UK Life Project Update: Focus on Cash & Capital

7 June 2011

Resolution Limited ("Resolution" or the "Company")

Cash return to shareholders

Resolution is today announcing the results of its work on the cash and capital position and policies of the Friends Life group. Key elements include:

■ a targeted return of excess cash to shareholders of £500 million via:

- an on-market share buyback of £250 million commencing tomorrow; and

- a further £250 million of cash to be returned in the first half of 2012, following receipt of the necessary approvals, subject to the delivery of planned capital synergies of £235 million which are being announced today which are expected to be delivered in 2011;

■ the potential to return further cash resulting from further capital synergies and potential releases under the currently proposed Solvency II regime;

■ these returns are additional to the Company's previously announced cash and dividend targets;

- the Company's distributable cash target remains at £400 million per annum after interest costs from 2011 without reducing the MCEV of Friends Life;

- the Board will continue to keep under review the appropriateness of the Company moving to a growing dividend toward the end of the UK Life Project; and

- the £500 million cash return will not reduce the aggregate dividend capacity and therefore the Company's dividend per share is expected to increase accordingly;

■ the UK Life Project remains on track to deliver its targeted returns; and

■ the Board confirms that Resolution will be exclusively focused on the UK Life Project.

Commenting on today's announcement, Mike Biggs, Chairman of Resolution Limited said:

"Today we have set out our clear and transparent capital framework for the enlarged group. This along with our strategy statements in February and our results in March have highlighted the strong value potential from the UK Life Project. We are pleased to demonstrate the delivery of this value through our cash returns announced today and from our strong dividend commitments."

Resolution is holding a presentation this morning to update analysts and investors on its UK Life Project focusing on cash and capital.

There will be a conference call today for real-time media at 08:00 (BST), hosted by John Tiner and Jim Newman, respectively the CEO and CFO of Resolution Operations LLP +44 (0) 1452 555 566 quoting 71686498.

A presentation to analysts will take place at 09.30 (BST) at the London Stock Exchange, 10 Paternoster Square, EC4M 7LS.  A conference call of the presentation can be accessed on +44 (0)208 817 9301 or 0800 634 5205 (free phone number). An audio cast of the presentation and the presentation slides will be available on Resolution's website, www.resolution.gg.

1. Resolution and Friends Life Group* capital framework

Resolution's policy is to return excess cash released from the UK Life Project to shareholders to the extent that it is not expected to be required for further M&A opportunities in the short to medium term.

Resolution is announcing today that it believes that it will have £500 million of excess cash which is not required for acquisitions and which should be returned to shareholders, over the next year. This cash falls into two components:

■ excess cash currently held at the Guernsey top company, which is being returned immediately by way of a £250 million share buyback; and

■ surplus cash which is expected to be released in FLG by the end of 2011 as a result of the implementation of capital synergies, and which will be available to be transferred to the Guernsey top company during the first quarter of 2012, subject to appropriate approvals.

Resolution cash

As at 31 May 2011, Resolution had approximately £410 million of Available Shareholder Cash ("ASC"), of which approximately £160 million will be retained to fund the 2011 interim dividend and meet corporate costs, and £250 million will be returned to shareholders through an on-market buyback programme commencing tomorrow.

FLG cash flow

The cash required to fund future planned dividends and further ad hoc returns of cash beyond 2011 will need to be released from Friends Life Group plc ("FLG"), and the Company is today setting out the cash and capital framework for FLG.

The key constraints on FLG paying dividends or otherwise returning cash to Resolution are:

■ the need to maintain excess capital over FLG's target minimum capital ratios; and

■ the level of ASC in FLG holding companies.

FLG capital framework

FLG operates a capital framework in which its Group Capital Resources ("Group CR") must cover the following:

■ Group Capital Resource Requirements ("Group CRR");

■ sufficient additional capital to satisfy FLG's capital policies. FLG currently targets minimum capital policies at three levels, these are set out in Appendix 1;

■ amounts held back in working capital to cover known future commitments; and

■ a "prudence buffer". Resolution expects that FLG will hold a prudence buffer broadly equal to one year's planned cash flows at Resolution level (i.e., Deferred Consideration Notes ("DCN") capital repayments and interest and planned external dividends) in order to minimise volatility in the level of dividends which FLG can pay and ensure that Resolution can meet its commitments to shareholders and under the DCN.

