negative goodwill on the acquisition of BHA and non-recurring costs.

·; MCEV based operating profit before tax unchanged at £180 million reflecting the inclusion of the acquired businesses offset by lower rates of expected return and lower contribution from new business as Lombard has experienced a slow down in new business from the exceptional levels attained in 2010. However, volumes remain strong compared to historic levels. MCEV profit after tax down from £148 million to £54 million reflecting the fall in actual market returns and non-recurring costs.

·; Group embedded value on an MCEV basis of £6,482 million down from £6,515 million at the end of 2010 principally reflecting the £141 million final cash dividend paid in respect of 2010 and the return of capital to shareholders through the share buy-back programme.

·; FLG operating ROEV of 4.5% primarily reflects the reduced contribution from new business as a proportion of opening embedded value. The ROEV has also been negatively affected by lower expected rates of return and operating variances in the period and inclusion of the AXA UK Life Business for the full period.

·; Group available shareholder cash of £793 million down from £1,067 million at 31 December 2010 reflects dividends and capital returned to shareholders, finance costs and the scheduled repayment of the deferred consideration notes.

·; Estimated IGCA surplus capital of £2.0 billion as at 30 June 2011, down from £2.3 billion at the end of 2010 principally reflecting the £350 million dividend paid from the life businesses to Resolution Limited.

·; Continued high asset quality, with no significant shareholder exposure to sovereign debt or corporate bonds of higher risk European economies.

(i) The half year 2010 IFRS based operating profit has been restated to exclude the impact of investment volatility in the long-term funds. £52 million of positive investment return has been reclassified from operating profit to short-term investment fluctuations. This has no impact on profit after tax.

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

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

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

Group summary

The Group has made solid progress in the first half of 2011. Following the acquisition of the AXA UK Life Business in 2010, the Group completed the acquisition of BHA in January 2011. BHA was the third business acquired in the UK Life Project and forms an important part of the integrated business, increasing the Group's scale and capabilities in group and individual protection. In February, the results of the Group's strategic review were announced, setting out the Group's focus in the UK on three key business lines, being corporate benefits, protection and retirement income.

The Group's results for the half year reflect the enlarged group, including the results of the AXA UK Life Business and, from 31 January, BHA. The IFRS based operating profit before tax of £390 million (30 June 2010: £151 million) benefited from the implementation of certain elements of PS06/14 as part of the capital optimisation programme for the UK business. MCEV operating profit before tax of £180 million (30 June 2010: £180 million) reflects a reduced contribution from new business for International and Lombard and low rates of expected return, especially in respect of the net worth, for which current expected returns are just over 1%. The contribution from UK new business is progressing but the benefit of the actions taken to reduce costs and to channel new business to the selected platforms has not yet flowed through into the operating result. For International, whilst the business has continued to develop well, the result has been adversely affected by weaknesses in modelling systems which were identified during a groupwide review and update of the finance systems infrastructure. Lombard has continued to perform well, delivering its second highest sales for a first half period, but has not repeated the exceptional levels achieved in the first half of 2010.

The operating results of the Group are set out below and are discussed in more detail in the operating reviews that follow.

i) 2010 half year results include the following restatements:

a. reclassify £9 million from UK to International segment in respect of a DAC acquisition accounting adjustment; and

b. reclassify £52 million of positive investment fluctuations on non-profit fund investments as short-term investment fluctuations.

IFRS based operating profit analysis by segment

MCEV operating profit analysis by segment

The strategic review announced in February 2011 set a number of targets for improvement in the profitability of new business in the UK. A number of critical early steps have now been taken. The selection of the BHA protection platform and the Friends Provident corporate benefits platform as the new business platforms for the future, seeks to ensure that future new business will benefit from the low unit cost associated with these platforms. The IRRs of the business written on these platforms are already close to or above the target returns announced in February with the target platform for corporate benefits business achieving an IRR of 8.8% in the period and the target platform for the individual protection business achieving an IRR of 26.4%. The UK business has commenced the development of its annuity proposition and has recruited a number of key individuals to lead the retirement income business. The objective of significantly growing the Group's market position in retirement income will be achieved through increasing the capture of internal vestings, while maintaining overall profitability, as well as through the development of an open market proposition.

International is making good progress with its strategy as it seeks deeper penetration in the markets in which it has established positions. It has benefited from the strong growth in the Asian markets serviced through the Hong Kong and Singapore branches and is on track to deliver its financial targets by 2013.

Lombard new business in the first half of 2011 was the second highest first half sales Lombard has seen in its 20 year history. Sales are reduced compared to the first half of 2010 which benefited from the impact of the European Union Saving Directive ("EUSD") and the final phase of the Italian tax amnesty. New business for Lombard can be highly dependant on economic returns, and the recent volatility seen in global investment markets may introduce volatility into business growth, though the company remains well positioned in its market.

Profitable new business

The following table shows the IRR performance of the key business lines compared with the targets set for 2013.

(i) 2010 full year baseline includes an estimate of 12 months BHA and AXA UK Life Business results.

(ii) The 2011 Lombard IRR (and therefore the blended group IRR) now takes account of the Luxembourg regulatory regime in which DAC is an allowable asset.

Integration and cost savings

The integration of the UK businesses is on track and the Group remains confident of delivering the synergy target of £112 million, with £24 million of run-rate savings delivered by the half year. The integration activities are key to building an efficient and cost effective base for the combined business. In March 2011, the Group launched the "Friends Life" brand which brings together all parts of the UK business and is a key step in the integration, both for Friends Life's customers and people.

Cash delivery

The Group has committed to deliver both distributable cash and a capital efficient business. In the period to 30 June 2011 the Group has delivered a contribution to the annual distributable cash target of £283 million, after including a one-off benefit on a free surplus basis of £161 million following management actions to take account of certain elements of FSA's policy statement PS06/14 (Prudential changes for Insurers ("PS06/14")) in Friends Life Company Limited ("FLC") and BHA, primarily the recognition of negative reserves with an allowance for prudent lapses in accordance with the rest of the Friends Life Group. Excluding negative reserves, the Group has delivered operating free surplus before one-off capital synergies of £122 million in the six month period. The Group is confident that through the delivery of the targeted cost savings and the reduction of new business strain in the UK (targeted overall reduction of £200 million by 2013) the underlying free surplus, including related capital movements, will grow to support the £400 million annual distributable cash target for the business.

The one-off benefit of PS06/14 adoption of £161 million comprised £61 million in respect of the BHA acquired assets, with the balance arising from the AXA UK Life Business. This £100 million delivers part of the Group's overall £235 million capital synergies target for 2011, which the Group remains confident of achieving in addition to the £400 million distributable cash target.

UK operating review

UK operating segment

IFRS based operating profit before tax in the first half of 2011 was £364 million (30 June 2010: £99 million) reflecting the enlarged scale of the UK business following the acquisitions, as well as the one-off benefit following the implementation of negative reserves.

As part of the Group's capital optimisation programme, the Group has adopted elements of the PS06/14 guidance; this has enabled the recognition of negative reserves, thereby reducing capital requirements on protection products. This has effectively accelerated the surplus generated on these products with lower in-force surplus releases expected in future. In addition, as the profit profile of these products has changed the corresponding amortisation of deferred acquisition costs has likewise been accelerated. The resulting one-off benefit to IFRS based operating profit is £221 million in the period, with a corresponding reduction of £20 million in the emerging in force surplus. This £20 million reduction is likely to reoccur in the second half of the year and then to reduce to an annualised £25 million to £30 million in 2012 based on current expectations of in-force run-off. The overall net impact on IFRS based operating profit for 2011 (excluding improvements in new business strain), is expected to be approximately £180 million. IFRS profit after tax remains largely unaffected, despite the increased one-off benefit as the earlier recognition of surplus is offset by the accelerated run-off of acquired value of in-force business.

MCEV operating profit of £184 million (30 June 2010: £121 million) reflects the change in the size of the business following the acquisitions and the initial impact of the revised strategy. It is not significantly affected by negative reserves.

Included in the assets that were acquired within the AXA UK Life Business are certain portfolios of insurance business (the Guaranteed over Fifty, ("GOF"), and Trustee Investment Plan, ("TIP") portfolios) that are expected to be transferred back to AXA UK via Part VII transfers as part of the separation process agreed between FLG and AXA UK. In line with the agreed timetable for the finalisation of the AXA UK Life Business transaction, this transfer is anticipated to take place in the final quarter of 2011. The terms of the transfer were agreed as part of the transaction and the portfolios are treated as "held for sale" in the Group's accounts.

In addition, the shares of Winterthur Life UK Limited ("WLUK") are to be acquired by the Group once the businesses to be retained by AXA UK have been removed from WLUK. This acquisition is also on track to take place in the final quarter of 2011, once the GOF and TIP insurance portfolios have been transferred back to AXA UK. WLUK will only be included in the Group's accounts once the acquisition has taken place and is not therefore included within these financial results.

Profitable new business

The Group's strategy focuses on products and distribution channels in the UK market where Friends Life has a significant existing presence and the prospect of generating attractive returns. The key product lines in the UK are corporate benefits, protection and retirement income. Full implementation plans are being executed and tracked to ensure delivery of the 2013 targets. Management structures have been reorganised to bring individual protection and group protection under a single executive, consistent with the plan to write all new group protection and individual protection business on the existing BHA platforms.

In UK product lines where Friends Life will not be able to generate satisfactory returns (principally individual pensions and investment bonds) steps have been taken to exit or scale back sales to reduce new business strain.

New business profitability is not comparable year-on-year due to the inclusion of the acquired AXA UK Life Business and BHA. The profitability of new business will improve significantly as the remainder of the synergies and implementation actions are delivered. The profitability of the selected platforms is already close to or above target returns with the target corporate benefits platform at 8.8% (target: 10%) and the target individual protection platform at 26.4% (target: 20%).

As such, Friends Life remains confident of meeting the targeted product metrics by the end of 2013. The relevant sections below contain a detailed commentary on the results for each proposition.

Integration and cost savings

The UK Life Project has brought together the Friends Provident operations, the AXA UK Life Business and BHA through a series of acquisitions from November 2009 to January 2011. There is a unified executive team responsible for the day-to-day management of the business and this has overseen the development and roll-out of a single set of corporate values, an integrated staff grading structure, a streamlined pay and reward system and the alignment of performance management processes across the acquired businesses. The Friends Life brand was launched in March 2011, supported by significant brand activity including sponsorship of the Friends Life t20 cricket tournament.

The separation and integration programme remains on track. This includes the separation of the former AXA UK Life Business and BHA and the creation of a fully integrated Friends Life business.

Joint separation plans have been agreed with AXA and exits from transitional service agreements are in line with expectations (25% exited to date). Significant expenditure has been committed with the Group's external partners to deliver the separation of IT infrastructure from AXA Technology Services and to migrate certain blocks of policies onto strategic IT platforms.

The separation of BHA remains on plan with IT infrastructure changes due to be delivered ahead of the 12-month deadline ending January 2012, and all Finance and HR-related service agreements terminated ahead of schedule (including payroll and general ledger migrations).

The integration of these three businesses is expected to deliver synergy benefits of £112 million by the end of 2013, of which £39 million is expected to be realised by the end of 2011 on a run-rate basis. To date, a total of £24 million run-rate cost savings have been delivered through:

·; creating an integrated and streamlined sales capability for a targeted and rationalised individual protection proposition;

·; integrating the sales and marketing model for corporate benefits;

·; rationalising the combined brand budgets;

·; improving contractual negotiations with strategic sourcing suppliers; and

·; restructuring the senior management team and central functions.

The platforms acquired with BHA have been chosen to provide a cost-effective solution for the individual and group protection businesses, both for targeted IFA and controlled distribution. The restructure of the combined salesforce, marketing capability and customer service functions are well advanced.

