13th Sep 2005 07:03
Friends Provident PLC13 September 2005 PART 1 Friends Provident plc Interim results for half year ended 30 June 2005 Continued delivery of profitable growth Group Financial Highlights • Achieved profit: • Underlying profit* before tax up 46% to £233 million (2004: £160m) • Profit before tax up 221% to £334 million (2004: £104m). • International Financial Reporting Standards (IFRS): • Underlying profit* before tax up 24% to £125 million (2004: £101m) • Profit before tax up 476% to £196 million (2004: £34m). • Friends Provident plc achieved underlying earnings per share* up 11%to 7.2 pence per share (2004: 6.5 pence). • F&C IFRS earnings per share up 21% to 7.95 pence per share (2004: 6.56pence). • Capital resources excess over capital requirements of £1.5 billion (31Dec 2004: £1.2 bn) • Risk Capital Margin covered over 7 times. • Interim dividend up 2% to 2.6 pence per share. • Total new life and pensions business APE* up 33% to £282 million(2004: £212m). • Gross contribution to profits from new business up 40% to £52 million(2004: £37m). Margin 18.4% (2004: 17.5%). * See notes to editors. Keith Satchell, group chief executive, Friends Provident said: "This has been another period of consistent profitable growth and of deliveringservice excellence to distributors and customers alike. Contribution to profitsfrom UK new life and pensions business continues to grow, demonstrating thequality of our proposition and our focus on key market segments. In addition,profits from the Group's asset management and international operations havedoubled following the acquisitions of F&C and Lombard. Overall, the Group's performance demonstrates the new size and diversity thatunderpins our momentum. We see genuine opportunities for profitable growth invirtually all the market segments in which we operate, so the prospects are goodfor the remainder of this year and beyond." - Ends -For further information contact: Nick Boakes Friends Provident plc 0845 64 17914Di Skidmore Friends Provident plc 0845 64 17833Simon Moyse Finsbury Limited 0207 25 13801 Ref: Notes to editors: 1. An interview with Keith Satchell, group chief executive, and Philip Moore,group finance director, will be available to view in video, audio and textformats at www.friendsprovident.com and www.cantos.com from 7.00am today. 2. An analyst presentation will take place at 9.30am today at JP MorganCazenove, 20 Moorgate, London EC2R 6DA. 3. The analyst presentation will be webcast live and can be viewed on theFriends Provident website: http://www.friendsprovident.com/results 4. The presentation slides will be available from 9.30am onwww.friendsprovident.com/presentations 5. Friends Provident media image library is available atwww.friendsprovident.com/imagelibrary. A newscast login is required. 6. Financial reporting dates Dividend dates: Shares go ex dividend 5 October 2005 Record date 7 October 2005 Dividend paid 25 November 2005 Financial Reporting Calendar: European Embedded Value 2004 analyst presentation 12 October 2005 2005 Quarter 3 life and pensions new business 1 November 2005 2005 Full Year life and pensions new business 31 January 2006 2005 Friends Provident plc preliminary results 23 March 2006 7. The principal life and pensions subsidiary company is Friends Provident Lifeand Pensions Limited (FPLP). 8. Achieved underlying earnings per share is based on achieved underlying profitafter tax. 9. Underlying profit on an achieved profit basis represents profit (based onlonger-term investment return) before impairment of Asset Management goodwill,amortisation and impairment of Asset Management acquired intangible assets andnon-recurring items. Therefore, underlying profit is comparable to achievedoperating profit (based on longer-term investment return) before amortisation ofgoodwill and operating exceptional items, which is the terminology used in the2004 preliminary announcement. 10. Underlying profit on an IFRS basis represents profit (based on longer-terminvestment return) excluding returns on Group controlled funds attributable tothird parties and before impairment of goodwill, amortisation and impairment ofacquired intangible assets and present value of in-force business andnon-recurring items. Therefore underlying profit is comparable to ModifiedStatutory Solvency (MSS) operating profit (based on longer-term investmentreturn) before amortisation of goodwill and operating exceptional items, whichis the terminology used in the 2004 preliminary announcement, except thatamortisation of acquired present value of in-force business is now excluded fromunderlying profit. 11. The Realistic Balance Sheet (RBS) relates to the FPLP With Profits business.Risk Capital Margin (RCM) cover is defined as unencumbered capital in the Life &Pensions business plus 50% of the present value of future profits arising in theNon-Profit Fund of FPLP, divided by the RCM, calculated on a realistic solvencybasis. 12. Unless otherwise stated, all new life and pensions business is based on theindustry standard Annual Premium Equivalent (APE) basis. APE representsannualised new regular premiums plus 10% of single premiums. 13. Market movement and market share data is based on the latest available fromthe Association of British Insurers (ABI) and is adjusted to ensure comparisonsare compatible. 14. Certain statements contained in this announcement constitute"forward-looking statements". Such forward-looking statements involve risks,uncertainties and other factors, which may cause the actual results, performanceor achievements, from time to time, of Friends Provident plc, its subsidiariesand subsidiary undertakings or industry results to be materially different fromany future results, performance or achievements expressed or implied by suchforward-looking statements. Such risks, uncertainties and other factors include,among others, adverse changes to laws or regulations; risks in respect oftaxation; unforeseen liabilities from product reviews; asset shortfalls againstproduct liabilities; changes in the general economic environment; levels andtrends in mortality and morbidity; restrictions on access to productdistribution channels; increased competition; and the ability to attract andretain personnel. These forward-looking statements are made only as at the dateof this announcement and, save where required in order to comply with theListing Rules, there is no obligation on Friends Provident plc to update suchforward-looking statements. The Friends Provident Group The Friends Provident Group is structured around its two core businesses of Life& Pensions and Asset Management, although the size and stature of ourinternational life and pensions operations are such that it is now appropriateto segment information for the Life & Pensions business between UK andinternational. Our focus remains to grow contribution to profits from each ofour core business segments. UK life and pensions Trading summary Our UK Life and Pensions business is firmly established as one of the top ten,as measured by our share of new business sales. Over recent years, our aim hasbeen profitable growth, focusing on the three product segments of grouppensions, protection and investments. These three remain important and, inaddition, we have renewed our interest in the individual pensions market,following the Government's relaxation of the charging structures. An analysis of new UK life and pensions business was included in our TradingStatement, issued 29 July 2005. The key figures are that total new UK life andpensions business increased by 14.8% to £202.1 million in the first half of 2005(2004: £176.0m) and by 11.4% to £113.8 million for the second quarter of 2005(2004: £102.1m). Over the first half of this year, group pensions accounted for 55% of our UK newbusiness, followed by protection (17%) and investments (15%). The two segmentsof individual pensions and annuities were not key to us, and accounted for only6% and 7% of our half-year new business respectively, although we now expect theformer to grow steadily. We have reorganised our distribution over the past two years, primarily inanticipation of regulatory changes. Going forward, we expect IndependentFinancial Advisors (IFAs) will remain important distributors of our products andservices, with recent and new distribution partnerships with advisor firms,banks and building societies increasingly providing additional new businessgrowth potential. In addition, our restructured Appointed Representative channelis now focused exclusively on protection. We have consistently stated that it is our standard of service, enabled by theapplication of leading-edge technology, that differentiates us from ourcompetitors and we still believe this is so. Some 80% of our UK new business isnow transacted online. We are the only stock exchange-listed Life company with aFive Star ranking for service in the latest Financial Adviser Practiv ServiceAwards. Market overview and outlook Protection: For the first six months of 2005, our market share increased by 18%and we fully expect our market share over 2005 to exceed that for 2004. Themarket contracted by 17% over the first half of 2005 and we expect it to be downby a similar percentage for the whole of 2005, fewer house-purchase transactionsbeing the primary cause. Compared with 2004, there are now more competitorspursuing fewer new business opportunities, so both pricing and service remainkey. The continued appeal of our online systems and service quality willmitigate some of the pressure on pricing. Investments: We remain confident that growth in our 2005 sales will exceedmarket