Any capital in excess of the above four items can be considered to be surplus capital, and will be available to be paid up to Resolution, subject to appropriate board and regulatory approvals.

* Friends Life Group means Friends Provident Holdings (UK) plc (proposed to be renamed Friends Life Group plc) and its subsidiaries.

Following the payment of £350 million of dividends to Resolution and the acquisition of Bupa Health Assurance Limited ("BHA"), the FLG IGCA surplus had reduced from £2,317 million at 31 December 2010 to an estimated £1,911 million at 3 June 2011 and excess capital over the FLG IGCA capital policy had fallen from £1,233 million at 31 December 2010 to an estimated £800 million at 3 June 2011.

FLG ASC

As noted in the 2010 preliminary results announcement on 24 March 2011, FLG's Distributable Cash Target ("DCT") of £400 million per annum is expected to be met from a combination of:

a) surplus emerging from in-force business; plus

b) required capital released through run-off; less

c) new business strain and associated required capital for new business; plus

d) release of capital in excess of required capital from operating companies (i.e. working capital); plus

e) capital released as a result of capital synergies.

It is expected that over time FLG will move to a position where the DCT target is met from the sustainable sources listed under paragraphs (a) to (c) above. However in the short term the delivery of the DCT will be supported by releases of working capital from operating companies. Working capital is already included in Group CR, and thus does not result in an increase in the FLG IGCA surplus when released into ASC, and indeed would result in a fall in the FLG IGCA surplus if paid as a dividend to Resolution.

FLG summary

The £800 million estimated excess capital over FLG's capital policy as at 3 June 2011 is all required either to cover the prudence buffer (of approximately £400 million currently) or to meet planned future commitments, being:

■ £175 million retained to meet separation, integration and service company costs; and

■ £225 million to be released over time to support DCT generation until this is entirely covered by sustainable sources.

A consequence of this is that any cash returns in 2012 and future years in excess of planned dividends need to be funded from the delivery of capital synergies or the cash proceeds from partial disposals.

2. Planned capital synergies

The estimated FLG IGCA surplus at 3 June 2011 reflects the release of approximately £50 million after tax from the full utilisation of negative reserves in BHA following completion of the acquisition.

In addition to this, Resolution has planned management actions which are intended to deliver a further £235 million of capital synergies within FLG before the end of 2011. These actions are:

a) The full utilisation of negative reserves and other reserving changes in Friends Life Company Limited ("FLC") is expected to be implemented in the second quarter of 2011 with an estimated after-tax increase in Pillar 1 capital resources of around £100 million; and

b) Implementation of a Part VII scheme in the second half of 2011 to transfer the business of BHA, Friends Provident Life Assurance Limited and part of the business of Friends Provident Pensions Limited to Friends Provident Life and Pensions Limited, which is expected to reduce aggregate Pillar 1 CRR by around £90 million and increase capital in excess of FLG capital policies by around £135 million.

The MCEV impact of these management actions is expected to be broadly neutral with a reduction in the MCEV cost of capital offsetting the after tax cost of implementation.

We expect that delivery of these management actions will put FLG in a position whereby it can afford to pay a special dividend (in addition to planned dividends) of around £250 million to Resolution during the first half of 2012, thereby providing the Company with funds to undertake a further £250 million cash return in 2012 subject to relevant approvals.

3. GOF/TIP and WLUK transactions

FLC was acquired including certain portfolios of business (i.e., the Guaranteed Over Fifty plan ("GOF") and Trustee Investment Plan ("TIP") business) which are due to be sold back to AXA UK plc. Winterthur Life UK Limited ("WLUK") will not be acquired by Resolution until certain portfolios of business have been transferred out of it to a retained AXA UK entity. These transactions are expected to be completed in November 2011, with key financial impacts expected to be:

■ a small reduction in excess capital over FLG IGCA capital policy;

■ neutral impact on FLG ASC; and

■ an aggregate increase in FLG MCEV of approximately £25 million.