The Group has announced the planned closure of the Coventry site by the middle of 2012. Further closures of the Loudwater, Manchester, Basingstoke and the BHA London offices, in line with the Group's target operating model, are planned during 2011 and 2012.

Implementation costs are on track against forecast and are being closely controlled through a robust governance structure. To date cumulative separation costs of £35 million (£20 million in the period) have been incurred and are tracking in line with budget. Cumulative costs of the integration project, totalling £30 million to date (£21 million in the period), have also been incurred and are at the level expected as the business aims to deliver the targeted cost savings.

Cash delivery

The planned strategy will steadily improve the free surplus generation of the UK businesses. The UK operating free surplus generated in the period was £317 million, up on 2010 primarily due to the inclusion of a one-off benefit of £161 million from the recognition of negative reserves across the AXA UK Life Business and BHA. The impact of investment in new business on free surplus was £124 million for the period and £98 million measured on a "cash" basis at product level (that is, before the impact of capital requirements and tax). £98 million on a cash basis for the 2011 half year compares to a 2010 full year baseline of £303 million, demonstrating strong progress in the six months towards the target annual reduction of £200 million. Further details are provided in the cash and capital sections. In order to further generate capital efficiencies, the Group is undertaking a number of Part VII transfers to move business from some of the smaller life companies into Friends Provident Life and Pensions ("FPLP"). These transfers are expected to reduce aggregate Pillar 1 capital requirements by around £90 million, thereby increasing excess capital over capital policies by around £135 million, and are on track to be approved by the court and implemented in 2011. Further Part VII transfers are planned for 2012.

Corporate benefits

The Friends Life corporate benefits business is one of the largest in the UK market with £18 billion of assets under management and over 17,000 corporate clients. Current propositions are focused around both trust and contract-based pensions solutions. The launch of the corporate platform in the second half of 2011 will expand this into a wider workplace savings market and also bring enhanced functionality to Friends Life's investment proposition.

The proposition is highly regarded in the market, ranking first in the Greenwich 2010 DC survey with eighteen leading employee benefits consultants ("EBCs"), based on overall proposition including investment solutions, service and relationship management.

Market environment

The Friends Life corporate benefit business has continued to deliver against a difficult economic back drop. The market has seen membership declining in recent years as a result of employers implementing recruitment freezes, and rationalising their workforces. There has also been an increasing trend in employers opting for pay freezes; this, coupled with increasing pressure on disposable income, means there have been limited opportunities to grow existing pension arrangements. Despite this pressure, Friends Life has been able to drive significant volume growth from the existing in-force schemes.

The outlook for the corporate benefits market is favourable, driven by changes in product mix, legislation and demographic factors.

Strategy implementation

In February, Resolution reiterated the importance of the corporate benefits market to the Friends Life UK strategy, based around selective participation in an increasingly valuable market. The business will improve value and returns by focusing on:

·; retention and growth of the existing large customer base;

·; selective participation in new business, focusing on the nil commission and fee based market; and

·; efficiency gains from synergy savings as the Friends Provident and acquired AXA UK Life Business are integrated.

Friends Life's selected platform for new corporate pension business, the existing Friends Provident New Generation Pension ("NGP") platform, will be enhanced in order to accept approximately 150,000 members and £3.5 billion assets moving across from the Embassy platform, which is being retained by AXA UK, in 2012. At the same time the business will consider opportunities to offer a wider product range to the NGP customer base.

Financial performance

(i) 2010 full year baseline includes an estimate of 12 months AXA UK Life Business results.

Strong incremental new business, combined with cost synergies has led to the significant improvement in the VNB written in the period, although at negative £1 million this is clearly not satisfactory. Overall returns are impacted by the less profitable new business on the acquired AXA UK Life Business platforms. The profitability of business written on the target Friends Provident NGP platform has been better, delivering £11 million of VNB and an IRR of 8.8%. This platform is expected to achieve the 10% target return during 2012 as the cost synergies and migration of business onto NGP takes effect.

Additionally, the overall business mix remains favourable leading to a static new business strain picture despite the increased flow of business.

New scheme wins in the first half of 2011 (40 scheme wins) were restricted as a result of both market caution around the AXA UK Life Business acquisition and a significant restructuring of the new business sales force in January, in order to drive out cost savings. The outlook for the second half of 2011 is promising with a strong pipeline of new business skewed towards single premium business, and a step-change in the quality of schemes being secured (average APE per scheme is significantly higher in 2011 compared to 2010).

Group pensions assets

Over the first half of 2011 group pensions assets have grown by approximately £1 billion and now stand at £18 billion. There have been strong volume increases in the first half of the year from increments to the existing book, with both the Friends Provident and acquired AXA UK Life Business performing well. This pattern is expected to continue in the second half of 2011, subject to market conditions, driving a strong underlying business performance from increasing fee revenues.

There have been notable successes as a result of defined benefit plan closures and large consolidation exercises where companies are folding a number of arrangements into one and choosing Friends Life as the consolidating scheme. This trend is expected to continue into the second half of the year.

The business is confident of achieving the 2013 financial targets as a result of:

·; expected business growth, benefiting from the combination of Friends Life's highly regarded proposition and a significant growth in customer premium flows driven by auto enrolment ("AE"). This is expected to increase revenues on a primarily fixed cost base;

·; ongoing separation and integration, in particular the migration of business off the AXA UK-owned platform Embassy, onto the more efficient NGP platform with reducing operational complexity and cost; and

·; continuing realisation of cost synergies as part of the wider programme to reduce the overall cost base of the business.

Protection

Friends Life's protection business brings together the Friends Provident individual and group protection propositions with those acquired from the AXA UK Life Business and BHA. It presents a unique opportunity to combine the strengths of each proposition to build a market leading protection provider.

The individual protection business provides life, critical illness and income protection cover to individuals and businesses. The products are distributed through IFAs, banks, estate agents and leading brands such as Tesco, Virgin and the AA.

The acquisition of BHA in January 2011 enhanced the group protection capability and the Group's product range now includes the full suite of group income protection, group life and group critical illness products. In February 2011, the Group confirmed group protection as a strategic proposition alongside individual protection to support distribution partnerships within the corporate benefits business.

The integration of the Friends Provident, AXA UK Life Business and BHA protection propositions is well underway with the decision taken to adopt the BHA platform as the base for the integrated business. In line with this the Friends Provident group income protection proposition will cease trading in the second half of 2011 from which point new group business will be written on the BHA platform.

Individual protection

Market environment

The individual protection market has held up well in a difficult economic climate, including a depressed housing market. Friends Life envisages this continuing in the lead up to the Retail Distribution Review ("RDR") implementation. As protection has been excluded from the main impacts of the RDR there is an expectation of an increased focus on protection sales by intermediaries in the short term.

The changes in the tax regime for life business will support the competitiveness in the medium term with all providers being on a level playing field for tax. The protection proposition is value based which should facilitate Friends Life being able to respond positively to the new tax regime for protection and the removal of gender based premium rating relative to the commoditised players where price is a more significant factor.

Strategy implementation

In March, the Group announced the decision to consolidate the individual protection business onto the acquired BHA platform. It is a low cost operating platform which will deliver the required functionality to support the business going forward. The proposition will be further enhanced by improving the functionality available on the platform, drawing upon the "best" features across the three former propositions.

The enhanced proposition is expected to be delivered in October 2011, with focused activity in train with each distribution partner to ensure the transition of all targeted IFA new business to the new platform by the end of 2011. The Group will also work with existing controlled distribution partners on a case-by-case basis throughout 2011 and 2012 to achieve the same outcome.

In February, a new distribution arrangement was announced to provide the AA with Life, Critical Illness and Over 50s products. This arrangement adds to the Group's current agreements with Tesco and Virgin Money. A new simplified product is being developed to leverage the existing distribution partnerships and also to attract new distribution.

Financial performance

(i) 2010 full year baseline includes 12 months BHA and AXA UK Life Business results.

The growth in sales volumes reflects the acquisitions of the AXA UK Life Business and BHA in 2010 and 2011. However, as the strategy is delivered the volumes will reduce from the 2010 baseline as there is more selective market participation through greater pricing discipline and increased focus on profitable product lines.

The improvement in value of new business from 2010 is due to the delivery of synergy benefits across the AXA UK Life Business and Friends Provident and the writing of increased levels of critical illness business in BHA following the acquisition. Further synergy benefits will be delivered as the businesses are integrated during the remainder of 2011 and 2012.

This change, combined with the transition to the target BHA platform and emerging costs synergies, is expected to result in a reduction in the 2011 full year new business strain of some £100 million. The IRR of individual protection business has improved to 5.0% in the period with the lower new business strain benefiting the half year result. The improvement is expected to continue through to 2013 as the strategy is delivered, with further efficiencies achieved as new business is migrated to the BHA platform and an increased proportion of the higher margin critical illness and income protection business is written. The current returns on the BHA platform are significantly higher than those being delivered through the Friends Provident and AXA UK Life Business with the IRR for the half year at 26.4% already in excess of the 20% target. As more business is migrated to the BHA platform and the mix of business changes, returns in excess of the target IRR are expected to be maintained although it is likely that there will be some fluctuations in the level of return achieved from period to period.

Group protection

Financial performance

The BHA proposition has made a significant difference to the scale of the Friends Life group protection proposition with sales in the period of £12 million APE significantly higher than that recorded in the first half of 2010. BHA contributed £7 million APE in the period with the Friends Provident proposition also performing well, recording £5 million APE (30 June 2010: £2 million).

New business profitability with VNB of £2 million and IRR of 7.0% is expected to improve as business is consolidated onto the BHA platform and volumes of income protection and critical illness are increased. 

Retirement income

Retirement income business written by the Group is generated from internal vestings as existing Friends Life pension policyholders retire. The current business model looks to maximise the value from these maturities but does not compete for business in the open market for those customers who look to consider other providers. The strategy for the annuity market has been reviewed and in future will include a more sophisticated proposition to vesting policyholders alongside developing new capabilities to support participation in the open market. There is a significant opportunity to leverage the value available from the £2 billion per annum of maturing pensions across the Group.

Market environment

The changes to the minimum retirement age in April 2010 created a spike in annuity market sales in the first half of 2010 and also reduced the number of consumers eligible to buy an annuity in future. As a result, annuity market sales fell back in the second half of 2010. Market figures for the beginning of 2011 show growth on the last quarter of 2010 but are still lower than previous years. The proportion of vesting pensions using the open market option ("OMO") continues to rise (57% in the first quarter of 2011). The share of vestings represented by impaired annuities also continues to rise and now stands at 23% of the annuity market (41% of open market annuities).

Prospects for future market growth remain strongly positive, principally as a result of the impacts of the baby boomer generation approaching retirement age and the continued movement from defined benefit to defined contribution pension products in the pensions accumulation phase. The removal of compulsory annuitisation at age 75 is expected to have a limited initial impact on the market except for those individuals with large retirement funds, as a result of the minimum income requirements that need to be met to take advantage of this increased flexibility. The OMO part of the market continues to benefit from the regulatory and industry push to publicise the benefits of the open market option, including access to impaired annuities.

Competition within the annuity market has reduced over the last year as the number of providers looking to compete at the top of the open market has reduced and providers have looked to reflect the impact of expected higher capital requirements under Solvency II in their pricing, leading to increased margins.

Strategy implementation

The Group has started to implement the annuity strategy which will focus on building the enhanced range of capabilities needed to retain vesting pensions and provide optionality for entry into the open market. The developments will include sophisticated mortality analysis to inform a highly targeted pricing approach, new customer management systems to support improved engagement with customers and distributors in the run up to retirement and the development of more sophisticated capability for the selection and management of investments such as credit. The developments are expected to deliver enhanced capabilities over a 12-18 month timeframe which will drive increased volumes and profitability during 2013. A good start has been made in building the team with the appointment of a Managing Director of Retirement Income and a Director of Longevity.

