8th Aug 2007 07:00
Friends Provident PLC08 August 2007 PART 2 Notes to the IFRS results 1. Basis of preparation Friends Provident plc (the 'Company') is a company domiciled in England andWales. The consolidated interim financial statements of the Company as at andfor the six months ended 30 June 2007 comprise the Company and its subsidiaries(together referred to as the 'Group') and the Group's interests in associatesand jointly controlled entities. The comparative figures for the financial year ended 31 December 2006 are notthe Company's Report & Accounts for that financial year, but they are derivedtherefrom. Those accounts have been reported on by the Company's auditors anddelivered to the Registrar of Companies. The report of the auditors was (i)unqualified, (ii) did not include a reference to any matters to which theauditors drew attention by way of emphasis without qualifying their report, and(iii) did not contain a statement under section 237(2) or (3) of the CompaniesAct 1985. The Report & Accounts of the Group for the year ended 31 December 2006is available upon request from the Company's registered office at Pixham End,Dorking, RH4 1QA, or at http://www.friendsprovident.co.uk/investor/ The accounting policies applied by the Group in these consolidated interimfinancial statements are the same as those applied by the Group in itsconsolidated financial statements as at and for the year ended 31 December 2006. The preparation of interim financial statements requires management to makejudgements, estimates and assumptions that affect the application of accountingpolicies and the reported amounts of assets and liabilities, income and expense.Actual results may differ from these estimates. The IFRS results were approved by the Board of Directors on 7 August 2007. 2. Segmental information (a) Summary The Group's management and internal reporting structure is based on thefollowing business segments: • UK Life & Pensions (including corporate items) • International Life & Pensions • Asset Management (including F&C's managed pension fund business) These segments comprise the Group's primary reporting format for segmentalinformation. Information relating to a class of business has been amended to be in line withits classification at year-end 2006. This has meant the reclassification ofcertain items for 30 June 2006 between the UK and International Life & Pensionsbusiness segments. (b) Business segment analysis Half year ended 30 June 2007 Elimination UK Intn'l of inter- Life & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £m--------------------- --------- --------- ----------- --------- -------Gross earned premiumson insurance andinvestmentcontracts 2,020 1,041 36 - 3,097Less investmentcontract premiums (i) (1,518) (1,036) (36) - (2,590)--------------------- --------- --------- ----------- --------- -------Gross earnedpremiums 502 5 - - 507Less premiums cededto reinsurers (1,731) (1) - - (1,732)--------------------- --------- --------- ----------- --------- -------Net earned premiums (1,229) 4 - - (1,225)Fee and commissionincome andincome from serviceactivities 102 78 124 (18) 286Investment income 858 519 66 - 1,443--------------------- --------- --------- ----------- --------- -------Total revenue (269) 601 190 (18) 504--------------------- --------- --------- ----------- --------- -------Net claims andbenefits paid 732 - - - 732Movement in insuranceand investment contracts liabilities (1,470) 491 57 - (922)Transfer to fund forfuture appropriations (6) - - - (6)Movement in net assetsattributable to unitholders 63 - - - 63Acquisition expenses 166 29 6 - 201Administrative andother expenses 105 75 110 (18) 272Finance costs 45 9 9 - 63--------------------- --------- --------- ----------- --------- -------Total claims, benefitsand expenses (365) 604 182 (18) 403--------------------- --------- --------- ----------- --------- -------Share of profits ofassociatesand joint venture - - 1 - 1--------------------- --------- --------- ----------- --------- -------Profit before tax fromcontinuing operations 96 (3) 9 - 102--------------------- --------- --------- ----------- --------- -------Policyholder tax (18) - (1) - (19)Shareholder tax 23 1 - - 24--------------------- --------- --------- ----------- --------- -------Segmental result aftertax 101 (2) 8 - 107--------------------- --------- --------- ----------- --------- -------Inter segment(expense)/revenue (18) - 18 - ---------------------- --------- --------- ----------- --------- ------- (i) Accounted for as deposits under IFRS. Half year ended 30 June 2006 Elimination UK Intn'l of inter- Life & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £m---------------------- -------- -------- ----------- --------- --------Gross earned premiums oninsurance and investmentcontracts 1,731 910 169 - 2,810Less investment contractspremiums (i) (1,245) (907) (169) - (2,321)---------------------- -------- -------- ----------- --------- --------Gross earned premiums 486 3 - - 489Less premiums ceded toreinsurers (49) - - - (49)---------------------- -------- -------- ----------- --------- --------Net earned premiums 437 3 - - 440Fee and commission income andincome from serviceactivities 79 67 129 (17) 258Investment income 339 83 15 - 437---------------------- -------- -------- ----------- --------- --------Total revenue 855 153 144 (17) 1,135---------------------- -------- -------- ----------- --------- --------Net claims andbenefits paid 794 - - - 794Movement in insurance andinvestment contractsliabilities (346) 86 4 - (256)Transfer to fund for futureappropriations 43 - - - 43Movement in net assetsattributable to unitholders 12 - - - 12Acquisition expenses 111 10 5 - 126Administrative andother expenses 142 42 157 (17) 324Finance costs 37 7 - - 44---------------------- -------- -------- ----------- --------- --------Total