growth, which was 2% over the first half of 2005, and with an expectationof only single-digit growth over the course of this year. Our sophisticated fundrange coupled with our online facilities is an attractive proposition, so theoutlook for sales is positive, with the prospect of stable margins.Group Pensions: There are a number of positive factors currently influencingthis market, which has grown over the first half of 2005, and the effect ofpensions simplification is likely to provide further stimulus next year. We arewell prepared for A-day, our single platform system providing competitiveadvantage. The A-day changes will add further impetus to the drive towardsdefined contribution and contract-based schemes, which plays to our position inthe marketplace. As expected, tendering opportunities from fee-based EmployeeBenefits Consultants are now increasing, supplementing the high levels ofactivity seen over the first half of 2005 from commission-based IFAs thatspecialise in high quality pension schemes. We are now routinely demonstratingthat our systems can accommodate the 'customisation' increasingly required, sothe outlook is very positive. As for margins, the trends of lower commissionrates, higher contribution schemes, an increase in transfer business andincreasing levels of new business from existing arrangements, are all positivefactors. Individual pensions: The market increased by 8% over the first half of 2005. Ifaccepted, the FSA's recommendation to revoke what is commonly referred to as theRU64 rule will, we believe, stimulate higher growth in 2006 by allowing a moreflexible approach to pricing and commission levels. We launched a new individualpensions product in April and early indications are encouraging. Our strengthsare a very wide investment fund range (akin to that offered under our grouppensions product), a robust electronic trading platform (using the samestructure as developed for our leading-edge protection system) and a chargingstructure that encourages loyalty, attracts transfer business and offerscommission flexibility. We fully expect to grow our new business levels andmarket share over the course of this year. International life and pensions (International) Trading summary In January this year we completed the acquisition of Lombard International(Lombard) providing us with a Luxembourg-based operation to complement FriendsProvident International (FPI). FPI is based primarily in the Isle of Man withoffices in Hong Kong, Dubai, Guernsey and the UK. Accurate market share data isnot available for the international market, but there is no doubt that ourcombined international operations make us one of the major cross border players. FPI offers a comprehensive range of products, marketed in the UK, Middle East,Asia and Europe. Lombard specialises in providing bespoke life assurance-basedtax and estate planning solutions for high net-worth investors (HNWIs) andultra-HNWIs, principally throughout Europe. Distribution of FPI's products and services is predominantly through specialistIFAs. For Lombard, distribution is mainly via private banks, family offices andspecialist IFAs. An analysis of new international life and pensions business was included in ourTrading Statement, issued 29 July 2005. The key figures are that newinternational life and pensions business increased by 122% to £80.0 million inthe first half of 2005 (2004: £36.0m). In large part, this significant increaseis attributable to the acquisition of Lombard. On a pro forma basis, thehalf-year increase in total international new business was 18.3%. FPI: new FPI business increased 24.9% to £45.0 million in the first half of 2005(2004: £36.0m). Lombard: new business amounted to £35.0 million over the first half of 2005.Lombard was acquired in January this year, and on a pro forma basis, thehalf-year new business was up 10.8%. We are advancing strongly in the international market, which has significantgrowth prospects, beyond those of the UK. For perspective, 38% of our totalgross contribution from new business now arises from our internationaloperations (50% net of solvency capital charge, pension service charge and theeffect of accounting for share incentive arrangements), double the proportion in2004. Market overview and outlook FPI: We achieved a strong performance in the first half of 2005. New businessgrowth in the specialist UK market and the Middle East was particularlyencouraging. We also achieved good growth in Europe, and Asia remains our mostimportant market. In the UK, we are successfully deepening our relationshipswith key distribution partners. An important systems harmonisation programme isdue to complete in 2005, leading to improved service and efficiency. The overalloutlook is positive, notwithstanding the risk further of political tensions inthe Middle East. We expect to achieve continued growth over the course of theyear. Lombard: Lombard has well-established operations across many European countries,and is developing new relationships in Asia and Mexico. Particularly strongperformances over the first half of 2005 were achieved in Belgium, the UK andfrom expatriate business in Southern Europe. We remain confident that stronggrowth in both new business volumes and profits will be achieved over theremainder of 2005. A new product range has been introduced for the Germanmarket, which we expect to stimulate growth towards the end of this year andinto next year. As previously announced, the very high level of new businessachieved in Germany last year was due to special circumstances and, althoughthis level of sales will not be repeated in 2005, our position and prospects inthat country have strengthened as a result. Asset Management Trading summary F&C Asset Management plc (F&C) is a quoted company in its own right and operatesout of seven European cities and Boston, USA. By funds under management, F&C isone of the top five asset managers in the UK and in the top ten of Europe formanaging pension funds. F&C offers a diverse range of products across all themajor asset classes, for institutional, insurance and retail clients. The present company was formed through the merger of ISIS Asset Management plc(ISIS) and F&C Group (Holdings) Limited in 2004 with the objectives of creatinga scalable platform to accommodate further growth, enhancing investmentperformance through increased resources, diversifying both regionally andthrough a widening of the product range, and realising cost synergies. An analysis of funds under management, together with an integration update, wereincluded in our Trading Statement, issued 29 July 2005. The key figures are thatassets under management rose by £3.3 billion to £128.1 billion, with gains frommarket movements being offset by around £1.6 billion of net outflows. Outflows from insurance clients were dominated by attrition on the closed lifebook managed for Resolution Life in the UK. Other areas, which constitute thehigher revenue margin segments of F&C's business, experienced positive netflows. Following on from two successful property trust launches in 2004, a third fundraising in the first half of 2005, through the Commercial Property Trust withassets of £965 million, was completed and is the largest launch to date of aninvestment trust specialising in direct property. UK retail business experienced net inflows in the first half of the year, helpedby a number of strategic distribution arrangements. In addition, the subadvisory European retail operation gained new business, boosted in particular byimproving momentum in Portugal but also in Germany. During the period, a privateequity fund of funds team was also acquired from Martin Currie for a priceequivalent to slightly over one year's revenues and F&C plans to expandactivities in this area. The integration has gone largely to plan and, as a result, the dedicated ProjectOffice supported by external consultants was closed on 30 June, with eleven ofthe sixteen workstreams wound up and activities returned to business as usual.The outsourcing of investment administration has proven to be complex and willtake longer to implement than originally envisaged. Mellon has been chosen topartner F&C in this area, and it will take until late 2006 to fully integratedata and systems onto a single platform. Since the merger F&C has made a number of enhancements to its investment teamsand investment performance has been broadly neutral. Specialist areas such asproperty, private equity and hedge funds continue to generate returns ahead ofbenchmark in most cases. Market overview and outlook Equity markets performed well during the first half of the year. For example,the FTSE 100 rose almost 10% and other European markets did even better in localcurrency terms, although when measured in sterling the gains were very similarto the UK equity market. However, almost all of the market uplift took place inthe final months of the half year and had a limited effect on F&C's revenues forthe full period. Earlier this year it was announced that Resolution plc, post its merger withBritannic, will be internalising up to £22 billion of funds currently managed byF&C. At the current time discussions are taking place with Resolution about thetiming of withdrawal of funds from F&C and compensation amounts. Unrelatedoutflows of around £3.8 billion are expected in the second half of 2005 due tothe transfer by Resolution of various annuity books to third parties. Once there is clarity on Resolution's plans to internalise asset managementoperations, details on revenue losses, compensation payments and timing will beprovided. In terms