4. Impact of Solvency II

Solvency II will replace the current UK Pillar 1 and Pillar 2 capital regimes on 1 January 2013. The current three sets of FLG capital policies will therefore need to be replaced by a capital policy suitable for the Solvency II capital regime from this date.

A number of key aspects of Solvency of relevance to UK life companies (e.g., treatment of annuity business, regulatory debt qualification) are currently unclear and these, together with the final Solvency II methodology and detailed implementation rules, are not expected to be clarified until later this year or early next year. Once the full details of the Solvency II regime have been clarified, the FLG Board will need to adopt a revised capital policy to apply in a Solvency II environment.

Resolution believes that beyond the timeframe for the planned £500 million capital return announced today, the delivery of further capital synergies and the implementation of Solvency II may provide potential for further cash returns in 2012 and beyond.

5. Cash

The Company reaffirms its DCT of £400 million per annum and remains confident that it will be achieved. The delivery of £400 million of cash per annum will enable the Company to meet its guideline dividend commitment at an estimated cost, "assuming no scrip dividend take-up", of £275 million per annum and to meet its scheduled repayment of £63 million of the outstanding principal amount of the DCN, leaving £62 million to cover Company costs and the DCN interest payments.

This effectively means that the target ASC is sufficient to meet annual commitments, but that any returns of cash need to be met either from existing ASC or from synergies that enable the business to deliver in excess of £400 million in any given year.

As at 31 December 2010, ASC was £1,067 million. This reduced to £812 million on 3 June 2011, following the payment of the 2010 final dividend (£142 million), repayments under the terms of DCN (£86 million in principal and interest) and the payment of other costs, totalling £27 million including interest under the acquisition finance facility entered into by Resolution Holdings (Guernsey) Limited which was used to part fund the acquisition of the majority of the AXA UK Life business. Of this £812 million, the Company expects to utilise approximately £100 million to pay the interim dividend for 2011 and to cover costs through to the end of 2011, on the assumption that cash generated this year will be required to meet 2012's dividend, debt and cash requirements.

The Company estimates, therefore, that after known commitments, it currently has £706 million of ASC. Its policy is to retain cash equivalent to one year's cash flow, estimated at £400 million, to provide a prudent buffer against volatility in the market and ensure dividend and debt commitments are met. This leaves £306 million available of which £250 million is targeted to be returned by way of buyback for which a non-discretionary mandate has been issued to the Company's brokers.

Further to this return of cash, the Company also plans to return a further £250 million to shareholders over the next twelve months, subject to the achievement of its target 2011 capital synergies of £235 million, as outlined above.

6. Gearing

The impact of the proposed shareholder capital returns, debt issuance and DCN repayments on the Group's MCEV gearing ratio is relatively small and the ratio remains below the stated target range of 25% to 30%. Assuming that there is no change to the 2010 year end gross MCEV of £8,009 million of the Group, other than for dividends to shareholders and debt repayments, the gearing ratio moves from 18.7% at 2010 year end to 19.4% following the issuance of £500 million of lower tier 2 debt in 2011, the repayment of the £400 million acquisition finance facility, the repayment of £63 million of DCN and the payment of £142 million cash cost of the 2010 final dividend.

The gearing ratio would increase to 20.9%, on a pro-forma basis, on completion of the targeted £500 million return of cash to shareholders after allowing for the 2011 interim dividend. This is stated before any possible increase in gross MCEV as a result of 2011 business performance. The gearing ratio would fall by approximately 0.2% for every £100 million of increase in Group gross MCEV.

7. Dividend

The Company paid a final dividend of 12.57 pence per ordinary share on 26 May 2011. This made the total dividend paid for 2010 18.03 pence per share. In the Chairman's annual statement included in the Company's annual report and accounts for the year ended 31 December 2010, the Chairman announced the directors' intention to recommend an increase in the Company's aggregate dividend per share for 2011 to 18.85 pence per ordinary share.

The directors have reviewed the dividend policy in light of the Company's decision to implement a share buy-back programme and concluded that the aggregate value of dividend payable by the Company on all shares in issue should not reduce as a result of the buy-back. This means that the proposed dividend per share is expected to be increased in order to maintain the aggregate dividend payout.