Financial performance

(i) 2010 full year baseline includes an estimate of 12 months AXA UK Life Business results.

Half year sales volumes of £19 million represent a 40% increase on the 2010 half year comparative, reflecting the acquisition of the AXA UK Life Business in the second half of 2010. Annuity sales in the first half of 2010 were boosted by the change to early retirement rules in April last year, which resulted in a spike of retirements from 50-55 year-olds who might otherwise not have been able to take their benefits for up to a further five years.

The key financials remain attractive for the retirement income proposition with high revenue margin and IRR for annuity new business. Annuity business also continues to be cash generative before allowance for capital requirements. VNB at the half year of £16 million is consistent with the annualised 2010 levels whilst IRR has improved to 23.8%. A significant portion of sales continues to be driven by internal vestings with a guaranteed annuity option where margins are lower.

Retention rates as a percentage of vesting funds have fallen marginally compared to 2010, reflecting the general move towards open market options seen in the market more widely. The benefits of the strategy to improve the value retained from maturing pensions business are not expected to be reflected in improvements to this retention figure or VNB until later in 2012.

UK: other products and Sesame Bankhall Group

Other products

Other products include the combined individual pensions and investment propositions of Friends Provident and the AXA UK Life Business. The Group does not expect to be able to generate the minimum target returns required from these product lines and as a result sales are being limited.

Other sales in the period relate to the onshore bond proposition acquired with the AXA UK Life Business. The decision was made to close to IFA new business applications on 31 March 2011 in line with the UK new business strategy announced in February. New business continues to be written through the Group's inherited tied bancassurance relationships with £14 million APE being written in the period.

The Group does not expect to see significantly increased lapses on the back book of bond business as a result of RDR, for various reasons such as the shrinkage in the population of advisers, the wide choice of funds offered and the popularity of income withdrawals on these bonds.

The remainder of the other product category mainly relates to individual pensions business which delivered £33 million of APE in the first six months. This includes a significant contribution from DWP rebates in respect of individuals who are contracted-out of the State Second Pension, with £11 million of APE generating £6 million of VNB. Contracting out of the State Second Pension ceases in 2012, with no further new business contribution from this business expected after that date.

Sesame Bankhall Group

Sesame Bankhall Group ("SBG") is the UK's largest distributor of retail financial advice and operates three market leading brands. Sesame is the leading appointed representative network, Bankhall is the largest support service provider for directly regulated IFAs and PMS is the biggest mortgage club for intermediaries. SBG traded profitably in line with expectations in the first six months, whilst making significant investments in its technology infrastructure and in new services for its customers, and has commenced a number of implementation activities in advance of RDR.

The operating result for the first six months of the year (£nil) reflects this programme of investment (30 June 2010:£2 million).

UK operating segment - In-force

A key driver of the Group's ability to meet its £400 million per annum distributable cash target is the rate at which profits emerge on the Group's existing in-force business.

Value of in-force ("VIF")

The most significant source of future profits in the UK book is unit-linked pensions and investment business which, at30 June 2011, accounted for 58% of the VIF. The corporate pensions business VIF is expected to grow over time as profitable new business is added, whilst the VIF from investment business is expected to decline over time as the Group has ceased to write new investment bond business, although the book remains open for increments. The profits emerging from with-profits business will decline over time as the existing business runs-off and increments to with-profits policies are small in volume.

The table below shows the 30 June 2011 UK VIF split, on an estimated basis, between the major product lines.

By product line, the primary drivers of future profit are:

·; Unit-linked pensions and investment: the value of charges (mostly annual management charges) less costs of administration and any renewal or trail commission. Profits are therefore sensitive to the levels of investment markets and, to a lesser extent, lapse and expense experience. Relative to other product lines, these policies require little regulatory capital.

·; Annuities: the value of the investment margins expected on the assets and the release of reserving margins, in particular in relation to longevity. Profits are affected by changes in long-term longevity assumptions and the return achieved on the assets. Relative to other product lines, these policies require significant regulatory capital.

·; Protection: the value of the margins assumed in the premiums less the best estimate expected costs of claims, expenses and renewal commission. Relative to other product lines, these policies require modest amounts of regulatory capital.

·; With-profits: typically the value of the shareholders' 10% share of the cost of bonus on 90/10 with-profits business and the value of charges less expenses on other with-profits business. Relative to other products lines, these policies require significant regulatory capital.

UK profit emergence in 2011

Based on the 2010 year end MCEV, during 2011 approximately £380 million of VIF is expected to monetise, of which unit-linked business accounts for around £200 million. In addition, recognition of negative reserves in respect of certain protection portfolios has accelerated the emergence of profit by approximately £146 million.

The table illustrates the VIF expected to emerge in future five year periods.

Unit-linked funds under management

Unit-linked funds under management are a significant source of future revenue in the form of annual management charges less investment management fees and trail commission. Unit-linked funds under management in respect of pensions business have grown in recent years, with inflows from new and existing business, combined with strong investment returns during 2010 in particular, more than outweighing claim payments. In 2011, the Group has seen net outflows of unit-linked pensions business driven by individual pensions business. Unit-linked funds in relation to investment business, primarily single premium bonds, have declined over the year as outflows have outweighed inflows as new business has been modest for some years and is expected to reduce further in the future.

Key drivers

Cash generation from the in-force business is sensitive to a number of key drivers, including:

·; investment performance of the assets, in particular on unit-linked funds and the £6.4 billion of assets held in respect of shareholder backed pension annuities;

·; lapse experience, which is a function of client behaviour in response to future uncertainties around the economic outlook and their particular situations, adviser behaviour and changes in UK UK fiscal and regulatory regimes;

·; future claims experience on the Group's protection and annuity business which is a function of underlying mortality and morbidity trends, risk selection and claims management; and

·; capital requirements as specified by the regulatory regime eg Solvency II in 2013.

·; During the first six months of 2011, cash generation was affected by:

·; the accelerated emergence of surplus on protection business through the adoption of negative reserves;

·; operating cost savings in respect of servicing in-force business; and

·; positive investment returns from a modest rise in UK equity markets and falling yields on fixed interest assets.

Further information on how these have affected cash generation, IFRS and MCEV profits are contained in subsequent sections. 

UK operating segment - IFRS based operating profit

UK IFRS based operating profit

(i) 2011 half year results comprise six months results for Friends Provident; six months for the AXA UK Life Business; and five months for BHA.

(ii) 2010 half year results comprise six months for Friends Provident and include the following restatements to align with the re-presentation of full year results at the 2010 year end:a. reclassify £9 million from UK to International segment; in respect of a DAC acquisition accounting adjustment; andb. reclassify £52 million of positive investment fluctuations on non-profit fund investments as short-term investment fluctuations.

(iii) 2010 full year results include 12 months for Friends Provident and four months for the AXA UK Life Business.

In the period to 30 June 2011 the UK segment delivered IFRS based operating profit before tax of £364 million (30 June 2010: £99 million), representing an increase of £265 million on the prior period. The increase reflects a number of significant changes to the UK segment including the acquisition of the AXA UK Life Business and BHA, and the subsequent implementation of negative reserves on both of these businesses.

Principal reserving changes reflect the implementation of negative reserves on protection business which accelerates the recognition of surplus. This earlier recognition of surplus has a one-off positive impact on the overall UK result of £221 million. This one-off benefit is offset by reduced ongoing in-force surplus (due to the accelerated recognition referred to above) of £20 million in the first six months, with a further estimated £20 million expected in the second six months. There is also an impact on the first half year through a reduction in new business strain of £5 million.

UK new business strain and in-force surplus

Details of new business strain and in-force surplus for the UK business are set out below with the 2010 half year comparatives restated in line with the operating profit changes noted above.

Reconciliation of cash strain to IFRS new business strain

IFRS new business strain of £66 million includes £31 million in respect of the AXA UK Life Business and BHA; this explains the majority of the increase from the half year ended 30 June 2010. In addition, the strengthened annuitant mortality assumptions, effective at the end of 2010, have increased new business strain compared to 2010.

The implementation of PS06/14 reserving changes and the recognition of negative reserves across the UK protection portfolio means that DAC is no longer recognised on this business. This change in treatment offsets the reserving benefits which are apparent in cash strain and as a consequence there is no significant reduction in protection IFRS new business strain. DAC continues to be recognised on pensions and investments business and has moved in line with expectations given the current product mix and levels of new business.

Reconciliation of cash surplus to IFRS in-force surplus

In-force surplus of £214 million is £101 million higher than that recorded in the first half of 2010 due to the inclusion of the AXA UK Life Business and BHA results. These account for £96 million of this income. IFRS surplus generated by the Friends Provident UK business increased marginally to £118 million (30 June 2010: £113 million).

The £1 million net amortisation of acquisition costs and front end fees ("DAC/DFF") reflects the relatively small value of these costs that has been capitalised in the post acquisition period. On the acquisition of the business, the existing capitalised deferred acquisition costs and deferred front end fees were eliminated and recognised within the acquired value of in-force ("AVIF"). In the post acquisition period, as new business is written, the capitalisation of acquisition expenses and front end fees resumed and hence the amortisation charged against in-force surplus will increase each year for pensions and investments business.

Investment return and other items

Longer term investment return on shareholder funds, net of debt, was lower at £4 million (30 June 2010: £14 million) reflecting a lower expected return on shareholder assets due to a decrease in expected rates and a change in asset mix from bonds to cash. This change has more than offset the effect of the higher asset base from the inclusion of the AXA UK Life Business shareholder assets. There was also an £8 million interest charge associated with the £500 million debt issued by Friends Life in April 2011.

Distribution businesses relate to Sesame Bankhall Group, which generated operating profits of £nil in the first six months of 2011 (30 June 2010: £2 million) and, for the period prior to its disposal in March 2010, Pantheon Financial Limited.

Principal reserving changes and one-off items

The implementation of the PS06/14 reserving change to the AXA UK Life Business and BHA has resulted in a one-off £221 million release of reserves including a DAC write-off of £22 million in the protection proposition. As a result of this early recognition of margins, the Group has reviewed the run-off profile of the AVIF and accelerated the amortisation charge for these UK businesses. As the amortisation of AVIF is presented as a non-operating item, the impact of this additional charge (£201 million) is recognised within non-operating profit.

UK operating expenses

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

UK operating expenses, which exclude commission payments and non-recurring costs, were £229 million compared to £91 million in the first half of 2010 reflecting the increased scale of the business. Operating expenses remain a key focus with the delivery of the £112 million targeted synergies critical to driving a step change in UK business performance.

Acquisition and maintenance costs total £219 million in the six month period compared to the full year 2010 baseline of £476 million. The 2010 baseline includes £31 million of WLUK operating costs, which the Group is due to acquire by the end of 2011. After adjusting for the inclusion of WLUK, costs are slightly below baseline on a run-rate basis and reflect a number of the early synergies, which include the reorganisation of sales, marketing and new business processing functions. These are however partially offset by temporary increases for VAT on transitional services from AXA UK, and increases in finance and governance, to support business as usual activities during a period of significant change.

To date in 2011, development costs of £10 million include £5 million expenditure on the development of the corporate platform, refinement and progression of the Group's retirement income strategy and a number of other projects spanning the UK Life business.

UK operating segment - MCEV operating profit

The MCEV operating profit of £184 million in the half year to 30 June 2011 includes a contribution from Friends Provident UK of £105 million (30 June 2010: £121 million). The half year to 30 June 2011 included a full six months' contribution from the AXA UK Life Business and contribution from BHA from 31 January 2011.

Value of new business

The value of new business for the six months ended 30 June 2011 was £28 million (30 June 2010: £20 million). The run-rate cost savings achieved at 30 June 2011 were largely not reflected in this result as they were not secured throughout this six month period. In addition, the result includes less profitable business lines where sales run-rates reduced by the end of the period.