claims, benefitsand expenses 793 145 166 (17) 1,087---------------------- -------- -------- ----------- --------- --------Profit before tax fromcontinuing operations 62 8 (22) - 48---------------------- -------- -------- ----------- --------- --------Policyholder tax (4) - (1) - (5)Shareholder tax 3 1 9 - 13---------------------- -------- -------- ----------- --------- --------Segmental resultsafter tax 61 9 (14) - 56---------------------- -------- -------- ----------- --------- --------Inter segment(expense)/revenue (17) - 17 - ----------------------- -------- -------- ----------- --------- -------- (i) Accounted for as deposits under IFRS. Year ended 31 December 2006 Elimination UK Intn'l of inter- Life & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £m---------------------- -------- -------- ----------- --------- --------Gross earned premiums oninsurance and investmentcontracts 3,709 2,769 199 - 6,677Less investment contractspremiums (i) (2,741) (2,757) (199) - (5,697)---------------------- -------- -------- ----------- --------- --------Gross earned premiums 968 12 - - 980Less premiums ceded toreinsurers (82) (2) - - (84)---------------------- -------- -------- ----------- --------- --------Net earned premiums 886 10 - - 896Fee and commission income andincome from serviceactivities 148 198 258 (39) 565Investment income 2,934 640 123 - 3,697---------------------- -------- -------- ----------- --------- --------Total revenue 3,968 848 381 (39) 5,158---------------------- -------- -------- ----------- --------- --------Net claims andbenefits paid 1,542 2 - - 1,544Movement in insurance andinvestment contractsliabilities 1,176 579 101 - 1,856Transfer to fund for futureappropriations 19 - - - 19Movement in net assetsattributable to unitholders 131 - - - 131Acquisition expenses 329 72 11 - 412Administrative andother expenses 240 130 287 (39) 618Finance costs 72 15 1 - 88---------------------- -------- -------- ----------- --------- --------Total claims, benefitsand expenses 3,509 798 400 (39) 4,668---------------------- -------- -------- ----------- --------- --------Share of profits of associatesand joint venture 1 - - - 1---------------------- -------- -------- ----------- --------- --------Profit before tax fromcontinuing operations 460 50 (19) - 491---------------------- -------- -------- ----------- --------- --------Policyholder tax (124) - - - (124)Shareholder tax 45 1 8 - 54---------------------- -------- -------- ----------- --------- --------Segmental resultsafter tax 381 51 (11) - 421---------------------- -------- -------- ----------- --------- --------Inter segment(expense)/revenue (39) - 39 - ----------------------- -------- -------- ----------- --------- -------- (i) Accounted for as deposits under IFRS. 3. Underlying profit Half year ended 30 June 2007 UK Life Intn'l & Life & Asset Pensions Pensions Management Total £m £m £m £m----------------------- --------- --------- ----------- -------Profit before tax fromcontinuing operations 96 (3) 9 102Policyholder tax (18) - (1) (19)Returns on Group-controlled fundsattributable to third parties (30) - - (30)----------------------- --------- --------- ----------- -------Profit before tax excludingprofit generated withinpolicyholder funds 48 (3) 8 53Non-recurring items (i) (9) - 3 (6)Amortisation of Asset Managementacquired intangible assets - - 21 21Amortisation of acquired presentvalue of in-force business 4 9 - 13Amortisation of Life & Pensionsacquired intangible assets - 4 - 4Interest payable on STICS (26) - - (26)Short-term fluctuations ininvestment return 53 (1) - 52----------------------- --------- --------- ----------- -------Underlying profit before tax 70 9 32 111Tax on underlying profit (3)Minority interest in underlyingprofit (10)----------------------- --------- --------- ----------- -------Underlying profit after taxattributable to ordinaryshareholders of the parent 98----------------------- --------- --------- ----------- -------Earnings per shareUnderlying earnings per share(pence) 4.6----------------------- --------- --------- ----------- ------- (i) Non-recurring items UK Life & Pensions items include a credit of £9m (30 June 2006: £1m) in respectof the reduction in estimated cost to shareholders of historic business reviewsand mortgage endowment complaints. Asset Management items include costs of £3m (30 June 2006: £6m) in respect ofissuing shares to employees under the 2004 Reinvestment Plan. Costs incurred inintegrating, rationalising and reorganising the Asset Management businessfollowing the acquisition of F&C Group (Holdings) Limited were £nil (30 June2006: £7m). Half year ended 30 June 2006 UK Life Intn'l & Life & Asset Pensions Pensions Management Total £m £m £m £m----------------------- --------- --------- ----------- -------Profit before tax fromcontinuing operations 62 8 (22) 48Inter-segment loan interest 6 - (6) -Policyholder tax (4) - (1) (5)Returns on Group-controlled fundsattributable to third parties (52) - - (52)----------------------- --------- --------- ----------- -------Profit before tax excludingprofit generated withinpolicyholder funds 12 8 (29) (9)Non-recurring items (i) (1) - 13 12Amortisation of Asset Managementacquired intangible assets - - 22 22Amortisation of acquired presentvalue of in-force business 4 8 - 12Amortisation of Life & Pensionsacquired intangible assets - 4 - 4Impairment of Asset Managementacquired intangible assets - - 45 45Interest payable on STICS (26) - - (26)Short-term fluctuations ininvestment return 60 - - 60----------------------- --------- --------- ----------- -------Underlying profit before tax 49 20 51 120Tax on underlying profit (22)Minority interest in underlyingprofit (17)----------------------- --------- --------- ----------- -------Underlying profit after taxattributable to ordinaryshareholders of the parent 