The Board will also continue to keep under review the appropriateness of the Company moving to a growing dividend toward the end of the UK Life Project.

8. M&A

The Board continues to believe that significant value can be created from consolidation in the UK life sector. The value from any specific opportunity depends on a number of factors, including the price paid, the strategic fit, synergies available and the level of integration risk / disruption caused. The Board has confirmed that it will not undertake further acquisitions if they dilute the returns likely to emerge from the three acquisitions already made.

Given the strong returns and cash flow available from the Company's current portfolio, ROL has advised the Board that any acquisition would have to add significant value to be additive to the project returns and that the Group should remain particularly cautious regarding any transaction which would involve disruption to the current integration programme in Friends Life.

ROL continuously maps current consolidation opportunities for the Company. ROL has advised the Board that the cash returns announced today are appropriate given the current acquisition opportunities available.

9. Resolution - scope of activities

As the Company has previously stated, the Board understands that shareholders do not wish to have the returns from the UK Life Project blended with those of other possible restructuring projects. The Board is therefore today confirming that the Company will not undertake additional projects until after completion of the UK Life Project. In the light of this, the Board has discussed, and reached agreement on the principles which will drive changes required to the Operating Agreement. These changes will allow ROL to advise other entities which ROL may sponsor to undertake restructuring projects which do not conflict with the UK Life Project. Therefore, none of the Company's cash resources will be required to invest in new restructuring projects and shareholders will not be asked to invest further in Resolution for the purposes of financing new projects. The Operating Agreement will continue to ensure the ongoing commitment of the ROL team to securing a successful outcome for shareholders from the UK Life Project.

The Board will work with ROL to finalise the detailed changes required to the contractual arrangements between the Company and ROL over the next few weeks and will in due course issue a circular setting out the changes proposed, upon which shareholders will be invited to vote.

10. Integration update

The Group is on track to deliver £39 million of targeted synergies on a run-rate basis by the end of 2011. The integration program remains on schedule and the total estimated synergies of £112 million remain on target for the end of 2013. The Group's rationalisation and integration strategy is expected to result in an overall headcount reduction in 2011 of 400 employees. There has been no disruption to the integration of the AXA UK Life Business into Friends Life from the additional activity as a result of the acquisition of BHA. The work to deliver the strategic targets announced on 23 February 2011 continues according to plan. For example, there is a clear IT implementation strategy based on the highly regarded BHA Protection platform and Friends Life's Next Generation Pensions platform that will facilitate the achievement of the specific product targets.

The Friends Life brand was successfully launched on 29 March 2011 which brought together the acquired businesses under a unified brand. A significant percentage of the top 250 roles have now been appointed and the sales and marketing teams of Friends Provident and the acquired AXA UK life businesses have been combined. Other key highlights include the implementation of a common performance management system across the organisation, the utilisation of the enlarged group's scale to renegotiate supplier contracts to more favourable terms and agreeing fixed-price contracts with the significant IT providers to enable the separation of the acquired AXA UK life businesses.

The Company is pleased with the progress being made on the integration and will update the market further with the interim results in August and its update on the UK Life Project in November.

11. IFRS update

At the 2010 preliminary results presentation to the market, the Company undertook to provide further analysis of its 2010 IFRS operating performance, recognising that the reported results were difficult to interpret due to changes in the definition of operating profit and the need to apply acquisition accounting requirements. Accordingly, in Appendix 2 the Company sets out:

■ the impact of the operating profit restatement on 2009 full year and 2010 interim result;

■ an estimate of what the Group's 2010 full year results would have been if the acquired AXA UK Life businesses had been owned by the Group throughout 2010, and recognised other one-off impacts during the year;

■ an explanation of the second half results in FP UK compared to the first half of the year given the recognised disparity between the two; and

■ a summary of the key expected impacts of accounting for acquisitions on IFRS results going forward and the potential impact of the adoption of negative reserves for the acquired AXA UK Life Business and BHA.