Expected existing business contribution

The expected existing business contribution for UK includes the expected return on the value of in-force business, the expected return on shareholders' net assets and an allowance for the release of the cost of non-hedgeable risk capital.

The expected return on the value of in-force has increased following the acquisition of the AXA UK Life Business and BHA. However, the longer term rates of return applied to equities and properties have fallen since 2010.

Expected return comprises two components:

·; expected earnings on all opening assets assuming a reference rate based on the one year swap return set at the beginning of the period, plus an illiquidity premium which is applied to annuity business only; and

·; additional expected earnings consistent with management's long-term expectation of the asset returns on the business.

For assets such as cash and government bonds, management's expectation has been based on the one year risk free rate, by reference to the swap yield curve. The rate applied for the half year 2011 results is based on the one year risk free rate at 31 December 2010 of 1.14%, which is materially below the longer term rate that could be derived from a 10 year swap rate (31 December 2010: 3.70%). The use of a one year rate for cash and government bonds results in a lower expected return, and hence a lower MCEV operating profit, than that which would have been obtained had a longer term risk free rate been applied. It is estimated that adopting a longer term rate would increase operating profit by £20 million for the period. The Group believes that this approach is appropriate given the current market conditions and the decision to apply the lower rate has no impact on overall embedded value, as any reduction in operating profit is compensated for by an increase in economic variances.

Operating experience variances

Total operating experience variances in the UK amounted to a £7 million charge as a result of the net impact of:

·; higher lapses than expected on corporate pensions business, from a combination of scheme withdrawals, rewrites of existing schemes on different charging structures, and premium reductions; and

·; better mortality and morbidity experience than expected on life and income protection business, primarily as a result of improved recovery rates.

The persistency experience has been partially offset by the release of £11 million (£8 million net of tax) of the short-term recessionary provision held at 31 December 2010 of £26 million (net of tax).

In 2010 the operating experience variance benefited from a £14 million benefit following the release of the final element of a prior year's tax provision held to cover potential tax exposures arising on transactions undertaken by Friends Provident.

Operating assumption changes

In accordance with the Group's normal practice, there have been no operating assumption changes in the period to30 June 2011. The normal review of assumptions, notably those where experience is diverging from that expected, will be conducted in the second half of 2011 and, where necessary, assumptions updated accordingly.

Other operating variances

Other operating variances of £6 million (30 June 2010: £4 million) include the effects of a number of refinements to calculations to better reflect the underlying nature of the policies.

International operating review

International operating segment

The International business has increased new business flows, with APE growing to £132 million in the first half of 2011. Whilst this has generated reasonable VNB, enhancements to modelling methodology made at the end of 2010 to correct historic errors, show a reduced result when compared to the previous, unadjusted half year. The operating result reflects the growing book of business which generates an increasing return on the in-force book, offset by a number of one-off items that are explained further below.

The International segment comprises:

·; Friends Provident International Limited ("FPIL"), an Isle of Man based company manufacturing unit-linked regular contribution savings and single premium bond products targeted at high net worth individuals via distribution hubs in Hong Kong, Singapore and Dubai;

·; Overseas Life Assurance Business ("OLAB"), the overseas branch business of Friends Provident Life Assurance Limited, benefiting from EU freedom of services rules which allow regulated EU insurers to trade anywhere within its borders;

·; Financial Partners Business AG ("fpb"), a German distributor of OLAB unit-linked pensions business; and

·; a 30% interest in AmLife Insurance Berhad ("AmLife"), a Malaysian life insurance company, majority owned by AmBank Berhad, a major Malaysian banking group.

Market environment

Most core markets appear to have recovered well from the recession, in particular in Asia where demand is strong, although Europe remains a difficult environment and is expected to remain so over the course of 2011.

The largest market is the North Asian region, serviced through the Hong Kong branch. This is a relatively mature market, although continuing to grow strongly, with an established IFA distribution segment servicing affluent local nationals, corporate clients and expatriates. FPIL is one of the market leaders in IFA distributed business with very strong relationships, supported by strong service and leading propositions which include a wide choice of funds available through FPIL's range of unit-linked products. Quality of distribution relationships, service, commitment to overseas markets, systems capability and proposition development are fundamental to success in the region.

Singapore, serving South Asia, has been one of the most resilient regions, being first out of the global recession, with 14.5% GDP growth in 2010. It is rapidly evolving as a wealth management hub to rival Hong Kong, and should offer excellent growth potential for FPIL.

The United Arab Emirates and the wider Middle Eastern region are relatively under-developed, but wealthy markets with potential for further development. FPIL has transformed itself from a Western expatriate-oriented business to a leading regional life insurance operation and remains well positioned for continued growth in the region.

In Germany, the business participates, through OLAB, in the market for unit-linked individual pensions, a growth segment where the business has a well regarded product set. This market and the product choices offered by local players are still dominated by with-profits type investment products. Whilst the market environment is challenging in the short term, as low investment market confidence drives consumers towards traditional with-profits business, the unit-linked sector has good prospects in the medium term through demand for private sector savings and investments and the move from state to private pensions provision. The trend towards lower guaranteed rates of return is also reducing the attractiveness of traditional product structures whilst the impact of Solvency II is expected to limit market participants' ability to provide traditional with-profits product offerings. OLAB is well positioned to benefit from these changes as the German pensions market continues to evolve and market confidence returns.

The UK offshore market is significant and comprises mainly single premium investments. FPIL has a small market share, leaving significant scope for growth. The market remains attractive as mass affluent investors continue to seek tax advantageous savings solutions outside the UK.

AmLife participates in the Malaysian market through both an agency and the bancassurance channel. This is a fast moving market which is currently closed to further entrants through the rationing of available licences.

Strategy implementation

The Friends Life strategy is to grow the value of the International business and its component parts, improving overall growth prospects and returns. As the business grows, the level of cash generation is expected to improve to deliver the targeted sustainable cash generation of at least £20 million per annum by 2013 whilst increasing new business IRR to at least 20%.

The business has continued to invest in building capability, developing propositions and platforms, and revising product structures to improve profitability and persistency. New business profitability will be enhanced by the development and rollout over the next 18 months of an improved FPIL regular premium product.

Financial performance

New business volumes

International new business sales (APE) increased by 10% compared with the first half of 2010, with a 14% increase for FPIL offset by a 7% reduction for OLAB. The results were driven by strong sales in Asia and the UK, offset by weaker European sales, where market conditions remain challenging.

New business profitability

The value of new business has reduced from the levels of the first half of 2010 following the enhancements to internal models and methodology changes that were made in the second half of 2010 which impacted the measurement of new business profitability. The full year 2010 results are consequently a better comparator for VNB and PVNBP margin.

Total International margins are slightly below 2010 full year comparatives as a result of changes in business mix, with the writing of a higher proportion of FPIL regular premium business and a lower proportion of OLAB business. This driver has likewise adversely affected the half year new business IRR of 13.5% (31 December 2010: 15.4%).

Funds under management as at 30 June 2011 total £5.9 billion and have increased by 3% in the six months to 30 June 2011. Fund flows are largely driven by the growth of the FPIL business with net in-flows in the period of £0.3 billion.

IFRS based operating profit

(i) 2010 half year results comprise six months for Friends Provident and a reclassification of £9 million from UK to International segment in respect of a DAC acquisition accounting adjustment.

International generated IFRS based operating profits of £41 million in the six month period to 30 June 2011 compared to £47 million in the first six months of 2010.

New business strain

Reconciliation of new business strain to IFRS

New business strain has reduced by £5 million to £52 million period on period principally as a result of the increased benefit from financial reinsurance. Higher acquisition costs as sales volumes increased have partly offset this benefit.

IFRS new business strain has increased to £20 million from £11 million at half year 2010, largely due to modelling improvements as well as increased new business volumes. Other IFRS adjustments include the elimination of financial reinsurance from IFRS new business strain as well as the elimination of actuarial funding and sterling reserves which are a feature of the products sold by the International business.

In-force surplus

Reconciliation of in-force surplus to IFRS

Cash in-force surplus increased by £2 million to £73 million, benefiting from the growth of the back book although this growth has been restricted by adverse economic and currency variances, notably the weakening of the US Dollar against Sterling. Exchange rate movements on Sterling reserves have had a £5 million adverse impact on the cash surplus in the period.

In-force surplus on the IFRS basis increased from £58 million in the first half of 2010 to £69 million at half year 2011 and likewise benefited from the underlying cash drivers. However, the majority of the exchange rate impact on the cash surplus is reversed out within other IFRS adjustments and therefore does not impact on the IFRS in-force surplus.

In the first half of 2010 the cost of enhanced allocations on in-force policies still in their initial 18 month period was not deferred, as in 2010 these policies largely related to the block of pre-acquisition business, and therefore no further DAC was set up on this block of business. Much of this impact is offset by increased DAC amortisation on the growing book of post-acquisition policies, which was minimal in 2010. The first half of 2011 represents a more normalised level of in-force surplus. In future the growth of the book of post-acquisition business will result in higher DAC amortisation but this should be more than offset by the growth in in-force surplus from the growing back book.

Principal reserving changes and one-off items

Adverse principal reserving changes and one-off items of £6 million comprise a number of small adjustments principally relating to FPIL, arising from the Group's review and enhancement of the business's financial infrastructure.

Operating expenses

International operating expenses, which exclude commission payments and non-recurring costs, have increased to£31 million from £25 million in the first six months of 2010. Expense increases across the business reflect the higher new business volumes and improvements to propositions and distribution capabilities as well as the costs of strengthening the governance and controls to meet the needs of a growing, complex business. Development costs relate to the German business and the development of the International business's platform.

MCEV operating profit

International MCEV operating profit has reduced from £31 million in the first half of 2010 to £15 million in 2011.

Value of new business

New business profitability has reduced from the levels of the first half of 2010, with full year 2010 being a better comparator for VNB. Margins have also been affected by business mix in the first half of 2011, leaving the VNB result below 2010 levels despite increased new business volumes.

Expected existing business contribution

The expected existing business contribution has increased from £12 million to £14 million. This has been driven primarily by strong growth of the in-force book, offset by a slight reduction in expected rates of return.

Operating experience variances

Adverse experience variances of £1 million result from a number of small items primarily in relation to persistency.

Operating assumption changes

Adverse operating assumption changes of £2 million are in respect of AmLife basis review changes for mortality and expenses (identified through the annual valuation process for AmLife which has a year end of 31 March) offset by a small positive persistency variance.

Other operating variances

Adverse other operating variances amounting to £13 million are mainly in respect of £7 million improved modelling of FPIL partial surrenders and a variety of other smaller modelling improvements, mainly in FPIL, which increase the robustness of the reported market consistent embedded value. The models for FPIL are being updated as part of the Group's overall transformation of the finance systems infrastructure to a more robust base, which will provide a basis for enhanced financial and economic risk management.

Lombard operating review

Lombard operating segment

(i) The 2011 Lombard IRR now takes account of the Luxembourg regulatory regime in which DAC is an allowable asset.

Lombard has delivered a solid result in the first half of 2011, although the exceptional sales experienced in certain markets in the first half of 2010 have not been repeated. MCEV operating profit has been impacted by this lower contribution from new business, whilst IFRS based operating profit continues to be sustained, benefiting from the higher managed asset base.

Lombard is the leading pan-European life assurance business specialising in onshore estate planning solutions for high and ultra-high net worth individuals. Based in Luxembourg the business offers innovative solutions and superior service, through a well-established distribution network of private banks, high-end IFAs and independent family offices across Europe and selected markets in Latin America and Asia. Solutions offered by Lombard are typically based on single premium, whole of life, unit-linked life assurance structures with all but minimal levels of life exposure reinsured. The business is well placed to benefit from the continued flow of business into onshore propositions.