81----------------------- --------- --------- ----------- -------Earnings per shareUnderlying earnings per share(pence) 3.8------------------------ ------- --------- ----------- ------- Year ended 31 December 2006 UK Life Intn'l & Life & Asset Pensions Pensions Management Total £m £m £m £m----------------------- --------- --------- ----------- -------Profit before tax fromcontinuing operations 460 50 (19) 491Inter-segment loan interest 12 - (12) -Policyholder tax (124) - - (124)Returns on Group-controlled fundsattributable to third parties (104) - - (104)----------------------- --------- --------- ----------- -------Profit before tax excludingprofit generated withinpolicyholder funds 244 50 (31) 263Non-recurring items (2) - 19 17Amortisation of Asset Managementacquired intangible assets - - 43 43Amortisation of acquired presentvalue of in-force business 9 16 - 25Amortisation of Life & Pensionsacquired intangible assets - 7 - 7Impairment of Asset Managementacquired intangible assets - - 58 58Interest payable on STICS (52) - - (52)Short-term fluctuations ininvestment return 41 (2) - 39----------------------- --------- --------- ----------- -------Underlying profit before tax 240 71 89 400Tax on underlying profit 6Minority interest in underlyingprofit (29)----------------------- --------- --------- ----------- -------Underlying profit after taxattributable to ordinaryshareholders of the parent 377----------------------- --------- --------- ----------- -------Earnings per shareUnderlying earnings per share(pence) 17.9------------------------ ------- --------- ----------- ------- 4. Appropriations of profit (a) Dividends paid and proposed on ordinary shares Dividends paid during the period and recognised in reserves Half year ended Year ended 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------------- ----------- --------- ---------Final dividend in respect of prior year 110 108 108Interim dividend in respect of current year - - 56----------------------------- ----------- --------- ---------Total dividends paid 110 108 164----------------------------- ----------- --------- --------- After the balance sheet date the dividends set out below were proposed by thedirectors. In accordance with IAS 10 Events After the Balance Sheet Date, thesehave not been provided as a liability at the balance sheet date. 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------------- ----------- --------- ---------Final dividend in respect of current year - - 110Interim dividend in respect of current year 58 56 ------------------------------ ----------- --------- --------- The 2007 interim dividend is based on 2,150m shares in issue (excluding treasuryshares). The 2006 final dividend was based on 2,117m shares. (b) STICS interest STICS interest paid during the period and recognised in reserves Half year ended Year ended 30 June 31 Dec 2007 2006 2006 £m £m £m-------------------------------- ------- ------- ----------Interest on 2003 STICS at 6.875% (paidhalf-yearly) 11 11 21Interest on 2005 STICS at 6.292% (paidannually) 31 31 31-------------------------------- ------- ------- ----------Total interest paid 42 42 52-------------------------------- ------- ------- ---------- Interest on 2003 STICS at 6.875% is paid in May and November each calendar year.Interest on 2005 STICS at 6.292% is paid in June of each calendar year. 5. Earnings per share (a) Basic and underlying earnings per share from continuing operations Earnings per share have been calculated based on the profit after tax and on theunderlying profit after tax, attributable to ordinary shareholders of theparent. The directors believe that the underlying earnings per share figuregives a better indication of operating performance. Half year ended Half year ended Year ended 30 June 2007 30 June 2006 31 Dec 2006 Per Per Per Earnings share Earnings share Earnings share £m pence £m pence £m pence -------------------- --------- -------- ------- ------- ------- ------- Profit/(loss) aftertaxattributable toordinaryshareholders of theparent 47 2.2 (12) (0.6) 276 13.1Short-termfluctuations ininvestment return 52 2.4 60 2.8 39 1.8Non-recurring items (6) (0.3) 12 0.6 17 0.8Amortisation andimpairment ofacquired intangibleassets 38 1.8 83 3.9 133 6.3Minority interest onitemsexcluded fromunderlyingprofit (6) (0.3) (27) (1.2) (40) (1.9)Tax credit on itemsexcludedfrom underlyingprofit (27) (1.2) (35) (1.7) (48) (2.2)-------------------- --------- -------- ------- ------- ------- -------Underlying profitaftertax attributable toordinary shareholdersof the parent 98 4.6 81 3.8 377 17.9-------------------- --------- -------- ------- ------- ------- ------- Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2007 2006 2006 millions millions millions--------------------- ------------------- ---------- ----------Weighted average number of sharesBasic 2,130 2,107 2,111Dilution (c) 10 6 164--------------------- ------------------- ---------- ----------Diluted 2,140 2,113 2,275--------------------- ------------------- ---------- ---------- (b) Diluted earnings per share from continuing operations Half year ended Half year ended Year ended 30 June 2007 30 June 2006 31 Dec 2006 Per Per Per Earnings share Earnings share Earnings share £m pence £m pence £m pence--------------------- -------- ------- -------- ------- ------- ------- Profit/(loss) after taxattributable to ordinaryshareholders of theparent 47 2.2 (12) (0.6) 276 13.1Dilutive earnings pershare - - - - 16 (0.3)--------------------- -------- ------- -------- ------- ------- -------Diluted earningsper share 47 2.2 (12) (0.6) 292 12.8--------------------- -------- ------- -------- ------- ------- ------- (c) Dilution Options of 34,075,765 (31 December 2006: 32,816,922) shares are outstandingunder the Group's option schemes as at 30 June 2007. Of these, 24,575,930 (31December 2006: 