12. Value Share

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

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

Total gross equity deployed in the UK Life Project is approximately £4,056 million with the amounts deployed on each acquisition being:

■ £1,916 million for the Friends Provident acquisition (see page 102 of Friends Provident Group plc acquisition prospectus for details of calculation of equity deployed);

■ £2,140 million for the AXA UK Life acquisition (see page 89 of the AXA UK Life Business acquisition prospectus for details of calculation of equity deployed); and

■ zero for the acquisition of BHA, which was funded using existing FLG resources.

Since commencement of the UK Life Project, Holdco has returned approximately £475 million of cash to Resolution. This cash has been utilised to pay external dividends to shareholders, meet Resolution's corporate costs (excluding the ROL Operating Fee, which is paid by Holdco), and to contribute to the current ASC held at Resolution Limited level.

The accumulated value of the net equity deployed in Holdco was £3,758 million on 31 May 2011.

The market value of the Company, based on the closing share price of 303.9 pence on 3 June 2011 was £4,456 million. Deducting the £410 million cash held at Resolution level, leads to an implied value of Holdco of £4,046 million and implied value added in Holdco of £288 million. The implied Value Share at 31 May 2011 was therefore approximately £29 million.

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

For comparison, valuing Holdco (i.e., the UK Life Project) at the amount implied by the market capitalisation of Resolution at the close of play on 3 June 2011 would lead to an average annualised return on net equity deployed in Holdco of 10.4% per annum. Resolution remains confident of achieving its targeted mid-teen returns on the UK Life Project and the actual value of the Value Share will only be capable of being determined on completion of the UK Life Project.

The Company will report on the Value Share on a mark-to-market basis going forward.

Forward looking statements

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

Notes to Editors:

Resolution Limited

Resolution's current restructuring project is in the UK life and related asset management sectors (the "UK Life Project").

The Company's ordinary shares were admitted to the Official List and to trading on the main market of the London Stock Exchange in December 2008. The Company transferred to a Premium Listing as it completed its first acquisition, Friends Provident Group plc, on 4 November 2009 and is subject to those provisions of the Listing Rules that apply to overseas companies with a Premium Listing. The Company completed its second acquisition, the majority of the AXA UK life business, on 15 September 2010. On 31 January 2011, the Company completed its third acquisition, the shares and business of Bupa Health Assurance Limited.

A copy of this announcement is and will be available, subject to certain restrictions relating to persons resident in restricted jurisdictions, for inspection on the Company's website at www.resolution.gg.

For the avoidance of doubt any other information contained on Resolution's website does not form part of this announcement.

Resolution Operations LLP

ROL is a privately owned advisory and operating firm which provides services to Resolution. ROL is part of The Resolution Group that also includes Resolution Capital Limited and Resolution Financial Markets LLP. Resolution Capital Limited facilitated the creation and initial public offering of the Company. Resolution Financial Markets LLP undertakes for Resolution Operations LLP a range of activities that include working with investors to facilitate the direct placing of equity and debt with institutions. Resolution Limited is not part of The Resolution Group and the members of The Resolution Group do not form part of the Resolution Limited group.

ROL is acting for the Company and no one else in connection with the matters referred to in this announcement and will not regard any other person (whether or not a recipient of this announcement) as a client in relation to such matters and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to any matters referred to in this announcement.

Appendix 1: FLG capital policies

1. Life Company Pillar 1

150% of capital resource requirements ("CRR") excluding WPICC

- WPICC is excluded as it is a device to increase statutory Pillar 1 liabilities to realistic liabilities for with-profits business, not a measure of risk capital

- surplus assets in long term funds included in capital resources for this test

2. Life Company Pillar 2

125% of CRR including any ICG received from the FSA

- base liabilities assessed on a realistic basis

- CRR calibrated to one year 1 in 200 stress event

3. Group Pillar 1 (Insurance Group Capital Adequacy ("IGCA"))

160% of Group CRR excluding WPICC

- increased from 150% to 160% during 2010, anticipated it will revert to 150% as the integration of the AXA UK Life Business and Bupa Health Assurance Limited ("BHA") into FLG proceeds

- essentially an aggregation of life company Pillar 1 positions but with surplus assets in long term funds excluded from capital resources

- shareholder assets have to cover 160% of non profit funds ("NPF") Pillar 1 CRR and 60% of with-profits fund ("WPF") Pillar 1 CRR excluding WPICC