of the impact on profitability, we can confirm that theeffective operating margin on this business is high and considerably above thaton our business as a whole. This mainly reflects the efficient and integratednature of the F&C business which means that there are considerable economies ofscale on this type of activity. Within the institutional business, a continuation of outflows from Dutch pensionfunds is expected in the second half of the year, partly driven by switches frombalanced to specialist mandates and by some historic performance issues.However, trends in F&C's non-institutional business are positive and areactivities in which revenue margin is relatively high. Currently there is a goodmomentum in UK retail and in particular on Continental European sub advisorybusiness, as well as new fund raising on F&C's largest hedge fund, Amethyst.Overall it is expected that non-insurance net flows will be negative in thesecond half of 2005, unlike in the first half when the launch of a CommercialProperty Trust boosted investment trust assets. Financial Review The results are presented on two bases: IFRS and achieved profit. IFRS results are presented for the first time in accordance with European Unionregulations requiring all European listed groups to prepare their consolidatedfinancial statements in accordance with IFRS from 1 January 2005. IFRS replacesreporting under the modified statutory solvency (MSS) basis. The balance sheetunder IFRS also includes the adoption of the principles of FRS27 (LifeAssurance) which, inter alia, requires with profits liabilities to be valued ona realistic basis. A full reconciliation to MSS accounting for 2004 is includedin the notes to these interim statements. The achieved profit basis has been developed by the Association of BritishInsurers (ABI). We believe the achieved profit basis provides a morerepresentative method of accounting for long-term business that fully recognisesthe shareholders' interest in the in-force portfolio. Some changes to IFRS alsohave an impact on achieved profit reporting and comparatives have been restatedaccordingly. The European Insurers' Chief Financial Officers (CFO) Forum agreed a timetablefor the introduction of changes to the achieved profit basis of reporting, knownas the European Embedded Value (EEV) basis which significantly enhances thisreporting methodology. It is our intention to adopt this basis from year-end2005 in accordance with the agreed timetable. The details of our methodology andthe results of our restatement of the 2004 achieved profit numbers on the EEVbasis will be disclosed on 12 October 2005. Achieved profit result Achieved profit highlights for the half year ended 2005 #200430 June £m £m---------------------------------- ----------- ---------- Analysis of underlying profit:UK Life & Pensions 163 139International Life & Pensions 32 16Asset Management 52 14Other* (14) (9)---------------------------------- ----------- ----------Achieved underlying profit before tax 233 160Achieved profit before tax 334 104Gross contribution from new business 52 37Gross new business margin 18.4% 17.5%Contribution from new business** 40 25New business margin 14.2% 11.8%---------------------------------- ----------- ----------# restated for the impact of IFRS* Comprises expected return on net pension liability, expected return on corporate net assets and corporate costs** after cost of solvency margin, pension service charge and share incentives, and before tax. Overview Group achieved underlying profit before tax increased by 46% to £233 million.This was mainly as a result of growth in the new business contribution of £15million, which includes Lombard for the first six months of 2005, an increase inexpected return from in-force business of £20 million, positive experiencevariances of £16 million and an increase in Asset Management operating profit of£38 million following the acquisition of F&C. The increase in Life & Pensionsachieved underlying profit has had the effect increasing our annualised returnon Life & Pensions embedded value (RoEV) by 0.7 percentage points to 8.9% (8.2%to 30 June 2004). Our gross Life & Pensions new business margin increased from 17.5% to 18.4%. Thedeductions from the gross contribution from new business comprise the cost ofsolvency capital charge (£4 million), pension service charge (£7 million) andthe effect of accounting for the share incentive arrangements (£1 million) asrequired under IFRS. With the introduction of EEV reporting as from 31 December2005, our margin will be disclosed differently. UK Life & Pensions UK Life & Pensions achieved underlying profit increased by 17% to £163 million,mainly from positive experience variances and a higher expected return as aresult of a larger opening embedded value. The contribution from new businesswas up by £2 million to £32 million. The gross margin reduced from 17.0% to15.8% as growth in new business volumes was offset by a different mix ofbusiness and pressure on pricing in the protection market on the back of thesluggish housing market. The contribution from in-force business increased by£11 million to £81 million due to the effect of a higher value of the in-forcebusiness at the start of 2005. Experience variances were positive £20 million. This comprises several positiveitems, the largest of which resulted from improved claims experience on incomeprotection business, partially offset by some smaller negative items. There was a small positive operating assumption change of £1 million as a resultof a renegotiation of the F&C investment agreement. Development costs have increased by £4 million to £11 million reflectingexpenditure on e-commerce initiatives to continue to strengthen ourmarket-leading proposition and implement electronic links with our newdistribution relationships. As indicated in our 2004 preliminary results, thesecosts are expected to be higher for the year as a whole relative to 2004. International Life & Pensions International Life & Pensions achieved underlying profit doubled from £16million to £32 million. The gross contribution from new business increasedsubstantially from £7 million to £20 million, driven primarily by the inclusionof Lombard from early January 2005 together with an improved performance fromFPI as a result of strong trading in the UK and the Middle East. Achievedunderlying profit was adversely affected mainly by a net negative experiencevariance of £4 million in FPI, arising from a number of items. Asset Management F&C increased its contribution to Group achieved underlying profit from £14million to £52 million for the half year to 30 June 2005, following the mergerof ISIS and F&C in October 2004. F&C's contribution to the Group results isincluded on an IFRS basis and is discussed in more detail under the IFRS resultsbelow. International Financial Reporting Standards result 2005 #2004IFRS highlights for the half year ended 30 June £m £m----------------------------------- ----------- --------Analysis of underlying profit:UK Life & Pensions - With Profits Fund with profits business 2 4UK Life & Pensions - other life business 43 35International Life & Pensions - life business - 7Asset Management 52 14Longer term investment return 34 42Other shareholder income less charges (6) (1)----------------------------------- ----------- --------Underlying profit before tax 125 101----------------------------------- ----------- --------Profit before tax 196 34----------------------------------- ----------- --------# Restated for the impact of IFRS Overview Underlying profit increased by 24% to £125 million due to good performance in UKLife & Pensions, and the inclusion of the results of the enlarged F&C andLombard. Profit before tax increased by £162 million due largely to the positiveimpact of short term fluctuations in investment return, an increase inpolicyholder tax of £79 million due to increased with profits return and £14million profit attributable to the minority holders of the Commercial PropertyTrust. UK Life & Pensions The contribution from pre-demutualisation with profits business (being theshareholders' share of the cost of bonuses) was £2 million and this is likely toremain a modest contributor to Group profits. UK Life & Pensions - other life business underlying profit increased by 23% to£43 million. This increase is the result of a number of positive and negativeitems, including the impact of reduced new business strain due to the change ofproduct mix and an increased surplus on income protection business. Provisions have been established for the estimated likely cost of redress,including administrative costs, arising from the review of past sales. The totalprovision for endowment complaints has been increased from £128 million to £139million with a charge in 2005 of £38 million (30 June 2004: £72m). None of thisincrease is attributable to shareholders in 2005 (30 June 2004: £6m charged as anon-recurring item). There is some uncertainty involved in these provisions,which have been calculated on a best estimate basis taking into account recentGroup and industry experience. The majority of the mortgage endowment redressprovision is expected to be settled in the next two years. International Life & Pensions The 2005 International Life and Pensions result has been negatively affected byIFRS rules which increase the reported new business strain on products that usecapital units. One such product is the FPI Premier product, which sold stronglyover the first half of 2005. This offsets a strong positive result from Lombardreflecting record levels of funds under management and tight expense