24,239,504) options were not dilutive for the period shownbecause the market price of the Company's share was below the option price orthe performance criteria were not met. At 30 June 2007 there were £287m (31December 2006: £283m) bonds in issue convertible to ordinary shares. If thesebonds converted at 30 June 2007, 169,590,058 new ordinary shares would have beenissued. The Group's convertible bonds were anti-dilutive for the period ended 30 June2007 and dilutive for the year ended 31 December 2006 based on the profitattributable to ordinary equity holders of Friends Provident plc. 6. Staff pension schemes (a) Introduction The Group operates several defined benefit schemes: the FPPS, to which themajority of the Group's UK Life & Pensions employees belong, and various schemesoperated by F&C. In addition defined contribution schemes are operated by F&C,FPI, Pantheon Financial Limited and Sesame Group Limited. Lombard does notoperate a pension scheme. In July 2007 the FPPS scheme was closed to new entrants and a definedcontribution plan has been introduced for new employees. During the period the FPPS has made further investments in F&C LDI pools and nolonger invests in fixed bonds or index linked bonds. The holding in F&C LDI pools at 30 June 2007 was £318m (31 December 2006:£256m), which represents 36% of total scheme assets. Since 30 June 2007 exposureto equity investments has been reduced to 40% of total scheme assets. The F&C UK defined benefit schemes closed to new entrants in 1995 and 2002.During the period the two schemes have merged and combined holding in LDI poolsat 30 June 2007 was £29m (31 December 2006: £nil), which represents 20% of totalF&C scheme assets. (b) Total schemes The net pension surplus and deficits are recognised on the balance sheet grossof deferred tax. A reconciliation of the Group pension surplus and deficitsincluded in the consolidated balance sheet and the net pension surplus anddeficits as determined by actuarial valuations are set out below. Half year ended Year ended 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------------- ------- -------- ---------Surplus in the FPPS 7 - ------------------------------ ------- -------- ---------Group pension surplus included in insuranceand other receivables 7 - -Deferred tax (2) - ------------------------------ ------- -------- ---------Net pension surplus 5 - ------------------------------ ------- -------- -------------------------------------- ------- -------- ---------Deficit in the FPPS - (67) (31)Deficit in the F&C schemes (25) (35) (46)----------------------------- ------- -------- ---------Group pension deficits included in provisions (25) (102) (77)Non-transferable assets - 44 -Deferred tax 7 17 23----------------------------- ------- -------- ---------Net pension deficits (18) (41) (54)----------------------------- ------- -------- ---------Analysis of net pension surplus/(deficit)FPPS 5 (16) (22)F&C schemes (18) (25) (32)----------------------------- ------- -------- --------- (13) (41) (54)----------------------------- ------- -------- ---------Amounts recognised in the income statementFPPS (9) (7) (14)F&C schemes (2) (2) (4)----------------------------- ------- -------- --------- (11) (9) (18)----------------------------- ------- -------- ---------Amounts recognised in the statement ofrecognised income and expenseFPPS 36 (5) (12)F&C schemes 13 12 2Deferred tax (14) (2) 3----------------------------- ------- -------- --------- 35 5 (7)----------------------------- ------- -------- --------- (c) Actuarial assumptions The inflation rate and increase in pensions in payment rate assumptions used bythe Scheme Actuary of the FPPS have increased from 3.02% at 31 December 2006 to3.31% at 30 June 2007. The discount rate assumption used by the Scheme Actuary of the FPPS hasincreased from 5.02% at 31 December 2006 to 5.62% at 30 June 2007. There have been no other changes to the major actuarial assumptions from thosedisclosed in the 2006 annual Report & Accounts. The assumptions used for the F&C schemes are broadly consistent with those usedfor the FPPS. 7. Intangible assets Investment Acquired management Goodwill PVIF contracts Other Total £m £m £m £m £m-------------------- --------- --------- ----------- ------- -------CostAt 1 January 2007 662 480 573 210 1,925Other additions 10 - - 64 74Disposals - - - (3) (3)Foreign exchangeadjustments - - 1 - 1-------------------- --------- --------- ----------- ------- -------At 30 June 2007 672 480 574 271 1,997-------------------- --------- --------- ----------- ------- -------Amortisation and impairmentAt 1 January 2007 - 140 289 91 520Amortisation charge forperiod - 13 21 12 46Disposal - - - (3) (3)-------------------- --------- --------- ----------- ------- -------At 30 June 2007 - 153 310 100 563-------------------- --------- --------- ----------- ------- -------Carrying amountsAt 30 June 2006 675 359 322 120 1,476At 31 December 2006 662 340 284 119 1,405At 30 June 2007 672 327 264 171 1,434-------------------- --------- --------- ----------- ------- ------- There has been no indication of potential impairment on intangible assets at 30June 2007. At 30 June 2006 an impairment charge of £45m was made in respect ofinvestment management contracts. In accordance with IAS 36 Impairment of Assets,goodwill is assessed annually in December. (a) Goodwill Goodwill is the only intangible asset which has an indefinite useful life andhas been allocated as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m---------------------------------- -------- -------- --------UK Life & Pensions 191 192 191Lombard 148 153 138Asset Management 333 330 333---------------------------------- -------- -------- --------Total goodwill 672 675 662---------------------------------- -------- -------- -------- (b) Acquired PVIF Acquired Present Value of