Appendix 2: UK Life Project - IFRS update

OVERVIEW

■ To date, Resolution's published IFRS results demonstrate lack of comparability between periods. This arises from:

- Resolution's strategy of acquisition based value-growth means that the composition of the Group has been different at every reporting point. The reported results for IFRS include the results for the acquired businesses from the date of acquisition so it has been difficult to provide a clear, comparable track record against which to explain performance;

- On acquisition, IFRS requires that acquired assets and liabilities are measured at fair value. This requires pre-acquisition intangibles, including deferred acquisition costs ("DAC") and deferred front end fees ("DFF"), to be eliminated and the acquired value of in-force ("AVIF") based on the MCEV VIF at acquisition to be included. This has a significant impact on the presentation of the results as a charge for the amortisation of DAC and DFF recognised prior to acquisition is no longer included in operating profit but the amortisation of AVIF and other intangibles is included in non-operating profit; and

- IFRS based operating profit is used internally to monitor the Group's performance as management consider this to be the most appropriate measure of IFRS performance of the Group. Operating profit is based on longer term investment return with the impact of short-term investment fluctuations shown separately as a non-operating item. As announced with the 2010 full year results, the Group has amended its definition of operating profit to exclude the impact of investment volatility in the non-profit funds. The Group has made further refinements to its presentation of operating profit, which are detailed below in the section on restatement of IFRS based operating profit.

■ Given the foregoing and to aid greater understanding, the Company has:

- Restated the 2009 full year results of Friends Provident UK, International and Lombard, i.e. including the results for the 10 months prior to Resolution's acquisition of the Friends Provident businesses, so that they are presented as if Resolution had acquired Friends Provident at the start of 2009. These results have also been restated to eliminate DAC and DFF amortisation for pre-acquisition business and to incorporate the new definition of operating profit;

- Represented the Resolution results as reported at interim 2010 to reflect the revised definition of operating profit;

- Set out the expected future amortisation of AVIF, on an operating segment basis, including the 2010 figure as previously reported and a 10 year forward projection;

- Provided further analysis of the 2010 result by bridging the Friends Provident UK results from H1 to H2. The Friends Provident UK operating segment results are the key contributor to the H1 v H2 profile of Resolution's consolidated results for 2010 and therefore the analysis has focused on explaining the results of this operating segment; and

- Determined a "normalised" earnings profile for 2010 which identifies the one-off items in 2010, that are not expected to reoccur and estimates the annualised impact of including the ex-AXA business and related debt costs.

■ The Company recognises that there will be future impacts arising from the acquisition accounting principles. These include:

- DAC/DFF amortisation increasing as the book of post-acquisition business builds; this will impact in-force surplus (no change to new business strain element). We expect the DAC/DFF amortisation charge to increase by approximately £30 million per annum; this will be recognised as an operating cost; and

- For 2011 reporting, the results of the AXA UK Life Business and Bupa Health Assurance ("BHA") will reflect negative reserves as permitted by PS06/14 (this is already included in the 2009 and 2010 results of the Friends Provident business). A one-off gain in operating profit of approximately £150 million is expected to arise in 2011 and, from 2012, an adverse impact on operating profit of approximately £25 million arising from the subsequent unwind of the negative reserves.

The one-off advancement of IFRS operating profits through the adoption of negative reserves could result in an impairment of AVIF and a resultant revision to the amortisation profile. This would reduce the charge to profit before tax but not affect operating profit.

IFRS BASED OPERATING PROFIT BASED ON PREVIOUSLY PUBLISHED RESULTS 

The tables below summarise the operating results of the Group as published at each period end, along with implied results for the second half of 2010. This illustrates the lack of comparability of previously published results.