control. Asset Management F&C has increased its contribution to consolidated Group underlying profit from£14 million in the first half of 2004 to £52 million in 2005, following themerger. Before non-recurring items, amortisation of intangibles and the cost ofthe reinvestment plan, F&C earnings per share increased 21% to 7.95 pence (2004:6.56 pence) and the F&C operating margin was 42.2% compared with 33.8% in 2004,consistent with the range indicated at the time of the announcement of themerger. Revenues from investment management fees for the first six months were £130million (2004: £59m) reflecting some benefits from rising equity markets as wellas new product sales in the higher revenue margin areas, offset by insurance andinstitutional outflows. While the average fee rate has risen from 18 basispoints at 30 June 2004 to 21 basis points at 30 June 2005 this is a result ofthe merger of ISIS and F&C. As commented on at the year end, a Reinvestment Plan including matching shareswas put in place to retain certain F&C Management staff who had an interest inthe old F&C group. This scheme, which is a one-off plan to facilitate themerger, is accounted for differently under IFRS which, while not materiallychanging the total cost, does front-end load the profit charge. F&C strip thischarge out of underlying earnings due to it being a one-off plan to facilitatethe merger. Asset Disposal The Group had a controlling interest in ISIS Private Equity and thereby inprivate equity investee companies held by the various life and pension funds.The Group disposed of its controlling interest on 30 June 2005. The results ofthe trading activities and financial effects up to the date of disposal arereported as discontinued operations in the Income Statement. Profit before Tax The IFRS profit before tax for the period is £196 million (2004: £34m)comprising profit before tax attributable to shareholders of £85 million (2004:£33m), tax on the policyholder funds (effectively not attributable toshareholders) of £97 million (2004: £1m) and £14 million of profit attributableto minority holders of the Commercial Property Trust. The profit before taxattributable to shareholders of £85 million comprises an underlying profit of£125 million (2004: £101m) adjusted for a £29 million deduction fornon-recurring items (2004: £9m), £46 million of intangible asset amortisation(2004: £11m), an increase of £44 million for the short term fluctuations ininvestment return (2004: £(38)m), and a deduction of £9 million for the negativevariation in the value of the equity option on 2007 Convertible Bonds (2004:£10m). The non-recurring items comprise £2 million for the integration of FPI,£14 million for the integration of F&C and £13 million for F&C Reinvestment Plancosts. The intangible asset amortisation comprises £32 million for acquiredintangibles and £14 million for the value of acquired in-force business. Operating Expenses Cost control remains key for the Group. In UK Life & Pensions we are keeping our operating expenses, excludingcommission, broadly stable at our current rate of new business growth whilstmaintaining our high levels of service. Acquisition expenses continue to benefitfrom the efficiencies gained through the increasing volumes of new business nowbeing transacted online, currently some 80%. At the time of the annual results, F&C indicated that it anticipated making £20million of cost savings during 2005 through removal of duplicated costs. Thisremains the position with further cost savings to be delivered in 2006 as theintegration is concluded. F&C has now signed heads of agreement with Mellonregarding outsourcing the back office of the enlarged group. To reduce clientrisk and to facilitate integration of the data, an approach involving conversionin 2006 and migration in 2007/08 has been agreed. This will extend the originaltimeline and add additional cost of about £10 million to the integration. Itwill also delay the attainment of the final financial integration benefits,amounting to £2-3 million until migration is concluded. Shareholders' Equity 30 June *30 June *31 Dec 2005 2004 2004Pro forma embedded value £bn £bn £bn---------------------------------- --------- -------- --------Shareholders' equity 3.5 2.8 3.3Represented by Group embedded value, comprising: Shareholders' invested net assets 1.1 1.1 1.1Value of in-force Life & Pensions business 1.9 1.4 1.6Market value of Asset Management business 0.5 0.3 0.6---------------------------------- --------- -------- --------* Restated for the impact of IFRS The embedded value on a pro forma basis was up 7% compared with 31 December 2004due to a strong achieved profit result for both UK and International Life andPensions and the new capital raised in respect of the acquisition of Lombard.Embedded value per share on a pro forma basis at 30 June 2005 was 169 pence (31December 2004: 170 pence). At the end of 2003 we took account of the cost of capital notionally assumed tobe backing our Risk Capital Margin in the UK. This cost arises from the use oflower future investment return assumptions than the risk discount rate on thecapital notionally assumed to be backing the Risk Capital Margin. This cost oflock-in has been reduced to £18 million (31 December 2004: £27m) as a result ofimproved Risk Capital Margin coverage from within the with profits fund. Over the half year to 30 June 2005 the value of our in-force business increasedby £0.3 billion to over £1.9 billion. Over the same period our shareholderinvested net assets, which are the best indication of our net cash position,remained broadly stable at £1.1 billion. An analysis of the movement in ourshareholder net assets is set out below. Movement in shareholders' invested net assets 2005 2004For the half year ended 30 June £m £m---------------------------------------- -------- -------Net assets at 1 January (restated for IFRS) 1,086 1,234Investment return 60 (8)Dividend paid net of receipt from F&C (86) (77)Life & Pensions net cash operating surplus/(strain): UK - FPLP With Profits Fund 45 44 UK - Other 6 (53) International - 8Reclassify convertible debt as equity 51 -Acquisition of Lombard (including expenses) (39) -Other 1 (3)---------------------------------------- -------- -------Net assets at 30 June 1,124 1,145---------------------------------------- -------- ------- Life & Pensions net cash operating surplus improved to £51 million (30 June 2004strain £1m) as a result of a number of items, including writing less capitalintensive lines of protection business and actions taken as part of ongoingcapital management. It also includes some one off items, including a £17 millionimpact of market movements. The international business remains broadlycash-neutral. The interim dividend declared for 2005 is 2.6 pence per share, up 2% in linewith policy. The dividend is covered 1.4 times by IFRS profit, although we donot believe that dividend cover is an appropriate measure under IFRS. At 30 June 2005 the shareholders' invested net assets were invested broadly in amix of 70% equities and 30% fixed income securities and cash. Long-term Borrowings The Group's long-term borrowings net of capitalised issue costs have increasedto £1,671 million at 30 June 2005 (31 Dec 2004: £1,175m), following thesuccessful issue of £500 million of guaranteed perpetual hybrid Tier One debt inJune 2005. The Tier One debt issue is guaranteed on a subordinated basis by FPLPand pays a coupon of 6.292%. The proceeds, which were invested by the holdingcompany in corresponding instruments in FPLP, will be used to pre-fund theredemption of the £215 million Undated Subordinated Guaranteed Bonds callable in2006 and to support future growth. The table below summarises the long-termborrowings of the Group: 30 June 31 Dec Coupon 2005 2004 % £m £m --------------------------------- --------- ------- -------Undated Subordinated Guaranteed Bonds callable 2006 9.125 215 215Convertible Bonds callable 2007 5.25 290 290Step-up Tier One Insurance Capital Securitiescallable 2019 6.875 300 300Step-up Tier One Insurance Capital Securitiescallable 2015 6.292 500 -Securitisation Notes - A1 due 2016 3m LIBOR 280 280 + 0.20 - A2 due 2019 3m LIBOR 100 100 + 0.23Net Capitalised Issue Costs (14) (10)--------------------------------- --------- ------- -------Total 1,671 1,175--------------------------------- --------- ------- ------- In May 2005, we renounced our right to redeem the Convertible Bonds callable in2007 in cash. This removes the need to reflect any further changes to the optionvalue in the IFRS income statement. Management of Risk and Economic Capital During 2005, the Group has continued to build on the new risk frameworkintroduced in late 2004. Its vision of active risk management, withconsideration of risk embedded into business planning, decision-making andeveryday management, is unchanged. The process for management of operationalrisk has been enhanced with the introduction of self-assessments by businessunits and reporting of loss incident data. Regular reports are made to theOperational Risk Committee, the Audit and Compliance Committee and to the Board,based on this data. Alongside this, more formal processes for managing strategicand financial risks have been introduced, closely linked to the businessplanning process. In addition, enhanced consideration of risk has been added tothe processes for investment appraisal, project initiation, and new productdevelopment. The Group has continued to develop and refine its economic capital modelcovering the Life and Pensions business. Results from the model will be used asan input to the calculation of