In-Force business (PVIF) is amortised over thelifetime of the in-force policies. The net book value is analysed as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m---------------------------------- -------- -------- --------UK Life & Pensions 79 89 84International Life & Pensions 248 270 256---------------------------------- -------- -------- --------Total acquired PVIF 327 359 340---------------------------------- -------- -------- -------- (c) Investment management contracts Investment management contracts relate to the Asset Management segment and areamortised over their expected useful economic lives of between 4 and 10 years. (d) Other intangible assets Other intangible assets are amortised over their anticipated useful lives ofbetween 3 and 15 years and include distribution channel relationships, softwaredevelopment and the intangible assets created on the acquisition of the two IFAGroups. As permitted under IFRS 3 Business Combinations, the identifiable intangibleassets including goodwill relating to the purchase of the two IFA groups (seenote 10) have been provisionally determined using initial accounting andcategorised as 'Other intangible assets' pending a detailed analysis of thisasset arising on acquisition. The analysis of the net book value for each segment is as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------- ---------- -------- --------UK Life & Pensions 74 17 21International Life & Pensions 96 102 97Asset Management 1 1 1----------------------- ---------- -------- --------Total other intangible assets 171 120 119----------------------- ---------- -------- -------- 8. Movement in capital and reserves Half year ended 30 June 2007 Equity attributable to equity holders of the parent Share Share Other Minority capital premium reserves STICS Total interest Total £m £m £m £m £m £m £m------------------ ------- -------- -------- ------- ------- -------- -------At 1 January2007 214 2,051 542 810 3,617 548 4,165Total recognisedincomeand expensefor the period - - 77 26 103 38 141------------------ ------- -------- -------- ------- ------- -------- -------Dividends onequity shares - - (110) - (110) (26) (136)Interest paidon STICS - - - (42) (42) - (42)------------------ ------- -------- -------- ------- ------- -------- -------Appropriationsof profit - - (110) (42) (152) (26) (178)Share basedpayments - 1 6 - 7 4 11Allocation on Lombardearn-outpayment 3 57 - - 60 - 60Change inparticipationin subsidiary - - - - - (10) (10)------------------ ------- -------- -------- ------- ------- -------- -------At 30 June 2007 217 2,109 515 794 3,635 554 4,189------------------ ------- -------- -------- ------- ------- -------- ------- Half year ended 30 June 2006 Equity attributable to equity holders of the parent Share Share Other Minority capital premium reserves STICS Total interest Total £m £m £m £m £m £m £m------------------ ------- -------- -------- ------- ------- -------- -------At 1 January2006 214 2,038 436 810 3,498 442 3,940Total recognisedincomeand expensefor the period - - (3) 26 23 46 69------------------ ------- -------- -------- ------- ------- -------- -------Dividends onequity shares - - (108) - (108) (27) (135)Interest paidon STICS - - - (42) (42) - (42)------------------ ------- -------- -------- ------- ------- -------- -------Appropriationsof profit - - (108) (42) (150) (27) (177)Share basedpayments - 12 5 - 17 4 21Change inparticipationin subsidiary - - - - - 54 54------------------ ------- -------- -------- ------- ------- -------- -------At 30 June 2006 214 2,050 330 794 3,388 519 3,907------------------ ------- -------- -------- ------- ------- -------- ------- Year ended 31 December 2006 Equity attributable to equity holders of the parent Share Share Other Minority capital premium reserves STICS Total interest Total £m £m £m £m £m £m £m------------------ ------- -------- -------- ------- ------- -------- -------At 1 January2006 214 2,038 436 810 3,498 442 3,940Total recognisedincomeand expensefor the year - - 258 52 310 92 402------------------ ------- -------- -------- ------- ------- -------- -------Dividends onequity shares - - (164) - (164) (46) (210)Interest paidon STICS - - - (52) (52) - (52)------------------ ------- -------- -------- ------- ------- -------- -------Appropriationsof profit - - (164) (52) (216) (46) (262)Share basedpayments - 13 12 - 25 7 32Change inparticipationin subsidiary - - - - - 53 53------------------ ------- -------- -------- ------- ------- -------- -------At 31 December2006 214 2,051 542 810 3,617 548 4,165------------------ ------- -------- -------- ------- ------- -------- ------- 9. Contingent liabilities and commitments (a) VAT on investment trust management fees The European Court of Justice (ECJ) delivered its judgement on 28 June 2007regarding the JP Morgan Claverhouse Investment Trust/Association of InvestmentCompanies (Claverhouse) case. In this case Claverhouse is seeking to establishthat management services to UK investment trusts should be a VAT exempt supply,rather than a taxable supply in accordance with current UK VAT law. In thejudgement the ECJ has restricted the discretion of Member States to limit thescope of fund management exemption. While this judgement is in favour ofClaverhouse, F&C is currently waiting for the decision from the UK VAT tribunaland/or for HM Revenue and Customs (HMRC) to comment on the judgement. If the judgement in favour of Claverhouse is upheld in the UK, a number of F&CGroup companies, in common with other fund managers in the UK, would face claimsfrom those investment trusts to which they have supplied services for repaymentof the VAT they have charged to them. Under current UK VAT law, companies in theF&C Group can submit repayment claims to HMRC, but only dating back as far as2001, being the maximum time period permitted. However, separate