Market environment

2010 was an exceptional period for the cross-border life insurance market with this being particularly evident in the first six months of the year. Total Luxembourg life insurance market premiums were estimated at around €22 billion with Lombard accounting for 16% of the market, underlining its market leading position.

Market activity has been markedly lower in the first half of 2011 as the European Savings Directive ("EUSD") and the Italian tax amnesty, which drove volume in the first half of 2010, were not prominent and there were no other similar event drivers. Additionally, whilst Lombard's performance is not directly linked to investment markets the continued market uncertainty and pervasive risk arising from the ongoing uncertainty in sovereign debt and general market-related volatility has led to clients postponing actions to structure their investments and manage intergenerational transfer of their wealth.

Notwithstanding the challenging short-term market conditions, the longer term drivers of the demand for compliant "Privatbancassurance" solutions remain compelling.

Strategy implementation

There are three core elements of Lombard's strategy and these will continue to progress in 2011:

·; strengthening of sales force: Lombard has strengthened its sales force in key markets with a 20% increase in sales consultants by the end of July 2011. This action, taking advantage of Lombard's leading market position, enhances Lombard's presence in key geographical markets. The business will continue to invest throughout the remainder of 2011 with the objective of increasing the total sales force by some 25%;

·; investment in marketing and deepening partner relationships: Lombard expanded its marketing and product development resource to enable further valuable support to existing and potential partners. Lombard is undertaking due diligence exercises with selected key partners to continue the tailoring of its service offering to match their precise needs and those of their clients (thereby enhancing Lombard's franchise and protecting margins); and

·; operating model: consistent with the needs of Lombard's partners and clients, this initiative is seeking to further improve the maintenance and servicing of policies whilst streamlining the business's operating model. This will contribute to enhancing competiveness and improving profitability whilst reducing business model risk.

It is envisaged that these initiatives will contribute to the delivery of the financial outcomes (strong growth in profitable new business and cash generation) by 2013 (IRR above 20% and £30 million dividend).

Financial performance

Overall, business in the first half of 2011 is below 2010 levels, with sales volumes of £97 million APE 28% below the same period in 2010. The lower volumes have directly affected the contribution from new business with VNB of£18 million and IRR of 19.0% falling below those generated last year. Historically, both VNB and IRR have increased in the second half of the year and accordingly the current levels should not be extrapolated for the full year. Compound annual growth rate ("CAGR") for sales in the first half of the year is 11% between 2007 and 2011.

Performance in the period has being impacted by a number of factors including:

·; the absence of strong policy drivers to generate new business which Lombard experienced in the first half of 2010, namely the planned EUSD changes, and ongoing flow of Italian post tax amnesty business;

·; Northern Europe and UK are primarily impacted by lower activity among IFAs. The business has seen some increase in activity but it remains significantly below 2010; and

·; a general increase in the time it takes to close large client deals due to market uncertainties in certain European countries.

Despite these factors, several markets have performed strongly with Finland, France, Italy, Sweden and Asia showing volumes significantly above 2010 business levels. These improvements reflect the benefits from sales force enhancement and continued deepening of relationships with partners in these markets. The growth in these regions is encouraging and highlights the market diversity of Lombard's business.

APE performance per region is as follows:

Whilst the external environment is challenging, it is anticipated that activity will be higher in the second half of 2011. This reflects the natural switch in the focus of the sales force from developing leads and client opportunities to closing business. The second half of the year also traditionally benefits from the December fiscal year end in operation within most markets. It is anticipated that Lombard will continue to attract a significant share of its target high and ultra-high net worth market segment.

Albeit below 2010 levels, the pipeline of new business remains high and large case prospects in development are encouraging.

IFRS based operating profit

Lombard generated operating profit before tax of £21 million in the six month period to 30 June 2011, up 62% on 2010.

New business strain and in-force surplus

Reconciliation of new business strain to IFRS

Period on period, levels of new business strain have remained higher than the 2010 full year, despite the lower sales volumes to date. This is due to local rules on deferral of acquisition costs which mean that DAC has been indirectly restricted by the lower level of new business to date. This proportion is expected to return to consistent levels in the second half of the year. Excluding the impact of deferred acquisition costs, actual new business strain cash flows have improved significantly compared to the first half of 2010.

Reconciliation of in-force surplus to IFRS

Surplus generated has benefited principally from the growth in the existing book of business with the increase in charges generated reflecting the growing scale of the managed asset base.

Average funds under management have increased significantly from £14.5 billion in the first half of 2010 to £17.7 billion in 2011 as a result of both investment market growth in 2010 and the significant sales volumes brought onto the book in the second half of 2010. The business has delivered net business inflows of £0.6 billion through the first half of 2011.

Operating expenses

The operating expenses of Lombard, which exclude both commission payments and non-recurring costs, are set out in the table above. Notwithstanding the growth in the in-force book, Lombard has maintained tight control of expense levels which, on a constant currency basis, and excluding an accrual for the management long-term incentive plan, are 5% higher than 2010, while average funds under management increased by 17%.

Development costs consist of expenses related to new product and market development.

Lombard MCEV operating profit

Lombard MCEV operating profit of £40 million has decreased from the prior year of £51 million, principally due to the impact of lower sales volumes on the value of new business.

The value of new business reduced as a result of lower volumes and lower average margins with the semi-fixed nature of acquisition costs also adversely affecting the new business contribution during the first months of the year.

The overall margin levels achieved in 2011 have decreased compared to last year as a result of a different product mix (lower proportions of higher margin IFA business and a higher proportion of large cases: 40% in 2011 compared to 30% in 2010).

Expected existing business contribution

The expected existing business contribution of £21 million is £5 million higher than the same period in 2010 with this increase principally resulting from the increased in-force book. Rates of return have also reduced slightly compared to 2010 levels.

Operating experience variances

Persistency and mortality experience variance are the principal drivers of a favourable variance of £2 million in the period.

Corporate operating review

FLG corporate segment

The FLG corporate segment includes the corporate holding and principal service companies of the Friends Life group.

Financing and interest costs

FLG has a number of debt instruments and the operating cost of financing these for the half year ended 30 June 2011 are presented below.

(i) Market value is based on listed offer price, at 30 June 2011, excluding accrued interest and before tax on market valuation

(ii) Finance cost is operating profit impact, before tax

The interest cost incurred differs between the two bases, reflecting the lower expected rate of return applied in the MCEV results.

In so much as these debts have been raised to support the ongoing growth and development of the life operating businesses the cash raised has been loaned to the UK operating segment. The external cost attributable to each segment is shown here.

FLG corporate IFRS based operating profit

The corporate result is primarily driven by the expected return on the debt held in the Group, offset by the investment return on shareholder assets. Corporate costs of £3 million primarily relate to the FLG long-term incentive scheme.

FLG corporate MCEV operating results

The corporate business unit consists of both non-covered and covered business. The non-covered element relates to the net assets of the FLG corporate holding and service companies whilst the covered element principally represents the net debt liabilities held at the Friends Life group level.

The Friends Life corporate segment includes the interest on the STICS and external lower tier 2 debt instruments at the reference rate and expected return over reference rate.

The interest on the £200 million debt issued to Resolution holding companies of £24 million is included within other income and charges as well as £3 million of corporate costs (in line with IFRS results). Other items primarily comprise the expected return on the pension asset and other investments (which are included in investment return in IFRS).

Resolution corporate segment

The operating results of the Resolution holding companies are summarised in the table below. These are presented consistently in the IFRS financial statements and MCEV supplementary information.

Friends Provident holding companies issued £700 million lower tier 2 debt to Resolution in September 2010 to fund the acquisition of the AXA UK Life Business; £500 million was repaid in April 2011.

Financing and interest costs are analysed in the following section.

Other operating items mainly comprise fees payable to ROL, directors and professional fees and other corporate costs.It also includes interest earned on cash based assets held by the Resolution holding companies.

Financing and interest costs

External financing within Resolution holding companies is summarised in the following table:

The deferred consideration notes were issued in September 2010 in connection with the acquisition of the AXA UK Life business; £63 million was repaid in June 2011.

The acquisition finance facility was a term loan facility agreement also issued in September 2010 to fund part of the consideration payable for the acquisition of the AXA UK Life business; this loan was repaid in April 2011.

IFRS result

Group IFRS profit

The Group's IFRS results are set out below, including a reconciliation from operating profit to IFRS based profit before tax. The Group uses the operating profit measure as the Board considers that this better represents the underlying performance of the business and the way in which it is managed. These results include the results of the acquired Friends Provident business, the AXA UK Life Business and BHA from the deemed dates of their acquisitions, which are4 November 2009, 3 September 2010 and 31 January 2011 respectively.

(i) 2011 half year results comprise six months results for Friends Provident; six months for the AXA UK Life Business; and five months for BHA.

(ii) 2010 half year results comprise six months for Friends Provident and include the following restatements:a. reclassify £9 million from UK to International segment in respect of a DAC acquisition accounting adjustment; andb. reclassify £52 million of positive investment fluctuations on non-profit fund investments as short-term investment fluctuations.

(iii) 2010 full year results include 12 months for Friends Provident and four months for the AXA UK Life Business.

IFRS based operating profit for 2011 was £390 million comprising the operating profit for the life business of £426 millionand £36 million of corporate costs. A detailed review of the operating profit of each segment has been provided in the relevant segmental review section of this business review.

Non-operating items

Short-term fluctuations in investment return of £2 million includes a £9 million benefit from the unwind of the credit default allowance in excess of actual defaults within the non-profit fund. This is partially offset by a £7 million variance on expected investment return.

In April 2010, the Friends Provident UK business reduced its holdings in F&C Commercial Property Trust ("F&C CPT") from 50.3% to 34.16% in order to manage the property exposure of the life funds. As a result, the Group is no longer required to consolidate the assets, liabilities and results of this investment trust and so the result for 2011 is nil.The £23 million return on F&C CPT in 2010 reflects the market return attributable to third-parties for the period upto April 2010.

Acquisition accounting adjustments, totalling £494 million, represent the amortisation and impairment of the intangible assets recognised on the acquisitions. These charges include £252 million of amortisation of acquired in-force business, and £41 million of amortisation of other intangible assets. Following the implementation of negative reserves within the AXA UK Life business and BHA, an acceleration of AVIF amortisation amounting to £201 million has been recognised to reflect the earlier recognition of surplus within operating profit.

Non-recurring items include the gain on acquisition of BHA of £68 million and £1 million costs associated with this. Other non-recurring costs totalling £79 million include Solvency II implementation and other finance transformation costs of £24 million, separation and integration programme costs of £41 million, capital optimisation programme costs of £8 million and other non-recurring costs of £6 million.

Interest payable on the Friends Provident STICS of £16 million is included as a £13 million deduction to corporate long-term investment return in the operating profit analysis, and £3 million adverse investment fluctuation. As the STICS are accounted for as equity in IFRS (with interest being recorded as a reserve movement), £16 million is added back to the non operating result to reflect the requirements of IFRS.

A shareholder tax credit of £147 million is recognised in the period and is significantly higher than the loss before tax of £102 million would imply. The principal differences between the implied and the actual shareholder tax credit relate to:

·; a £48 million one-off shareholder tax credit triggered by the change in pricing basis on certain unit-linked funds to reflect the fact that these funds were contracting. The discounted tax provision previously included in the pricing (and thus reflected in policyholder liabilities) has been replaced by an undiscounted provision for asset gains. This facilitated the release of a shareholder tax provision which was previously established as IFRS does not permit the discounting of tax provisions.

·; a £30 million shareholder tax credit relating to the reduction in rate of UK corporation tax; and

·; the £68 million accounting gain on the acquisition of BHA, which is non-taxable.