financial performance on an EEV basis, and wecontinue to use the economic capital model to inform our financial riskmanagement strategies. Examples of strategies under consideration includemigration of credit risk on bonds backing annuity business, migration of theproperty and credit risk components of with profits maturity guarantees, and theinvestment of shareholder funds. The model will play an increasingly importantrole in business planning and product pricing over the next year. Financial Strength Friends Provident remains financially strong and our financial standing has beenfurther improved in the first half of 2005. We continued to manage our businessfinancially on the basis of our economic capital whilst ensuring that we alsocomply comfortably with all other capital requirements. These include therealistic solvency requirement for our with profits business, our regulatorysolvency and our group solvency requirements, as detailed below. Realistic Solvency We have been managing the with profits business of FPLP on a Realistic BalanceSheet (RBS) basis for some time now. Surplus assets for FPLP's with profits fundat 30 June 2005 have increased by £51 million to £182 million (31 Dec 2004:£131m). Excluding liabilities representing the shareholders' share of futurebonuses as required by FRS 27, the excess amounted to £255 million (31 Dec 2004:£189m). In addition to calculating assets and liabilities on a realistic basis, we holda Risk Capital Margin (RCM). The RCM at 30 June 2005 was £260 million (31 Dec2004: £279m). The capital available to cover the RCM in FPLP amounts to £1,911million which means that the RCM is covered over 7 times. As required by theFSA, the capital includes 50% of the present value of future profits arising inthe Non-Profit Fund of FPLP amounting to £203 million. In the 2005 IFRS interim accounts, the balance sheet includes FPLP's withprofits liabilities to policyholders valued on a realistic basis in line withFRS 27. The impact of valuing FPLP's liabilities on this basis has been toincrease insurance contract liabilities by £400 million (31 Dec 2004: £294m),reduce deferred acquisition costs by £357 million (31 Dec 2004: £377m) andincrease deferred tax assets by £28 million (31 Dec 2004: £6m). The net resultof these changes has been taken to the fund for future appropriations in linewith FRS 27 - a net reduction of £729 million (31 Dec 2004: £665m). The totalFFA at 30 June 2005, after all adjustments, was £156 million (31 Dec 2004:£161m). Regulatory Solvency In addition to the realistic solvency reporting, FPLP also reports regulatorysolvency using the revised valuation rules. These focus solely on the adequacyof resources to meet existing guaranteed benefits. An explicit resiliencecapital requirement is held in addition to test capital adequacy in stressedinvestment conditions. The results of the regulatory and realistic basiscalculations are then compared after applying stress tests to each and the moreonerous requirement is applied. For FPLP, the more onerous requirement iscurrently that calculated on a regulatory basis, although this is expected toreverse in the short term. The Free Asset Ratio is a common measure of financial strength in the UK forlong-term insurance business. It is the ratio of assets less liabilities(including actuarial reserves but before the required regulatory minimumsolvency margin) expressed as a percentage of actuarial reserves. For FPLP thisratio has increased to 14.3% at the end of June 2005 (31 December 2004: 12.2%)and available assets to meet capital requirements have increased from £2,281million to £2,708 million. The quality of our regulatory capital has alsoimproved and this ratio no longer includes any implicit item or the £215 millionsubordinated debt callable in 2006, which were included at 31 December 2004. Our economic capital model forms the basis for the FSA to agree the economiccapital requirement for each insurance company based on an assessment of its ownrisk profile (ie the Individual Capital Assessment or "ICA"). Havingparticipated in a pilot exercise with the FSA and submitted our end 2004 ICA weremain satisfied with our methodology. On an ICA basis the capital position ofthe group's life and pensions companies is very strong. Group Life and Pensions Capital Position Under FRS 27 principles, the total available capital resources of the Group at30 June 2005 exceeded the capital requirement by £1.5 billion (31 Dec 2004:£1.2bn). The bulk of the Group's capital is held outside of the with profitsfunds and, consequently, can be deployed around the Group with a high degree offlexibility. Credit Ratings On 10 May 2005 Moody's raised the outlook on FPLP's A2 (strong) financialstrength credit rating from stable to positive. FPLP's rating from Standard &Poor's is unchanged at A+ (strong) with a stable outlook. Standard & Poor'supgraded the rating of Friends Provident plc from BBB+ (good) to A- (strong) on27 May 2005. With Profits Investments The proportion of equities and property backing the FPLP With Profits Fund assetshares (the EBR) has increased to 51% (31 December 2004: 48%). We continue toactively optimise returns to policyholders and manage the investments backingthe guarantee provisions to ensure guarantees are met as they fall due whilstlimiting risk to both policyholders and shareholders. The gross investmentreturn achieved by the With Profits Fund in the first half of 2005 was 6.9%. Pension Schemes The Group operates one principal defined benefit scheme, and various schemesoperated by F&C. The market value of the assets of the principal scheme (FPPS)at 30 June 2005 was £757 million. This scheme has a small surplus of £3 million(31 December 2004: deficit £5m). The fully funded position of FPPS in partreflects the success of ongoing risk management activities, including actionstaken some time ago to reintroduce employer and employee contributions and tohedge the risk of inflation and interest rate changes. Without the hedge, FPPSwould have needed a further £70 million injection of funds to be at anequivalent position. The F&C defined benefit schemes are closed to new entrants.In addition the Group also operates two defined contribution schemes, oneoperated by F&C Asset Management plc and the other by Friends ProvidentInternational Ltd. Corporate Responsibility Friends Provident's unique ethical heritage provides a clear point ofdifferentiation and we continue to perform well in all areas of the corporateresponsibility agenda, evidenced by our inclusion in the FTSE4Good and Dow JonesWorld Sustainability Indices and our high ranking in the Top 100 Companies thatCount survey. However the corporate responsibility agenda continues to move at pace and thereis always more that can be done. Earlier in the year, the Executive Directors ofthe main Board agreed a strategy and plan for the continued development ofcorporate responsibility over the next three years. The Friends Provident Foundation, endowed in July 2004, encourages new ways ofthinking about how money is used in today's society. The trustees havedetermined that its initial programme of grant-making will focus oninvestigating and developing solutions to the issue of financial exclusion inthe UK and the first grants are now being made. Conclusion The steady growth of the Friends Provident Group is continuing and the outlookis increasingly positive. In UK life and pensions, our excellent service is deepening the very goodrelationships we have forged with intermediary firms and has ensured that we arestrongly represented on distribution panels. As previously stated, the impact ofour distribution agreements will only now begin to be felt, and on into 2006.New business is likely to be impacted more quickly from those distributors wheremulti-tie is their main focus of operation. Our expertise in the application oftechnology underpins our service excellence and we are working to ensure ouronline facilities remain leading-edge across all our key product segments. TheUK market is very competitive but we are optimistic about gaining market shareand doing so profitably. Group pensions in particular will generate a greaterproportion of new business volumes, as we will be a beneficiary of the A-daychanges. For international life and pensions, the market holds excellent prospects for usto secure profitable growth. Our international operations are diverse andcomplementary. We have well-founded relationships with distributors in manycountries and we will seek to develop these still further, while also exploringthe opportunities in other potentially lucrative markets. In asset management, the immediate task is to complete the integration whilst atthe same time building an enhanced platform for organic growth. The assetmanagement business has considerable long-term growth opportunities, but it isbecoming increasingly competitive. Investment quality is emerging as an evenmore important differentiator and F&C intends to deepen and broaden itscapabilities as a result of the merger. Strong distribution links, a diverseclient base, a wide product offering are all important to success, but they needto be supported by superior investment performance if the full benefits are tobe realised. This will be our priority. The Group has made an excellent start to this year having increased stillfurther our scale and diversity, providing a wider platform on which to build. Contents Achieved profit interim statements Summary consolidated income statement on an achieved profit basisConsolidated statement of recognised income and expenses on an achieved profitbasisLife & Pensions