legalproceedings have challenged the validity of how the 'capping rules' introducedby HMRC in 1997 are applied. If this challenge is successful and it is held thatinvestment trust management fees should be exempt from VAT, then F&C may beeligible to reclaim VAT from HMRC in respect of the period between 1990 and1996. Until there is an indication of the quantum of claims received and theextent to which such claims could be mitigated, the Directors of F&C are notable to reliably estimate the potential liability. (b) F&C acquisition In December 2000, when Eureko BV acquired F&C Group (Holdings) Limited,approximately 73% of the issued ordinary shares of F&C Group Management Limited,a subsidiary company, were held in the form of two bearer share warrants whichcould not be located prior to the completion of the sale. Eureko BV wasindemnified by F&C Group (Holdings) Limited against any losses suffered as aresult of the loss of the old share warrants or the issue of replacement sharewarrants. Since a bearer share warrant issued by a company entitles the bearerto the shares specified in the share warrant, there is a risk that the thirdparty holding the old share warrants may claim that it is entitled to thespecified shares in F&C Group Management Limited. If a third party weresuccessful in establishing a claim in relation to the old share warrants, F&CGroup (Holdings) Limited could be liable to indemnify F&C Group ManagementLimited under the original indemnity arrangements, which could have a materialadverse effect on F&C's business, results of operations and/or financialcondition. Although there is a possibility that a third party may seek to establish that itis entitled to the shares specified in the old share warrants, the directors ofF&C have been informed that Eureko BV has been advised that the prospect of athird party succeeding in such a claim is remote. Under the terms of the 2004merger between ISIS and F&C, Eureko Holdings has given a specific indemnity(guaranteed by Eureko BV) to F&C in respect of losses arising in relation to thelost share warrants to bearer in F&C Group Management Limited (including inrespect of the indemnity granted by F&C Group (Holdings) Limited to F&C GroupManagement Limited) which is capped at approximately £432m. 10. Business Combinations (a) Pantheon Financial acquisition On 14 May 2007 the Group acquired 100% of the voting rights of PantheonFinancial, a non-listed group of companies, incorporated in the United Kingdom.Details of the consideration, and asset and liabilities acquired can be seen innote 10(c) below. Future consideration represents three further annual payments that are linked toPantheon Financial's performance. The value of £15m used for considerationpurposes is based on the fair value of the probable amount to be paid. TheseEarn-out payments are payable in cash. (b) Sesame acquisition On 1 June 2007 the Group acquired 100% of the voting rights of Sesame, anon-listed group of companies, incorporated in the United Kingdom. Details ofthe consideration, and assets and liabilities acquired can be seen in note 10(c)below. As part of the purchase agreement the Group financed the repayment of a £75mloan due to the vendor company. As permitted by IFRS 3 Business Combinationsthis has been treated as consideration. Due to the proximity of the above acquisitions to the interim reporting date, afull analysis of the acquired assets and liabilities including acquiredintangible assets, has not been completed. Consequently the following analysisshould be considered provisional. (c) Acquisition consideration Pantheon Financial Sesame £m £m---------------------------------- --------- --------Provisional Fair value of net assets acquired:Property and equipment - 2Insurance and other receivables 1 56Cash and cash equivalents 3 96Interest bearing loans & borrowings (1) -Provisions - (57)Insurance payables, other payables and deferred income (1) (38)Intangible assets arising on acquisition 31 17---------------------------------- --------- --------Total 33 76---------------------------------- --------- --------Discharged by:Cash 17 75Estimated further consideration 15 -Acquisition costs 1 1---------------------------------- --------- --------Total consideration 33 76---------------------------------- --------- -------- Independent review report by KPMG Audit Plc to Friends Provident plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2007, which comprises the Consolidated incomestatement, the Consolidated balance sheet, the Consolidated statement ofrecognised income and expense, the Summary consolidated cash flow statement andthe related notes ('the Financial Information') and to review the EEV basissupplementary information for the six months ended 30 June 2007, which comprisesthe Summary consolidated income statement, the Summary consolidated balancesheet, the Consolidated statement of recognised income and expense, theConsolidated movement in ordinary shareholders' equity and the related notes('the EEV basis Supplementary Information'). The EEV basis Supplementary Information has been prepared in accordance with theEuropean Embedded Value Principles issued in May 2004 by the European CFO Forumas supplemented by the Additional Guidance on European Embedded ValueDisclosures issued in October 2005 (together 'the EEV Principles') using themethodology and assumptions set out in notes 1 and 11 to the EEV basisSupplementary Information. We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with either the Financial Information or the EEV basisSupplementary Information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority and also to provide a reviewconclusion to the Company on the EEV basis Supplementary Information. Ourreviews have been undertaken so that we might state to the Company those matterswe are required to