Summary IFRS balance sheet

(i) Adjusted to exclude 499,873 Resolution Limited shares held by subsidiaries at 30 June 2011 (31 December 2010: 8,579,292).

At 30 June 2011, IFRS total equity was £6,418 million (31 December 2010: £6,549 million), with equity attributable to equity holders of the parent of £6,105 million (31 December 2010: £6,227 million) giving IFRS net assets per share attributable to shareholders of £4.20 (31 December 2010: £4.31) based on shares in issue at the balance sheet date, excluding Resolution Limited shares held by subsidiaries.

Resolution Limited issued share capital has increased reflecting the scrip element of the final 2010 dividend (14 million shares), offset by the share buy-back programme and changes in the shares held by subsidiaries. The return of capital to shareholders through the share buy-back programme which was announced on 7 June 2011 and commenced on 8 June 2011 has resulted in a reduction in issued share capital of 11 million shares with a total value of £34 million. The share buy-back programme is expected to conclude by the end of 2011. There has been a reduction in the number and value of shares in Resolution Limited held by the life companies (£1 million compared to £20 million at 31 December 2010).In accordance with IFRS requirements, these shares have been excluded from the equity attributable to equity holdersof the parent. It is expected that the Group's remaining shareholdings in Resolution Limited will be divested by the endof 2011.

Financial assets are predominantly invested in listed shares, other variable yield securities and corporate bonds and asset backed securities where 96% are at investment grade or above. Other assets and other liabilities shown above include £284 million of net assets in respect of the GOF and TIP portfolios which are treated as "held for sale" in the Group's accounts.

As part of the financing for the acquisition of the AXA UK Life Business, a £400 million short-term funding arrangement was put in place. This was repaid in April 2011 following the successful raising of £500 million lower tier two debt in the Friends Life group.

At 30 June 2011, the ratio of debt to IFRS equity, gross of debt, was 16.9% (31 December 2010: 16.3%), with the movement primarily reflecting the decrease in equity following the return of capital to shareholders.

MCEV results

Group MCEV profit

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 the previous year's assumptions on existing business for the actual experience. The total profit recognised under both MCEV and IFRS will be the same over the life of each policy, it is the timing of the recognition of that profit which differs.

Resolution presents the results and financial position for its life and pensions business ("covered business") on the MCEV basis and for its other businesses on the IFRS basis.

Group MCEV profit

Overall MCEV operating profit before tax for the half year was unchanged at £180 million in 2011 and 2010, primarily reflecting the impact of the reduced contribution from International and Lombard new business as well as the lower expected rates of return. The 2011 half year operating profit comprised operating profit for the Friends Life group of£196 million (30 June 2010: £188 million) and £16 million (30 June 2010: £8 million) of corporate costs in the Resolution holding companies.

Non-operating items

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 Group had a £48 million adverse impact on results (30 June 2010: £16 million favourable). This arises from a loss of £28 million on foreign exchange movements in both the International and Lombard businesses, reflecting the weakening of the euro and US dollar in the period and a loss from the mark to market valuation of group debt (including the STICS) of £35 million. Offsetting these losses was a gain on wider economic experience of £15 million, arising from gains on corporate bonds and swaps, partially off set by falls in equity returns.

The MCEV of the covered business of the Group remains relatively insensitive to market risk and, in particular, falls in equity and property capital values. The sensitivity to a 10% fall in equity and property capital values remains broadly in line with the position at 31 December 2010 which was a net of tax adverse impact of £258 million.

Non-recurring expenses and non-operating items totalling £46 million (30 June 2010: £9 million) comprise £1 million costs relating the acquisition of BHA and £79 million of non-recurring expenses as described in the IFRS section offset by £34 million benefit from the impact on the UK business of the Budget in April 2011. This includes the impact on the value of in-force business of changing the corporation tax rate from 27% to 26% with effect from 6 April 2011 and changing the ultimate corporation tax rate effective from 6 April 2014 from 24% to 23%.

MCEV balance sheet

(i) Includes IFA distribution and management services businesses.

(ii) Adjusted to exclude 499,873 Resolution Limited shares held by subsidiaries at 30 June 2011 (31 December 2010: 8,579,292).

At 30 June 2011, net Group MCEV was £6,482 million (31 December 2010: £6,515 million) giving MCEV per share of £4.46 based on shares in issue at the balance sheet date, adjusted to exclude shares held by subsidiaries. MCEV per share at 31 December 2010 was £4.51 based on shares in issue at that date adjusted to include the impact of the share consolidation and rights issue.

At the end of the period the ratio of debt to gross Group MCEV (excluding internal debt) was 19.3% (31 December 2010: 18.7%), primarily reflecting the reduction in MCEV arising from the return of capital to shareholders. The ratio of debt to gross FLG MCEV was 17.2% (31 December 2010: 16.6%).

Resolution holding companies net worth, including internal and external debt, increased by £178 million over the period reflecting the £350 million dividends received from FLG, offset by £141 million cash dividends paid to shareholders, the holding companies' results for the period and the impact of the share buy-back programme and disposal of shares held by subsidiaries, consistent with IFRS.

The annualised FLG operating ROEV, after tax, for the period to 30 June 2011 is 4.5% compared to a 2010 baseline of 5.5%. The baseline operating ROEV includes the estimated full year impact of AXA UK Life Business and BHA and assumes nil impact of operating variances and assumption changes. The operating ROEV at 30 June 2011 principally reflects the reduced contribution from new business as a proportion of opening embedded value. The ROEV has also been adversely affected by low expected rates of return, particularly on net assets, as well as the annualisation of operating variances in the period. The ROEV is calculated assuming that experience in the second half of 2011 will mirror that recorded in the first half and as a result any items which are one-off in nature will be compounded, causing a larger effect than would otherwise be expected if they did not recur. The use of a one year rate for cash and government bonds to calculate the expected existing business contribution results in a low expected return, and hence a lower operating ROEV than one based on a longer term view of swap rates.

Cash and capital

Group cash delivery

Available shareholder cash ("ASC") at 30 June 2011 was £793 million. The movement in ASC in the six months to30 June 2011 does not include any cash paid up from the life companies in respect of surplus generated by these businesses; in accordance with normal practice, cash transfers from the life companies, based upon actuarial valuations, form part of the year end reporting process. Consequently ASC for the first half of the year will not normally include cash generated in the life companies. As a proxy for the expected contribution to ASC from the life companies, the Group has considered the movements in free surplus in the period and compared these to the distributable cash target ("DCT") of £400 million per year. DCT is defined as the increase in FLG ASC after interest and before dividends to Resolution holding companies. DCT is the amount that could be paid to Resolution holding companies without reducing the MCEV of FLG, excluding investment variances and non-recurring items. The contribution to the DCT from FLG in the period, based on movements in free surplus, is £283 million, including the one-off impact of £161 million arising from the implementation of certain elements of PS06/14. This one-off benefit of £161 million represents part of the ongoing programme of optimising the capital base which is well underway. The Group remains confident of delivering its annual target of £400 million in 2011 and of generating additional cash from the targeted capital synergies of £235 million announced previously. These capital synergies will facilitate the Group's announced potential return of a further£250 million of capital to shareholders in 2012. The Group continues to maintain a prudent buffer, in addition to working capital, of £400 million to cover the external dividend, financing and corporate costs at Resolution holding companies level.

Cash management framework

The Group's cash management framework is based on the movement in MCEV, reflecting the basis of MCEV as the discounted value of expected future cash flows on a market consistent basis. The chart below shows how the core components of MCEV within this framework, and their respective values as at 30 June 2011, reconcile to ASC.

The total MCEV is split between the net worth, or shareholder resources, and the value of in-force business ("VIF"). Shareholder resources comprise the free surplus, required capital and inadmissible assets of the business. Required capital is based on the Group's capital management policy of maintaining 160% of Group capital resource requirements ("CRR") excluding WPICC, and at life company level, the higher of 150% of Pillar 1 CRR excluding WPICC and 125% of Pillar 2 CRR including Individual Capital Guidance. For other operating businesses and Friends Life group holding companies, free surplus is defined as IFRS net assets less required capital and inadmissible assets on an IGCA basis (for MCEV, where these assets relate to non-covered business, they are all included within free surplus). VIF comprises the value of the future cash flows arising from the policies currently in-force.

External debt issued by FLG is offset against required capital in the life businesses as this debt has been guaranteed by life operating companies and has been used to support their activities. This debt comprises STICS of £407 million and lower tier 2 subordinated debt of £706 million. Deferred consideration notes ("DCN") issued by the Company to AXA UK as part of the acquisition of the AXA UK Life Business are offset against free surplus.

ASC is stated after the deduction of regulatory and other restrictions on the availability of cash resources. ASC represents cash available to cover corporate costs, to service debt issued by Resolution holding companies and, subject to shareholder approval, to pay dividends, fund future acquisitions, or return to shareholders. The Group intends to maintain a prudence buffer, within ASC, of £400 million to cover the Company's dividend cost, DCN repayments and interest and Resolution holding companies corporate costs.

The key components and drivers of ASC for 2011 are detailed in the following sections.

a) Value of in-force business and shareholder resources

The movement in the VIF and shareholder resources is summarised in the table below, adopting an MCEV style presentation on a net of tax basis. The movements in shareholder resources are further subdivided between required capital, including inadmissible assets and free surplus.

Analysis of movement in MCEV

MCEV profit after tax for the period of £54 million comprises £204 million of free surplus generation offset by £19 million reduction in required capital and £131 million reduction in VIF. These movements are set out in more detail in the following section.

The value of BHA at acquisition was £226 million, comprising VIF of £132 million, required capital of £91 million and free surplus of £3 million. The consideration paid by FLG was £168 million, resulting in a gain on acquisition of £58 million. The net impact on free surplus was a reduction of £165 million reflecting the consideration paid net of the free surplus acquired.

Other movements in net equity comprise actuarial losses on defined benefit pension schemes (£24 million) offset by the reduction in the adjustment to exclude intra-group holdings in Resolution Limited shares (£19 million).

Capital and dividend flows comprise outflows in respect of the cash dividends paid to shareholders of £141 million and the impact of the share buy-back programme of £34 million, partly offset by £4 million inflow reflecting the change in value of the Lombard share option scheme (as this is an equity settled scheme, changes in value are shown as movements in equity).

The £500 million external tier 2 bond issued by FLG (net of £3 million costs) was used to repay £500 million of internal lower tier 2 debt issued by FLG to Resolution holding companies in 2010. The external tier 2 bond is offset against required capital as it supports the activities of the life businesses whereas the internal debt was, for FLG, offset against free surplus. Consequently the issue of the external tier 2 bond and repayment of the internal debt results in an increase in free surplus and an offsetting reduction in required capital.

b) Impact of MCEV profits on shareholder resources and free surplus

The table below sets out the impact of the MCEV profits generated in the period on the VIF, required capital and free surplus of the business. The analysis identifies the impact of underlying surplus generation, operating variances, including the implementation of certain aspects of PS06/14, and non-recurring and other non-operating items.The analysis is shown on a net of tax basis.

(i) The expected return from in-force business is shown net of the expected return on FLG external debt. As the coupon on this debt of £24 million is included within the financing costs of £41 million, it has been added back to underlying MCEV generation to provide greater clarity on the impact of debt on free surplus generation.

The key driver of underlying MCEV generation is expected return from in-force business net of investment in new business; this is explained in more detail below. The underlying free surplus generation of £169 million and £161 million impact on free surplus of the adoption of certain elements of PS06/14 underpin the £283 million operating free surplus generation in the period.

The impact on free surplus of financing costs, net of tax, comprises £11 million in respect of the STICS issued by FLG, £13 million in respect of the existing external lower tier 2 debt and new tier 2 bond issued by FLG and £17 million in respect of the internal lower tier 2 debt issued by FLG to Resolution holding companies. The receipt of this interest is included in the operating result for Resolution holding companies.