achieved profitSummary consolidated balance sheet on an achieved profit basisConsolidated statement of changes in equity on an achieved profit basisPro forma embedded valueNotes to the achieved profit results IFRS interim statements Consolidated income statement on an IFRS basis Underlying profit before tax and reconciliation to profit before taxConsolidated balance sheet on an IFRS basisConsolidated statement of recognised income and expenses on an IFRS basisConsolidated cash flow statement on an IFRS basisNotes to the interim IFRS statements Explanation of transition to IFRS Appendix - Analysis of Life & Pensions new business Summary consolidated income statement on an achieved profit basisFor the half year ended 30 June 2005 Half year *Half year *Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 Notes £m £m £m--------------------------- ------ -------- --------- --------Underlying profit (i)Life & Pensions 4 195 155 299Asset Management 5 52 14 40Expected return on net pensionliability - 4 8Expected return on corporate netassets 6 (8) (8) (14)Corporate costs (6) (5) (10)--------------------------- ------ -------- --------- --------Underlying profit 233 160 323Non-recurring items 7 (29) (11) (55)Amortisation of Asset Managementacquired intangible assets (28) (5) (21)Investment return variances 268 (162) 184Variation in value of equity option onconvertible debt (9) (10) (10)Effect of economic assumption changes 8 (101) 132 (91)--------------------------- ------ -------- --------- --------Profit before tax 334 104 330Tax on underlying profit (66) (45) (78)Tax (charge)/credit on items excludedfrom underlying profit (31) 11 (8)--------------------------- ------ -------- --------- --------Profit after tax 237 70 244--------------------------- ------ -------- --------- --------Attributable to:Equity holders of the parent 237 68 246Minority interest - 2 (2)--------------------------- ------ -------- --------- -------- 237 70 244--------------------------- ------ -------- --------- --------Earnings per share 9Based on profit after tax attributableto equity holders of the parent - basic 11.5p 3.9p 13.6p - diluted 11.4p 3.9p 13.5pBased on underlying profit on anachievedprofit basis, after tax, attributableto equity holders of the parent 7.2p 6.5p 12.9p--------------------------- ------ -------- --------- --------* As restated - see note 13 (i) Underlying profit on an achieved profit basis represents profit (based onlonger-term investment return) before impairment of Asset Management goodwill,amortisation and impairment of Asset Management acquired intangible assets andnon-recurring items. Consolidated statement of recognised income and expenses on an achieved profitbasis For the half year ended 30 June 2005 Half year *Half year *Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m-------------------------------- -------- --------- -------Profit after tax 237 70 244 Actuarial gains/(losses) on definedbenefit plans 5 (1) (9)Profit on deemed disposal of share in AssetManagementBusiness - - 36Exchange (losses)/gains on consolidation andother movements (16) - 2Deferred tax 2 - 1-------------------------------- -------- --------- -------Total recognised income and expenses forthe period 228 69 274-------------------------------- -------- --------- -------Attributable to: Equity holders of the parent 236 67 277 Minority interest (8) 2 (3)--------------------------------- -------- --------- ------- 228 69 274--------------------------------- -------- --------- ------- * As restated - see note 13 Life & Pensions achieved profit For the half year ended 30 June 2005 Half year *Half year *Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 Notes £m £m £m---------------------------- ------ -------- --------- --------Contribution from new business 4(a) 52 37 83Cost of share based payments (1) (1) (2)Cost of solvency capital and pensionservice charge (11) (11) (21)---------------------------- ------ -------- --------- --------Contribution from new business attributable to shareholders (after the costs of share based payments, solvency capital and pension service charge) 40 25 60Profit from existing business 4(b)- expected return 97 77 155- experience variances 16 (2) (6)- operating assumption changes 1 - (16)Development costs 4(c) (11) (7) (16)Expected return on shareholders' netassets within the Life & Pensions business 6(b) 52 62 122---------------------------- ------ -------- --------- --------Life & Pensions achieved underlyingprofit before tax 195 155 299Non-recurring items 7 (2) (10) (32)Investment return variances 266 (151) 193Effect of economic assumption changes 8 (101) 132 (91)---------------------------- ------ -------- --------- --------Life & Pensions achieved profit beforetax 358 126 369Attributed tax charge (104) (35) (99)---------------------------- ------ -------- --------- --------Life & Pensions achieved profit aftertax 3 254 91 270---------------------------- ------ -------- --------- --------* As restated - see note 13 Summary consolidated balance sheet on an achieved profit basis At 30 June 2005 30 June *30 June *31 Dec 2005 2004 2004 £m £m £m--------------------------------- ------- -------- --------Life & Pensions - long-term funds 735 996 629Life & Pensions - shareholder funds 625 450 656--------------------------------- ------- -------- --------Life & Pensions net assets (i) 1,360 1,446 1,285Corporate net liabilities (236) (301) (199)--------------------------------- ------- -------- --------Shareholders' invested net assets 1,124 1,145 1,086Attributable net asset value of Asset Managementbusiness(including goodwill) net of minorityinterest (ii), (iii) 466 66 486Net pension asset/(liability) of FPPS (iii) 3 (3) (5)--------------------------------- ------- -------- --------Shareholders' net worth 1,593 1,208 1,567Value of in-force Life & Pensions business 1,912 1,429 1,613--------------------------------- ------- -------- --------Shareholders' net assets on an achievedprofit basis 3,505 2,637 3,180--------------------------------- ------- -------- -------- Called up share capital 214 172 199Share premium account 2,035 1,447 1,799Achieved profit reserves 1,256 1,018 1,182--------------------------------- ------- -------- --------Shareholders' equity on an achieved profitbasis 3,505 2,637 3,180--------------------------------- ------- -------- --------* As restated - see note 13 (i) Unencumbered capital, which is defined as Life & Pensions net assets lesssolvency margin requirements in respect of business written in non-profit fundsless any statutory deficit in the FPLP With Profits Fund, amounted to £1,120m(30 June 2004: £1,291m; 31 December 2004: £1,092m).(ii) The attributable net asset value of Asset Management business includesgoodwill of £327m at 30 June 2005 (30 June 2004: £136m; 31 December 2004 £327m).(iii) The attributable net asset value of Asset Management business includes thevalue of the net pension liability of that business on an IAS 19, EmployeeBenefits basis and is net of related deferred taxation. The net pension asset/(liability) of Friends Provident Pension Scheme (FPPS) is stated on an IAS 19basis including holdings in non-transferable securities issued by the operatingentity and is net of related deferred taxation. Consolidated statement of changes in equity on an achieved profit basis For the half year ended 30 June 2005 Half year *Half year *Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m------------------------------- --------- --------- --------Total recognised income and expenses for the period attributable to equity holders of the parent including Life & Pensions business on an achieved profit basis 236 67 277Dividend (103) (84) (133)Reclassify convertible bond as equity 51 - -Share based payments 9 1 4------------------------------- --------- --------- --------Increase in achieved profit reserves in the period 193 (16) 148Issue of shares 132 1 365Movements in respect of unclaimed shares issued on demutualisation - - 15------------------------------- --------- --------- --------Net additions to shareholders' equity 325 (15) 528Shareholders' equity at beginning ofperiod 3,180 2,652 2,652------------------------------- --------- --------- --------Shareholders' equity at end of period 3,505 2,637 3,180------------------------------- --------- --------- -------- * As restated - see note 13 Pro forma embedded valueAt 30 June 2005 Assets held outside the Life & Pensions business are reported using the IFRSbasis of accounting. A pro forma adjustment to include the listed AssetManagement business at market value is shown in the table below: 30 June *30 June *31 DecPro forma adjustment to bring the value ofthe listed business to market value 2005 2004 2004business to market value: £m £m £m------------------------------- --------- --------- --------Shareholders' equity on an achieved profit basis 3,505 2,637 3,180Adjustment to the value of the listed AssetManagement business to market value 33 141 123------------------------------- --------- --------- --------Pro forma embedded value 3,538 2,778 3,303------------------------------- --------- --------- --------* As restated - see note 13 Notes to the achieved profit results 1. Achieved profit results The achieved profit results were approved by the Board of Directors on 12September 2005 2. Basis of preparation In order to identify the value being generated by the Group's business, thedirectors use the achieved profit basis of reporting in respect of the Life &Pensions business combined with reporting in accordance with InternationalFinancial Reporting Standards ("IFRS") for the remainder