state to it in this report and for no other purpose. To thefullest extent permitted by law, we do not accept or assume responsibility toanyone other than the Company for our review work, for this report, or for theconclusions we have reached. Directors' responsibilities The interim report, including the Financial Information and the EEV basisSupplementary Information contained therein, is the responsibility of, and hasbeen approved by, the directors. The directors are responsible for preparing theFinancial Information in accordance with the Listing Rules of the FinancialServices Authority which require that the accounting policies and presentationapplied to the interim figures should be consistent with those applied inpreparing the preceding annual financial statements except where any changes,and the reasons for them, are disclosed. The directors have acceptedresponsibility for preparing the EEV basis Supplementary Information inaccordance with the EEV Principles and for determining the assumptions used inthe application of those principles. Review work performed We conducted our review of the Financial Information in accordance with guidancecontained in Bulletin 1999/4 issued by the Auditing Practices Board for use inthe UK. We conducted our review of the EEV basis Supplementary Informationhaving regard to that Bulletin. A review consists principally of makingenquiries of group management and applying analytical procedures to theFinancial Information, the EEV basis Supplementary Information and underlyingfinancial data and, based thereon, assessing whether the accounting policies andpresentation have been consistently applied unless otherwise disclosed. A reviewexcludes audit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK & Ireland)and therefore provides a lower level of assurance than an audit. Accordingly wedo not express an audit opinion on the Financial Information or the EEV basisSupplementary Information. Review conclusions On the basis of our reviews we are not aware of any material modifications thatshould be made either to the Financial Information or to the EEV basisSupplementary Information as presented for the six months ended 30 June 2007. KPMG Audit PlcChartered AccountantsLondon 7 August 2007 Appendix: New business results Analysis of Life and Pensions New Business 6 months to 30 June 2007 vs 6 months to 30 June 2006 H1 2007 H1 2006 % Change Regular Single Regular Single Regular Single Prems Prems PVNBP Prems Prems PVNBP Prems Prems PVNBPUK Operations £m £m £m £m £m £m % % %------------- ------- ------- ------ ------- -------- ------- ------- ------ ------LifeProtection 34.6 - 202 34.3 - 199 1 - 2Investment 0.8 263.3 268 0.9 358.2 364 (11) (26) (26)------------- ------- ------- ------ ------- -------- ------- ------- ------ ------ 35.4 263.3 470 35.2 358.2 563 1 (26) (17)------------- ------- ------- ------ ------- -------- ------- ------- ------ ------ PensionsIndividualPensions 12.0 202.9 256 6.5 106.9 137 85 90 87DWP Rebates - 87.3 87 - 34.4 34 - 154 156Group Pensions 201.3 432.0 1,298 191.6 317.4 1,167 5 36 11Annuities - 146.2 146 - 119.0 119 - 23 23------------- ------- ------- ------- ------- -------- ------- ------- ------ ------ 213.3 868.4 1,787 198.1 577.7 1,457 8 50 23------------- ------- ------- ------- ------- -------- ------- ------- ------ ------------------- ------- ------- ------- ------- -------- ------- ------- ------ ------UK Life andPensions 248.7 1,131.7 2,257 233.3 935.9 2,020 7 21 12------------- ------- ------- ------- ------- -------- ------- ------- ------ ------ InternationalOperationsLombard - 648.1 648 - 546.0 546 - 19 19FriendsProvidentInternational 45.9 287.0 523 38.9 276.4 466 18 4 12 ------------- ------- -------- ------- ------- -------- ------- ------- ------ ------TotalInternationalLife andPensions 45.9 935.1 1,171 38.9 822.4 1,012 18 14 16------------- ------- -------- ------- ------- -------- ------- ------- ------ ------------------- ------- -------- ------- ------- -------- ------- ------- ------ ------Total GroupLifeand Pensions 294.6 2,066.8 3,428 272.2 1,758.3 3,032 8 18 13------------- ------- -------- ------- ------- -------- ------- ------- ------ ------ Effect of currency movements on PVNBP All amounts in currency other than sterling are translated into sterling at amonthly average exchange rate. The estimated new business assuming constantcurrency rates would be as follows: H1 2006 H1 2007 (as reported) Change £m £m %------------------------ ------------- ---------- -------Lombard 658 546 21Friends Provident International 547 466 17------------------------ ------------- ---------- -------Total International Life and Pensions 1,205 1,012 19------------------------ ------------- ---------- ------- Analysis of Life and Pensions New Business 3 months to 30 June 2007 vs 3 months to 30 June 2006 Q2 2007 Q2 2006 % Change Regular Single Regular Single Regular Single Prems Prems PVNBP Prems Prems PVNBP Prems Prems PVNBPUK Operations £m £m £m £m £m £m % % %------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- LifeProtection 17.7 - 102 18.3 - 106 (3) - (4)Investment 0.2 129.0 130 0.5 179.9 183 (60) (28) (29)------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 17.9 129.0 232 18.8 179.9 289 (5) (28) (20)------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- PensionsIndividualPensions 7.0 102.2 134 4.4 59.9 80 60 71 68DWP Rebates - 78.0 78 - 21.8 21 - 258 271Group Pensions 105.4 247.1 700 123.8 181.4 707 (15) 36 (1)Annuities - 71.4 71 - 66.7 67 - 7 6------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 112.4 498.7 983 128.2 329.8 875 (12) 51 12 ------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------------- ------- ------- ------- ------- ------- ------- ------- ------- -------UK Life andPensions 130.3 627.7 1,215 147.0 509.7 1,164 (11) 23 