The implementation of certain elements of PS06/14 resulted in accelerated recognition of free surplus; this has been largely offset by a reduction in future profits that were present in the VIF; the £2 million net MCEV profit represents the release of the associated cost of capital.

Other operating items relate to the impact of persistency and modelling changes on VIF and the positive impact on free surplus of mortality and morbidity experience variances, offset by FLG corporate costs.

Economic variances include £25 million for an increase in the market value of corporate debt within required capital. Adverse investment variances in Lombard and International have reduced VIF as a result of fund performance and exchange differences.

Non-recurring and non-operating items include the impact on VIF of the reduction in the corporation tax rate (£26 million) offset by the impact on free surplus of separation and integration and Solvency II costs (£62 million) as well as a related minor increase in required capital (£2 million).

c) Free surplus - £1,105 million

The generation of free surplus, net of movements in required capital, underpins the declaration of future dividends. The table below details the movement in free surplus.

(i) Before coupon on FLG external debt of £24 million

Total free surplus of the Group amounts to £1,105 million at 30 June 2011 up from £728 million at the end of 2010. This reflects the free surplus generated in the period of £204 million, the impact of the acquisition of BHA in January 2011, debt raising and the return of capital to shareholders.

A summary of the free surplus generated in the period is set out in the preceding section detailing the principal profit drivers, the BHA acquisition and the impact of debt raising. Further information on in-force surplus and new business strain are shown below.

The transfers to shareholders of £175 million comprise £141 million of cash dividend and £34 million in respect of the share buy-back programme. Other capital movements reflect the favourable impact of £19 million reduction in Resolution Limited shares held by subsidiaries, £1 million adverse foreign exchange movements, £4 million favourable movement in respect of the Lombard long-term incentive scheme and other variances primarily relating to the difference between the accrued and cash payments on the FLG STICS.

In-force business expected return and investment in new business

At product level, in-force surplus and new business drivers are monitored on a "cash strain" and "cash surplus" basis which excludes movements in required capital and is stated before tax and other adjustments. Tax and other items include the cumulative adjustments for tax and long-term investment return which use different assumptions across the MCEV and IFRS bases. The impact of this is set out below.

(i) movement in required capital for in-force surplus is shown before the impact of the £24 million coupon on FLG external debt

The following table provides a segmental analysis of in-force surplus and new business strain on both the MCEV free surplus and cash bases.

The Group has set a target, for the UK business to reduce cash strain, the measure used to manage individual products, by £200 million, by the end of 2013. This target is set from a full year baseline of £392 million, of which the UK accounted for £303 million. The UK new business cash strain of £98 million for the half year therefore represents an annualised reduction of just over £100 million compared to this baseline. The targeted reduction of £200 million is expected to be achieved for the UK business through moving to target platforms, utilising negative reserves and other initiatives set out in the UK operating section. International and Lombard have not been set specific targets for reductions in new business strain, but are expected to deliver annual dividends of £30 million by the end of 2014 for Lombard and £20 million by the end of 2013 for International. Continued improvement in business performance, focused on managing new business strain in comparison to in-force surplus emergence is expected to deliver the dividend targets.

Analysis of FLG operating free surplus generation by segment

Working capital - £749 million

The £1,105 million of free surplus at 30 June 2011 comprises £793 million available shareholder cash and £749 million of working capital, illiquid and restricted assets, net of the Deferred Consideration Notes of £437 million.

Working capital is held to cover known future requirements or reflects illiquid assets together with requirements to ensure sufficient flexibility to comply with the Group's capital policy. At 30 June 2011, it also includes free surplus generated to date as the Group would normally only expect to declare dividends in the life businesses following the year end valuation. The Group does not include free surplus within ASC until it is paid up to group holding companies.

An analysis of the movement in working capital in the period is shown below.

The movements in working capital primarily comprise the retention of free surplus generated in the period, the transfer of £100 million into the life companies on a temporary basis as part of an internal reorganisation, offset by the utilisation of resources from the life companies to acquire BHA. The £9 million reduction in respect of the share buy-back programme represents amounts owed to corporate brokers in respect of shares bought back in the period.

As at 30 June 2011, the key components of working capital are:

d) Available shareholder cash - £793 million

Available shareholder cash comprises £502 million of shareholder cash at FLG holding company level, offset by£140 million retained in FLG to fund integration costs and other operating costs together with £431 million held by Resolution holding companies. At 31 December 2010, £175 million cash was retained in FLG to fund integration and other operating costs. During the first six months of 2011, £35 million of this has been utilised to fund separation, integration and other restructuring activities. Life business free surplus generation will not directly impact available shareholder cash for the period, as dividends from life operating businesses are normally based on declaration of surplus as a result of annual actuarial valuations.

At 1 January 2011, after allowing for the impact of the year end intragroup dividend available shareholder cash was £1,067 million (£481 million at Resolution holding companies; £586 million at FLG holding companies). At 30 June 2011 available shareholder cash was £793 million (£431 million at Resolution holding companies; £362 million at FLG holding companies).

In the period ended 30 June 2011, the Group received £575 million of dividends from the life businesses as well as£65 million of loan repayments from the holding companies. These amounts were included in ASC at 31 December 2010 as they had been declared at the time of reporting.

The issue of the £500 million tier 2 bond by FLG, net of issue costs of £3 million, was used to finance the repayment of the £400 million acquisition finance facility drawn down to part fund the acquisition of the AXA UK Life Businesses.£100 million was injected into the life companies on a temporary basis as part of an internal reorganisation and is expected to be repaid before the end of 2011. A £63 million scheduled repayment of the Deferred Consideration Notes was also made in the period.

The £166 million outflow in respect of dividends and share buy-back comprises £141 million cash in respect of the final 2010 dividend and £25 million cash paid to corporate brokers in respect of the shares bought back in the period.

Other cash outflow of £42 million includes £69 million payment of the coupon on the STICS and external lower tier 2 debt, offset by £39 million of interest received from the life businesses in respect of internal loans less £12 million of corporate costs paid net of interest received in the period.

Distributable cash target ("DCT")

The Company has set a DCT of £400 million per annum at Friends Life Group level for 2011 and onwards, after interest costs and without reducing the MCEV of Friends Life group (excluding investment variances and non-recurring items). The DCT is satisfied by the payment of dividends from the life operating companies to the Friends Life group holding companies; as these are normally declared on an annual basis following the completion and approval of the actuarial valuations in those life companies, an indication of DCT generation in the period is given in the table below showing the movements in free surplus which would be expected to fund future dividends.

As announced in February 2011, the strategic plan aims to reduce cash new business strain by £200 million by the end of 2013, and in addition to this, the Group has targeted the delivery of £50 million of dividends from the overseas businesses by the end of 2014. The Group therefore expects the £400 million DCT to be met predominantly from operational cash flows and related releases of required capital, but until such time as this is achieved the delivery of the target will be dependent, in part, on the release of working capital and capital synergies. In addition to the £400 million expected to be generated in 2011 from the sustainable sources and the release of working capital, the Group expects a further £235 million to be generated from capital synergies. Of the £161 million of free surplus generated in the period through the implementation of certain elements of PS06/14, £100 million relates to the AXA UK Life Business and will contribute towards the £235 million to be generated from capital synergies. The additional capital synergies generated in BHA were already assumed in the Group's valuation of BHA (for capital purposes) and do not form part of the incremental £235 million. Part VII transfers to move business from smaller life companies into FPLP are currently on schedule to complete in the second half of 2011; these are expected to generate a further £135 million of excess capital over capital policies.

Targeted cash return

As announced on 7 June 2011, the Group plans to return £500 million of excess capital to shareholders. This will be completed in two stages with an initial £250 million share buy-back started on 8 June 2011. The return of a further£250 million is targeted for 2012 although this is subject to regulatory approval and the Group achieving £235 million of capital synergies planned for 2011 from the implementation of negative reserves and other reserving changes and the Part VII transfers noted above.

During the period the Company has returned £34 million of capital to shareholders, purchasing 11.2 million of its own ordinary shares at prices between 280.6 pence per share and 317.7 pence per share; all of these shares have been cancelled. The first tranche of the share buy-back programme is expected to complete by the end of 2011.

Group capital management

The Friends Life group manages its capital on both regulatory and economic capital bases, focusing primarily on capital efficiency and the ease with which cash and capital resources can be transferred between entities. In managing capital, the Friends Life group considers the following:

·; establishing targets for the main UK life companies at the greater of 150% of Pillar 1 CRR (excluding WPICC) and 125% of Pillar 2 CRR including ICG - the capital required to mitigate the risk of insolvency to a 99.5% confidence level over a one year period;

·; at the FLG level, to hold sufficient capital to meet 160% of the Group CRR (excluding WPICC);

·; maintaining financial strength within companies sufficient to support new business growth targets, including rating agency requirements;

·; the need to have strong liquidity to cover expected and unexpected events, which includes access to an undrawn facility with a consortium of banks;

·; managing, in particular, the with-profits business of the Group in accordance with agreed risk appetites and all regulatory requirements;

·; transfers from long-term business funds and dividends from entities that support the cash generation requirements of the Group, balanced with the need to maintain appropriate capital within the businesses for the reasons outlined above.

As part of the integration of the AXA UK Life Business, a number of initiatives are being implemented including fund mergers and the optimisation of the corporate structure, to ensure capital efficiency and to maximise the fungibility of capital resources.

Solvency II

The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group. The Group has been closely following the emerging regulations and monitoring their potential impact on the Group balance sheet. Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains.

During the first half of the year, Friends Life group participated in the EIOPA stress test exercise, an EU wide set of stress tests performed by the large insurance companies assessing companies' ability to meet their Solvency II Minimum Capital Requirements ("MCR") under a set of specified stress tests. Friends Life group also continues to be closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II.

The development and streamlining of some financial systems and tools are included within the Solvency II implementation programme and the overall implementation programme is on track against its plans and budget.

FLG is committed to applying for internal model approval pursuant to the Solvency II Directive and is planning accordingly. The Group has been accepted into the FSA's pre-application process.

The Group assesses strategic developments and opportunities on a Solvency II basis.

The Solvency II requirements are not completely specified, but if the industry is successful in achieving a satisfactory outcome to the key outstanding policy decisions, the Group believes that it will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements.

Insurance Groups Capital Adequacy

In addition to individual company requirements FLG, as the ultimate European Economic Area ("EEA") parent insurance undertaking, is required to meet the IGCA requirements of the Insurance Groups Directive. IGCA is monitored at FLG level and does not include the assets of the Resolution holding companies. The Group's capital policy is to maintain sufficient group capital resources to cover 160% of group CRR (excluding WPICC). This policy was increased from 150% following the acquisition of the AXA UK Life Business.

The balance sheet remained strong at the Friends Life group level, with an IGCA surplus of £2.0 billion at 30 June 2011, with Group Capital Resources being 209% of Group CRR (excluding WPICC). Group Capital Resources were £0.9 billion in excess of the amount required to satisfy the FLG group capital policy of holding 160% of Group CRR (excluding WPICC).

The IGCA surplus would reduce by around £0.1 billion for a 40% fall in equity markets from 30 June 2011 levels and would reduce by slightly less if interest rates were to rise by 100bps across the yield curve.

The movement in IGCA surplus over the period largely reflects the expected surplus emerging in the period after financing costs and less amounts retained in the long term funds, non-recurring and non-operating costs of £62 million (including integration costs), offset by the £132 million impact of acquiring BHA (£169 million cost of investment offset by a £37 million IGCA surplus at the acquisition date) and the £157 million benefit (on an IGCA basis) of negative reserves released in FLC and BHA businesses. Additional surplus of £46 million relating to surplus generated in FPLP during the year is not available in IGCA until it is transferred to shareholder funds after the full year actuarial valuation.