of the business. Theachieved profit basis of reporting is designed to recognise profit as it isearned over the term of a life assurance policy. The total profit recognisedover the lifetime of the policy is the same as that recognised under the IFRSbasis of reporting, but the timing of the recognition is different. The Group has adopted IFRS for the first time in order to prepare its financialstatements, whereas previously the non Life & Pensions business was reported ona modified statutory solvency basis. Consequently certain items have beenrestated as summarised in note 13. The achieved profit results have been prepared in accordance with themethodology and disclosure requirements contained in the guidance 'Supplementaryreporting for long-term insurance business (the achieved profits method)' issuedby the Association of British Insurers in December 2001. The guidance aims to provide an appropriate method of recognising shareholderprofits from long-term business. The guidance states that achieved profit shouldbe calculated net of tax and then grossed up at the effective rate ofshareholder tax. The full standard rate of UK corporation tax has been used togross up after tax profits on UK business and appropriate overseas tax rateshave been used for the International business, as this closely resembles theeffective rate. Shareholders' funds on an achieved profit basis provides an estimate of thevalue of the shareholders' interest in a life assurance business excluding anyvalue which may be generated from future new life and pensions business. Theycomprise the sum of shareholders' net worth and the value of existing business.The shareholders' net worth is the net assets attributable to shareholders. Thevalue of existing business is the present value of the projected stream offuture after tax distributable profit available to shareholders from theexisting business at the valuation date, adjusted where appropriate for the costof holding the minimum statutory solvency margin. Shareholders' funds on an achieved profit basis for the Friends Provident Groupconsists of the following: (i) Life & Pensions net assets;(ii) the Group's share of its investment in the Asset Management business on an IFRS basis;(iii) corporate net liabilities;(iv) the net pension liability of FPPS on an IAS 19 basis (but including holdings in non-transferable securities issued by the operating entity) (net of deferred tax); and(v) the present value of the future profits attributable to shareholders from existing policies of the Life & Pensions business. In addition, a pro forma embedded value has been reported showing shareholders'funds on an achieved profit basis adjusted to include the Asset Managementlisted subsidiary at market value. 3. Life & Pensions segmental information (a) Achieved profit after tax. UK International Half Half Half Half year year Year year year Year ended ended ended ended ended ended 30 June 30 June 31 Dec 30 June 30 June 31 Dec 2005 2004 2004 2005 2004 2004 £m £m £m £m £m £m---------------------- ------- ------- ------- ------- ------- ------- Contribution from new business 32 30 66 20 7 17Cost of share based payments (1) (1) (2) - - -Cost of solvency capital and pension service charge (11) (11) (20) - - (1)---------------------- ------- ------- ------- ------- ------- -------Contribution from new business attributable to shareholders (after the costs of share based and pension service charge) 20 18 44 20 7 16Profit from existingbusiness - expected return 81 70 141 16 7 14 - experience variances 20 (3) (11) (4) 1 5 - operating assumption changes 1 - (35) - - 19Development costs (11) (7) (16) - - -Expected return on shareholders' net assets within the Life & Pensions Business 52 61 120 - 1 2---------------------- ------- ------- ------- ------- ------- -------Life & Pensions achieved underlying profit before tax 163 139 243 32 16 56Non-recurring items (1) (9) (29) (1) (1) (3)Investment return variances 260 (151) 187 6 - 6Effect of economic assumption changes (99) 127 (85) (2) 5 (6)---------------------- ------- ------- ------- ------- ------- -------Life & Pensions achieved profit before tax 323 106 316 35 20 53Attributed tax charge (97) (32) (95) (7) (3) (4)---------------------- ------- ------- ------- ------- ------- -------Life & Pensions achieved profit after tax 226 74 221 28 17 49---------------------- ------- ------- ------- ------- ------- ------- (b) Shareholders' net assets UK International 30 June 30 June 31 Dec 30 June 30 June 31 Dec 2005 2004 2004 2005 2004 2004 £m £m £m £m £m £m---------------------- ------- ------- ------- ------- ------- ------ Life & Pensions net assets 1,341 1,408 1,234 19 38 51Value of in-force Life & Pensions business 1,598 1,266 1,431 314 163 182---------------------- ------- ------- ------- ------- ------- ------ 2,939 2,674 2,665 333 201 233---------------------- ------- ------- ------- ------- ------- ------ 4. Life & Pensions achieved underlying profit (a) Contribution from new businessThe contribution from new business for the half year ended 30 June 2005 iscalculated using economic assumptions at the beginning of the period. Thecontribution from new business using end of period economic assumptions amountedto £52m for the half year ended 30 June 2005 (half year ended 30 June 2004:£37m; year ended 31 December 2004: £84m). The contribution from new business is stated before tax and is calculated bygrossing up the contribution from new business after tax at appropriate rates oftax. In respect of stakeholder style pension business, where a regular pattern in thereceipt of premiums has been established, the business has been treated asregular premium business. (b) Profit from existing businessProfit from existing Life & Pensions business comprises the expected return onthe value of in-force business at the start of the period plus the impact of anychanges in the assumptions regarding future operating experience, changes in thereserving basis (other than economic assumption changes) and profits and lossescaused by differences between the actual experience for the period and theassumptions used to calculate the embedded value at the end of the period. Future bonus rates have been set at levels which would fully utilise the assetssupporting the in-force with profits business over its lifetime, after providingfor an estimate of the cost of guaranteed benefits calculated on a stochasticbasis, and are consistent with the economic assumptions and the company's bonuspolicy. The proportion of surplus allocated to shareholders on conventional withprofits business has been assumed to be 10%. (c) Development costsDevelopment costs represent investment in developing advanced electronic tradingsystems, e-commerce related activities and new business and service automationand improvement. 5. Asset Management Asset Management has been treated as a separate reportable segment and thus theprofit on investment management fees charged to the Life & Pensions business,approximately £9m for the half year ended 30 June 2005, is included within AssetManagement underlying profit (half year ended 30 June 2004: approximately £5m;year ended 2004: approximately £11m). 6. Expected return on shareholders' net assets (a) Expected return on corporate net assets The expected return on corporate net assets is the longer-term investment returnon assets held by Friends Provident plc and its non-life subsidiaries. Itexcludes the expected return on the net pension liability and the result of theAsset Management business which are shown separately in the summary consolidatedprofit and loss account. (b) Expected return on shareholders' net assets within the Life & Pensionsbusiness The expected return on shareholders' net assets held within the Life & Pensionsbusiness comprises the return on the shareholders' net assets held by the lifeassurance companies within that business, using the investment returnassumptions used to calculate the embedded value at the beginning of the period. 7. Non-recurring items Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m-------------------------------- --------- -------- --------Closure of Direct Sales operation - (2) 2Life & Pensions integration costs 2 4 9Provision for misselling/complaints - 6 14Gross up for shareholder tax - 2 7-------------------------------- --------- -------- --------Life & Pensions non-recurring items 2 10 32-------------------------------- --------- -------- --------Asset Management integration costs 14 1 19Asset Management Reinvestment Plan costs 13 - 4-------------------------------- --------- -------- --------Asset Management non-recurring items 27 1 23-------------------------------- --------- -------- -------- Total non-recurring items 29 11 55-------------------------------- --------- -------- -------- 8. Effect of economic assumption changes The effect of economic assumption changes reflect the impact of changes in theexpected level of future investment returns, asset mix, economic reservingbasis, expense inflation and the risk discount rate used to calculate the valueof existing business. 9. Earnings per share (a) Basic and underlying earnings per share Earnings per share have been calculated based on achieved underlying profitafter tax, and on the profit after tax attributable to equity holders of theparent, as the directors believe the former earnings per share figure gives abetter indication of operating performance. Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Earnings EPS Earnings EPS Earnings EPS £m pence £m pence £m pence-------------------- -------- ------- -------- ------ -------- -------Profit after tax attributable to equity holders of the parent 237 11.5 68 3.9 246 13.6Investment return variances (268) (13.0) 162 9.4 (184) (10.2)Variation in value of equity option on convertible debt 9 0.4 10 0.6 10 0.6Effect of economic assumption changes 101 4.9 (132) (7.6) 91 5.1Amortisation of Asset anagement acquired intangible assets 28 1.4 5 0.3 21 1.2Non-recurring items 29 1.4 11 0.6 55 3.0Tax charge/(credit) on items excluded from underlying profit 31 1.5 (11) (0.6) 8 0.4Minority interests on items excluded from underlying profit (19) (0.9) (1) (0.1) (14) (0.8)-------------------- -------- ------- -------- ------ -------- -------Underlying profit after tax attributable to equity holders of the parent 148 7.2 112 6.5 233 12.9-------------------- -------- ------- -------- ------ -------- -------Weighted average number of shares for the period (millions) 2,065 1,723 1,808-------------------- -------- ------- -------- ------ -------- ------- (b) Diluted earnings per share Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Earnings EPS Earnings EPS Earnings EPS £m pence £m pence £m pence-------------------- -------- ------- -------- ------ -------- -------Profit after tax attributable to equity holders of the parent 237 11.5 68 3.9 246 13.6Dilutive effect of options - (0.1) - - - (0.1)-------------------- -------- ------- -------- ------ -------- -------Diluted earnings per share 237 11.4 68 3.9 246 13.5-------------------- -------- ------- -------- ------ -------- ------- Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Weighted Weighted Weighted average average average number of number of number of shares shares shares millions millions millions-------------------- ------------- ------------- ------------Basic weighted average numberof shares 2,065 1,723 1,808Dilutive effectof options 14 11 11-------------------- ------------- ------------- ------------Diluted weighted averagenumber of shares 2,079 1,734 1,819-------------------- ------------- ------------- ------------ 10. Sensitivity analysis The table below shows the contribution from new Life & Pensions business, beforeshare based payments, the cost of solvency capital and the pension servicecharge, before tax, and the value of existing Life & Pensions business, assuminga 1% increase in the rate of investment return on equities and properties and,separately, a 1% increase in the risk discount rate (all other assumptionsremaining unchanged): Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m--------------------------------- --------- -------- --------Contribution from new Life & Pensionsbusinessbefore share based payments cost of solvency capital and pension service charge and before tax 52 37 83After the impact of a 1% increase ininvestment returns on equities and properties 57 43 92After the impact of a 1% increase in the riskdiscount rate 39 24 58--------------------------------- --------- -------- --------Value of existing Life & Pensions business 1,912 1,429 1,613After the impact of a 1% increase ininvestmentreturns on equities and properties 1,964 1,465 1,651After the impact of a 1% increase in the riskdiscount rate 1,770 1,315 1,488--------------------------------- --------- -------- -------- Profits are affected by any change in underlying investment returns. Wheninterest rates change, expected future investment returns will also change andthis in turn will affect projected cash flows. A change in investmentassumptions may also result in a change to the risk discount rate used tocalculate the present value of the projected cash flows. 11. Principal assumptions The table below sets out the principal economic assumptions used in thecalculation of the value of the existing business and the contribution from newbusiness. 30 June 30 June 31 Dec 2005 2004 2004UK and Friends Provident International Limited % % %(FPI) --------- -------- -----------------------------------------Risk discount rate 6.7 7.6 7.1Investment returns before tax:Fixed interest 3.7-5.0 5.1-5.9 4.1-5.2Equities 6.7 7.6 7.1Properties 6.7 7.6 7.1Future expense inflation 3.7 4.1 3.9Corporation tax rate 30 30 30--------------------------------- --------- -------- -------- 30 June *11 Jan 2005 2005Lombard % %--------------------------------- --------- -------- --------Risk discount rate 7.5 8.0Investment returns before tax 4.75 5.0Future expense inflation 3.3 3.5Tax rate 25.8 25.8--------------------------------- --------- -------- --------* Lombard was acquired on 11 January 2005. For UK and FPI business the risk-free rate of return used to derive theassumptions is taken as the annualised 15-year Gilt yield as at the date of thevaluation. The observed rates at 30 June 2005, 31 December 2004 and 30 June 2004were 4.2%, 4.6% and 5.1% respectively. The investment return on Government fixed interest securities is assumed to beequal to the risk-free rate of return. For Corporate fixed interest securities, the investment return assumptions arederived by taking a margin over the risk-free rate of return. The margin iscalculated as the AA- bond yield spread (2/3 of AA rated yields and 1/3 of Arated yields) over gilt yields, weighted by term of the actual portfolio held.This rate is then limited to the actual return achieved on the underlyingassets. The risk discount rate, equity investment return and property investment returnare derived by taking a 2.5% margin over the risk-free rate of return. The future expense inflation assumption is the rate implied by the differencebetween the risk-free rate of return and the average of the FTSE Actuaries Over5 year index-linked gilt at 5% and 0% inflation. For Lombard, the risk discount rate is derived as a margin of 3.75% over theequivalent EU risk-free rate. The investment return assumption is the weightedaverage (based on asset mix) of returns on fixed interest securities, equitiesand cash. The Lombard investment return assumption is shown gross of tax but netof fund management charges. The methodology for deriving economic assumptions for all businesses will bereviewed with the implementation of European Embedded Values from 31 December2005. Future bonus rates have been set at levels which would fully utilise the assetssupporting the in-force with profit business over its lifetime, after providingfor an estimate of the cost of guaranteed benefits calculated on a stochasticbasis, and are consistent with the economic assumptions and the company's bonuspolicy. The assumed rates of mortality, morbidity, lapse, surrender, conversion topaid-up and early retirement, which are reviewed annually, have been derivedfrom analyses of the Group's recent operating experience and industry studies.An allowance has been retained for the impact of the introduction of stakeholderpensions. Maintenance expenses are assumed to increase in the future at a rate of 1% perannum in excess of the assumed long-term rate of retail price inflation.Allowance for commission is based on the Group's recent experience. The value of existing business makes no allowance for the payment of futurepremiums on recurring single premium contracts or for non-contractual incrementson existing policies with the exception of stakeholder style pensions where, ifa regular pattern in the receipt of premiums is established, the business istreated as regular premium business. 12. Contingent liabilities Details of contingent liabilities are shown in note 9 to the IFRS results. 13. Impact of adopting IFRS on achieved profit interim statements The Group has adopted IFRS for the first time in the preparation of itsfinancial statements. Consequently the results presented on an achieved profitbasis are now prepared on an achieved profit basis for the Life and Pensionsbusiness and on an IFRS basis for the remainder of the business whereaspreviously the remainder of the business was reported an MSS basis. In addition, the 2004 results have been restated to gross up after tax profitsof the International business at appropriate overseas tax rates. The impact of the restatement on shareholders' equity and on profit after taxattributable to equity holders of the parent on an achieved profit basis isshown below. Reconciliation of shareholders equity on an achieved profit basis 31 Dec 30 June 31 Dec 2004 2004 2003 £m £m £m-------------------------------- -------- --------- --------Shareholders' equity on an achieved profit basis under MSS (comparatives as restated) 3,079 2,583 2,551Mid to bid investment adjustment (12) (12) (13)Derecognise dividends payable 103 48 84Convertible bond equity option (25) (23) (10)Business combinations 30 31 27Recognition of Life and Pensions intangible assets 16 16 17Other adjustments (11) (6) (4)-------------------------------- -------- --------- --------Shareholders' equity on an achieved profit basis under IFRS 3,180 2,637 2,652-------------------------------- -------- --------- -------- Reconciliation of profit after tax attributable to equity holders of the parenton an achieved profit basis Year Half year ended 31 ended 30 Dec 2004 June 2004 £m £m-------------------------------- -------- ---------Profit after tax attributable to equity holders of the parent on an achieved profit basis under MSS 254 79Mid to bid investment adjustment 1 1Convertible bond equity option (15) (13)Business combinations 4 4Other adjustments 2 (3)-------------------------------- -------- ---------Profit after tax attributable to equity holders of theparent on an achieved profit basis under IFRS 246 68-------------------------------- -------- --------- MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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