Segmental analysis

(i) Published 24 March 2010

(ii) Published 17 August 2010

(iii) Published 24 March 2011

(iv) 2009 results include Friends Provident UK, International and Lombard results for 12 months

(v) Resolution corporate costs in 2009 comprise the operating costs and income of the Resolution holding companies for 12 months

(vi) £259 million is a pro forma result comprising 12 months results for the acquired Friends Provident companies (i.e. including results for the pre acquisition period) and 12 months for the Resolution holding companies

Line item analysis

(i) Published 24 March 2010

(ii) Published 17 August 2010

(iii) Published 24 March 2011

(iv) 2009 in-force DAC/ DFF amortisation is excluded on a post-acquisition basis

(v) 2009 published results included FLG corporate costs within the UK segment

RESTATEMENT OF IFRS BASED OPERATING PROFIT

The impact of the restatement on total IFRS based operating profit is set out below:

The restatement reflects the change in the definition of IFRS based operating profit. The key elements were:

■ to exclude the impact of investment volatility in the non-profit funds;

■ present development costs separately (they were previously included in new business strain); and

■ include certain reserving changes within in-force surplus, in line with MCEV presentation (previously included in principal reserving changes and one-off items).

The restatement also incorporated the removal of pre acquisition DAC/ DFF from the previously published results to give comparability with the 2010 numbers. The restatement had no impact on the operating results of the Resolution holding companies.

The impact on each period is shown below.

IFRS based operating profit restatement - impact on 2009 segmental analysis

The adjustment for LTIR and other principally comprises re-classification of fixed interest investment variances in non-profit funds to non-operating result.

IFRS based operating profit restatement - impact on 2010 H1 segmental analysis

The DAC adjustment represents refinement of DAC acquisition accounting adjustments between UK and International segments.

IFRS based operating profit restatement - impact on 2010 H2 segmental analysis

IFRS based operating profit - summary segmental analysis based on 2010 restatement

(i) 2009 results include Friends Provident for 12 months.

(ii) £196 million is a pro forma result comprising 12 months results for the acquired Friends Provident companies (i.e. including results for the pre acquisition period) and 12 months for the Resolution holding companies 

IFRS based operating profit - summary line item analysis based on 2010 restatement

(i) 2009 results include Friends Provident for 12 months

(ii) £196 million is a pro forma result comprising 12 months results for the acquired Friends Provident companies (i.e. including results for the pre acquisition period) and 12 months for the Resolution holding companies 

DEVELOPMENT OF IFRS BASED OPERATING PROFIT 2009 TO 2010

The table below sets out the key developments in IFRS based operating profit between 2009 and 2010 year end results.

■ Principal reserving changes and one-off items in 2009 primarily comprised recognition of an expense reserve for expected investment in the operational infrastructure of the German business partly offset by net reserves releases in FP(UK) reflecting expense efficiency improvements offset by adverse persistency impacts and reserving for VAT on investment management fees;

■ Decrease in shareholder asset base post dividend led to lower investment return on shareholder assets;

■ One-off items totalling £(35) million comprised:

- Adjustments were made in the second half of 2010 to reserving assumptions, particularly relating to annuitant mortality projections, to reflect emerging industry and in-house views, resulting in an adverse impact of £39 million;

- There was a £10 million provision release relating to the renegotiation of FPLP with-profits scheme expenses. Under the demutualisation scheme, the amount of expenses that can be recovered from the with-profits fund is capped. A renegotiation of this cap, resulting in a 2% increase, led to the provision release;

- A one-off benefit of £14 million was recognised in respect of improvements to the modelling of income protection expenses and to the charging structure applied to ex-employees in group pension schemes;

- A provision of £8 million was established in the period relating to the relocation of the London office of FLG; and

- £12 million of adverse reserves and experience movements reflected a number of small increases in liabilities based on experience in the period and an increase in the provision held for certain unit-linked policies with positive values that are not expected to be recovered.

FRIENDS PROVIDENT UK 2010 H1 AND H2

The 2010 results for the Group demonstrated a significant disparity between the results for the first and second half of the year. This was primarily driven by the results of Friend Provident UK ("FPUK") where restated IFRS based operating profit for the six months ended 30 June 2010 was £99 million compared to £17 million for the six months ended 31 December 2010.