The surplus is also impacted by financing and dividend costs, which include the £350 million of dividends paid to Resolution holding companies in the period, £500 million of the lower tier 2 debt issued to Resolution holding companies has been repaid during the period, following an external debt raising by FLG of £500 million tier 2 bond, with£3 million of associated costs.

Management initiatives in the year to optimise the IGCA surplus position delivered a benefit of £157 million. This relates to the recognition of negative reserves in the acquired BHA and AXA UK Life Business. This benefit applies to the base IGCA position with release of capital requirements at 100% whereas the free surplus impact of £161 million includes the release of FLG - level required capital at 160% . Part VII transfers to be implemented in 2011 to move business from some of the smaller life companies into FPLP are expected to reduce aggregate Pillar 1 capital requirements by around £90 million, thereby increasing excess capital over capital policies by around £135 million. Further Part VII transfers are planned for 2012.

At 30 June 2011 the capital held to meet FLG capital policies was £1,112 million (1 January 2011: £1,085 million) and the excess over the capital policies was £915 million (1 January 2011: £1,232 million).

The IGCA surplus is a prudent measure and excludes surplus capital not immediately available to shareholders, such as surplus capital held in long-term funds to the extent that this is not needed to cover the capital resource requirements of the long-term fund concerned. Following actions taken in 2010 to transfer surplus long-term fund assets to shareholders, only £85 million of non-profit funds outstanding surplus remains in the UK business which is not counting towards the IGCA surplus. The IGCA surplus also excludes £755 million of UK with-profits funds surpluses. As the calculation is prepared to include the subsidiaries of the highest EEA parent company, the net assets of the Resolution holding companies are excluded.

Management of the with-profits fund

Friends Provident Life and Pensions Limited ("FPLP")

Asset allocation within the With-Profits Fund is actively managed. Market Value Reductions ("MVRs") were reduced in January 2010 and then removed from all product lines on 1 April 2010 in response to the high investment returns of the Fund over 2009 and the first quarter of 2010.

At 30 June 2011 the proportion of equities and property backing asset shares (equity backing ratio or "EBR") was close to 51% (31 December 2010: 49%).

A strategic EBR level of 50% for pre-demutualisation business and 55% for post-demutualisation business for assets backing asset share liabilities was approved in April 2011.

The split of investment strategy of pre- and post-demutualisation business was implemented on 30 June 2011.

Management actions allowed for within the risk management framework were revised and a change was approved in April 2011.

These actions reflect the risk appetite and risk management framework of the With-Profits Fund and are in line with FPLP's commitment to fair treatment of all its customers and the published Principles and Practices of Financial Management underlying the Fund.

Non-profit business in the With-Profits Fund, the majority of which is annuities, is backed by a mix of gilts and corporate bonds.

Friends Life Company Limited ("FLC")

Asset allocation within the With-Profits Fund is actively managed. During the first half of 2011 the Group has been able to continue to reduce MVRs on single premium bonds, although some remain due to the low levels of equity markets compared to when these bonds were taken out.

At 30 June 2011 the EBR was close to 66% (December 2010: 68%).

There have been no recent changes to investment policy. The fund maintains a stable asset allocation with a target EBR of 65% for assets other than those backing the realistic cost of guarantees, options and non-profit business. Guarantees and options remain backed by a combination of bonds and hedging derivatives (equity put options, interest rate swaps and swaptions). Cash is allocated to back current liabilities.

Non-profit business in the With-Profits Fund is backed by a mix of gilts and corporate bonds (some with credit default swap protection to hedge the default risk).

Friends Life Assurance Society Limited ("FLAS")

Asset allocation within the With-Profits Fund is actively managed. During the first half of 2011 the Group has been able to continue to reduce MVRs on single premium bonds, although some remain due to the low levels of current equity markets compared to when these bonds were taken out.

At 30 June 2011 the EBR was close to 52% (31 December 2010: 54%).

The investment policy of FLAS was reviewed in 2010. The strategy now is to target a stable EBR of 50% for assets backing policy asset shares. The allocation for assets backing guarantees and options comprises gilts and hedging derivatives (equity put options, sold equity futures, interest rate swaps, swaptions and "spreadlock" trades). The target allocation for assets backing the realistic with-profits estate is gilts only, although currently some property and corporate bond holdings still remain.

Non-profit business in the With-Profits Fund, the majority of which is annuities, is backed by a mix of gilts and corporate bonds (some with credit default swap protection to hedge the default risk).

Asset quality and exposure

The Group's financial assets as at 30 June 2011, excluding cash, are summarised as follows:

The vast majority of the Group's exposure to sovereign debt holdings is to UK gilts. The Group has £8 million shareholder exposure (including shareholder fund exposure to non-profit and with-profit funds) to the higher risk government debts of Spain, Portugal, Italy, Ireland and Greece (31 December 2010: £7 million).

In addition the Group's shareholder exposure to various corporate securities issued by companies domiciled in Spain, Portugal, Italy, and Ireland is £439 million (31 December 2010: £444 million). The Group's shareholder exposure to Greek corporate securities and sovereign debt is less than £1 million. 56% by value of these corporate securities are issued by non-financial companies, which are in many cases less exposed to their domicile economy than to other countries. Where the Group holds securities issued by financial companies, 23% of these are not linked to the institution's domestic economy. In all cases the company's financial strength and the ability of the domicile government to provide financial support in the event of stress has been considered.

(i) Restated to include two non-domestic financials totalling £39 million

Corporate bonds and asset backed securities (excluding £0.7 billion of unlisted bonds held in unit-linked funds) are analysed by fund and credit rating as follows:

Over 96% of the corporate bond and asset backed securities, to which the shareholder funds are exposed are, investment grade. The Group controls its exposures to corporate issuers by rating, type of instrument and type of issuer. The sub-investment grade bonds held in investment portfolios are monitored closely in order to maximise exit values. Where asset backed securities and other complex securities are held, the Group monitors closely its exposures to ensure that the relevant structure, liquidity and tail credit risks are well understood and controlled.

No defaults have been experienced in the year.

Liquidity

The liquidity of the Group remains strong.

FLG has an undrawn £500 million funding facility with a consortium of banks. This facility is due to run until June 2013 but can be extended at the option of FLG for a further two years.

Financial strength ratings

A number of the Group's life businesses are attributed financial strength ratings.

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

Value share

The Resolution Group, which is the private advisory group of which ROL forms a part, remains aligned with shareholders through its investment in the Company's ordinary shares, its direct investment in Resolution Holdco No. 1 LP ("Holdco") and its entitlement to receive 10 per cent of the value created from the UK Life Project through its Value Share. The Value Share structure was established at the time the Company was formed and, in broad terms, rewards members of The Resolution Group where the accumulated value of the deployed equity capital contributed to the UK Life Project has been returned to the Company or its shareholders, or there has been a change of control of the Group. The structure of the Value Share means that it is expected to be payable only on completion of the UK Life Project.

However, given that the Company has only one restructuring project, a mark-to-market valuation of the Value Share can be determined on any given day by deducting the value of cash held at Resolution level from the market value of Resolution, and then comparing the result to the accumulated value of the net equity deployed in Holdco (i.e., in the UK Life Project) accumulated at the agreed rate (currently 4% per annum).

Total gross equity deployed in the UK Life Project is approximately £4,056 million and the accumulated value of net equity deployed (at 4% per annum and after the return of £475 million of capital returned to Resolution Limited to date) is £3,769 million as shown below.

(i) The acquisition of BHA was funded using existing FLG resources

The market value of the Company, based on the closing share price of 294 pence per share on 30 June 2011 was £4,278 million. Deducting the £377 million cash held by Resolution Limited, leads to an implied value of Holdco of £3,901 million and implied value added in Holdco of £132 million. The implied Value Share at 30 June 2011 was therefore approximately £13 million.

Whether there is an implied value to the Value Share calculated on this basis will vary day-to-day depending, among other things, on the Company's share price. Furthermore, this implied market value does not guarantee that the Value Share will be realised for this amount, which will depend on how and when the Company realises value from the UK Life Project.

Dividend policy

On 7 June, at the cash and capital announcement, the directors announced a reviewed dividend policy in light of the decision to implement a buy-back programme. This proposed that the aggregate value of dividend payable by the Company on all shares in issue should not reduce as a result of the buy-back. The aggregate dividend cost in respectof 2011 is expected to be £277 million, based on shares in issue, before the buy-back programme commenced, of1.47 billion and a total dividend per share of 18.85 pence.

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 has declared an interim dividend of 6.47 pence per share in respect of 2011. This is based on the expected number of shares in issue on the record date of 9 September 2011 and would result in an estimated cost of £92 million. The dividend will be paid on 7 October 2011. 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 final dividend per share in respect of 2011 is expected to be 13.33 pence per share, subject to shareholder approval. This is based on the expected number of shares in issue after completion of the share buy-back programme.

The Board will continue to keep under review the appropriateness of the Company moving to a growing dividend.

Principal risks and uncertainties

The Group actively manages its risk profile and the Group's risk appetite framework drives the identification and mitigation of strategic, financial and operational risks to support the achievement of its objectives.

The principal risks and uncertainties to which the Group has been exposed to during the first six months of 2011 are unchanged from those described in the 2010 Annual Report and Accounts; that is:

·; economic conditions;

·; acquisition of target companies;

·; integration and restructuring;

·; regulatory change and compliance;

·; mortality and other assumption uncertainties; and

·; reliance on Resolution Operations LLP.

In the case of economic conditions it is noted that the drivers of uncertainty in the economic environment have changed to some degree since the end of 2010. In particular there has been increased concern about the risk of sovereign debt defaults both within continental Europe and the USA and this has impacted consumer confidence and driven uncertainties in both the debt and equity markets in recent months.

The Group's integration and restructuring work is continuing to plan, so while the work has progressed since the year end and some aspects of the work have been completed, the integration and restructuring programme remains an area of risk.

All of these remain relevant and applicable for the remainder of 2011.

Going concern and directors' responsibility statement

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 10 to 55.

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

15 August 2011

Independent review report to Resolution Limited

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the interim report and accounts for the six months ended 30 June 2011 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 13. We have read the other information contained in the interim report and accounts 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 (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim report and accounts is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report and accounts 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 interim 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 interim report and accounts based on our review.

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report and accounts for the six months ended 30 June 2011 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.

London

15 August 2011

Condensed consolidated income statement

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

(ii) The consolidated income statement includes the results of BHA from the date of acquisition on 31 January 2011. The results for the year ended31 December 2010 include the results of the acquired AXA UK Life Business from 3 September 2010.

Condensed consolidated statement of comprehensive income

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

(ii) Shadow accounting relates to a gain of £2 million (30 June 2010: loss of £8 million; 31 December 2010: loss of £3 million) in respect of foreign exchange adjustments on translation of overseas subsidiaries held by the with-profits fund of FPLP.

Condensed consolidated statement of IFRS based operating profit

(i) In the year ended 31 December 2010, the Group revised the definition of IFRS based operating profit in order to reduce the impact of investment volatility on operating profit. Operating profit excludes: (a) all investment variances from expected investment return which is calculated on a long-term rate of return; (b) policyholder tax; (c) returns attributable to non-controlling interests in policyholder funds; (d) significant non-recurring items; and (e) amortisation and impairment of the present value of acquired in-force business and other intangible assets and is stated after deducting interest payable on step-up tier one insurance capital securities ("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. Further details of the restatement are included in note 2.

(ii) On 7 June 2011 the Company began a repurchase programme involving the repurchase over time of £250 million of ordinary shares. As at 30 June 2011 a total of 11,243,352 shares had been repurchased at a total cost of £34 million.

Condensed consolidated statement of financial position