4------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- InternationalOperationsLombard - 429.9 430 - 311.8 312 - 38 38FriendsProvidentInternational 27.3 145.2 286 20.4 126.4 225 34 15 27 ------------- ------- ------- ------- ------- ------- ------- ------- ------- -------TotalInternationalLifeand Pensions 27.3 575.1 716 20.4 438.2 537 34 31 33------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------------- ------- ------- ------- ------- ------- ------- ------- ------- -------Total GroupLifeand Pensions 157.6 1,202.8 1,931 167.4 947.9 1,701 (6) 27 14------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- PVNBP by Operations 6 months to 30 June 2007 vs 6 months to 30 June 2006 H1 2007 H1 2006 £m % £m %-------------------- --------- -------- ------- --------UK 2,257 66 2,020 67-------------------- --------- -------- ------- -------- Lombard 648 19 546 18FPI 523 15 466 15-------------------- --------- -------- ------- --------International 1,171 34 1,012 33-------------------- --------- -------- ------- ---------------------------- --------- -------- ------- --------Total 3,428 100 3,032 100-------------------- --------- -------- ------- -------- PVNBP by Operations 3 months to 30 June 2007 vs 3 months to 30 June 2006 Q2 2007 Q2 2006 £m % £m %-------------------- --------- -------- ------- --------UK 1,215 63 1,164 68-------------------- --------- -------- ------- -------- Lombard 430 22 312 19FPI 286 15 225 13-------------------- --------- -------- ------- --------International 716 37 537 32-------------------- --------- -------- ------- ---------------------------- --------- -------- ------- --------Total 1,931 100 1,701 100-------------------- --------- -------- ------- -------- PVNBP equals new single premiums plus the expected present value of new regularpremiums. Premium values are calculated on a consistent basis with the EEV contribution toprofits from new business. Start of period assumptions are used for the economicbasis and end of period assumptions are used for the operating basis. A riskfree rate is used to discount expected premiums in future years. The impact ofoperating assumption changes across a whole reporting period will normally bereflected in the PVNBP figures for the final quarter of the period that thebasis changes relate to. No change in operating assumptions will be reflected inthe PVNBP for the first and third quarters, when the contribution to profitsfrom new business is not published. All amounts in currency other than sterlingare translated into sterling at a monthly average exchange rate. In classifying new business premiums the following basis of recognition isadopted: • Single new business premiums consist of those contracts under which there is no expectation of continuing premiums being paid at regular intervals; • Regular new business premiums consist of those contracts under which there is an expectation of continuing premiums being paid at regular intervals, including repeated or recurrent single premiums where the level of premiums is defined, or where a regular pattern in the receipt of premiums has been established; • Non-contractual increments under existing group pensions schemes are classified as new business premiums; • Transfers between products where open market options are available are included as new business; and • Regular new business premiums are included on an annualised basis. Analysis of APE 6 months to 30 June 2007 vs 6 months to 30 June 2006 APE APE 2007 2006 ChangeUK Operations £m £m %--------------------------- -------- --------- ------- LifeProtection 34.6 34.3 1Investment 27.1 36.7 (26)--------------------------- -------- --------- ------- 61.7 71.0 (13)--------------------------- -------- --------- -------Pensions Individual Pensions 32.3 17.2 88DWP Rebates 8.7 3.4 156Group Pensions 244.5 223.4 9Annuities 14.6 11.9 23--------------------------- -------- --------- ------- 300.1 255.9 17--------------------------- -------- --------- ---------------------------------- -------- --------- -------Total UK Life and Pensions 361.8 326.9 11--------------------------- -------- --------- ------- International OperationsLombard 64.8 54.6 19Friends Provident International 74.6 66.5 12--------------------------- -------- --------- -------Total International Life and Pensions 139.4 121.1 15--------------------------- -------- --------- ------- --------------------------- -------- --------- -------Total Group Life and Pensions 501.2 448.0 12--------------------------- -------- --------- ------- Analysis of APE 3 months to 30 June 2007 vs 3 months to 30 June 2006 APE APE 2007 2006 ChangeUK Operations £m £m %--------------------------- -------- -------- ------- LifeProtection 17.7 18.3 (3)Investment 13.1 18.5 (29)--------------------------- -------- -------- ------- 30.8 36.8 (16)--------------------------- -------- -------- -------Pensions Individual Pensions 17.3 10.4 66DWP Rebates 7.8 2.2 255Group Pensions 130.1 141.9 (8)Annuities 7.1 6.7 6--------------------------- -------- -------- ------- 162.3 161.2 1--------------------------- -------- -------- ---------------------------------- -------- -------- -------Total UK Life and Pensions 193.1 198.0 (2)--------------------------- -------- -------- ------- International OperationsLombard 43.0 31.2 38Friends Provident International 41.8 33.0 27--------------------------- -------- -------- -------Total International Life and Pensions 84.8 64.2 32--------------------------- -------- -------- ------- --------------------------- -------- -------- -------Total Group Life and Pensions 277.9 262.2 6--------------------------- -------- -------- ------- Annualised Premium Equivalent (APE) represents annualised new regular premiumsplus 10% of single premiums. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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