Reconciliation of 2010 operating profit: H1 to H2

The results for FPUK for the six months ended 30 June 2010 included a number of phasing differences and one-off items, summarised as follows:

■ Morbidity surplus emerging in this period was £5 million higher than the expected emergence, offset by a lower than expected emergence (by £5 million) in the second half of the year;

■ Phasing of the expenses across the year also varied between the first and second half, with expenses in the six months ended 30 June 2010 being £5 million lower than expected, offset by higher than expected expenses (by £5 million) in the six months ended 31 December 2010;

■ Sales of annuity business in the six months ended 30 June 2010 were positively impacted by the forthcoming changes in retirement age legislation with a one-off increase in profit from new business (resulting in reduced new business strain for the period);

■ The UK life businesses typically pay a dividend to the Friends Life Group ("FLG") holding companies in March or April; therefore the long term investment return included within operating profit is higher for the six months ended 30 June 2010 than for the second half of the year.

The estimated underlying 2010 IFRS based operating profit for the second six months after adjusting for the items shown above was £62 million; £45 million higher than the implied IFRS based operating profit for the six months ended 31 December 2010. As with the results for the six months ended 30 June 2010, this reflects a number of phasing differences and one-off items. The key items within these are summarised below.

■ As explained in the section above on development of profits from 2009 to 2010, one-off items of £(35) million comprise:

- annuitant mortality changes of £(39) million;

- impact of renegotiation of the FPLP WP scheme of £10 million;

- modelling changes of £14 million;

- additional £(8) million vacant property provision; and

- £(12) million impact of reserves and experience variances.

■ Results for the six months ended 30 June 2010 also reflect the impact of phasing of morbidity surplus and expenses which offsets the phasing impact of these items seen in the results for the first six months of the year.

2010 "NORMALISED" ESTIMATE

The 2010 full year actual IFRS based operating profit was £275 million. If the one-off items identified through the comparison of FP(UK) results for the first and second half of the year are adjusted for, this results in a "normalised" operating profit for the Group, before annualisation of the impact of acquired businesses, of £294 million. After annualisation of the results of the AXA UK Life Business and the FLG Lower Tier 2 interest, "normalised" IFRS based operating profit was £366 million.

The one-off items within the FLG operating profit have been explained in the analysis of FP(UK) 2010 result (H1 to H2) above. The FLG result included £19 million corporate interest for the 4 month period. The operating profit generated by the AXA UK Life Business in the post acquisition period was £71 million, including a one-off benefit of £16 million for the shareholders' share of the special bonus from the Reattributed Inherited Estate ("RIE"). Excluding this one-off benefit, the annualised AXA UK Life Business result would be £165 million.

As part of the acquisition of the AXA UK Life Business, Resolution injected £700 million of Lower Tier 2 capital into FLG. The interest on this debt was £19 million for the post acquisition period; annualising this results in a "normalised" FLG IFRS based operating profit for 2010 of £366 million.

2010 ADDITIONAL DISCLOSURES

To support an understanding of the foregoing analysis, a number of supplementary disclosures are set out below.

DAC/ DFF and AVIF amortisation

New business strain DAC/ DFF

■ 2010 AXA UK Life Business DAC/DFF movement is for 4 months only

■ Increase in International DAC/DFF movement reflects 19% increase in sales (on APE basis)

■ Reduction in Lombard DAC/DFF movement reflects impact of 2010 reinsurance arrangement

In-force surplus DAC/DFF

■ 2009 DAC/DFF comprises amortisation pre-acquisition (i.e. on DAC/DFF net asset recognised prior to the date of acquisition)

■ 2010 amortisation relates to DAC/DFF asset recognised post acquisition

■ 2010 UK DAC/DFF comprises £8m in respect of contingent commission which is offset in the gross in-force result by recognition of a liability for future renewal commission payments

■ 2010 International DAC/DFF includes £11m income in respect of DAC on enhanced allocations granted during the first 18 months of certain products (i.e. where units are allocated in the year after initial sale, DAC is capitalised in in-force not offset against reported new business strain)

AVIF amortisation

■ 2009 amortisation is for the period from 4 November 2009

■ 2010 amortisation of AXA UK Life Business is for period from 3 September 2010

AVIF amortisation profile

■ The table shows the expected AVIF run off pattern over the next 10 years. The 2010 charge reflects 4 months for AXA business

■ This does not include the impact of the implementation of negative reserves, which is expected to reduce the gradient of the UK: Ex-AXA profile

IFRS Based Operating Profit - FLG corporate costs

(i) Comprising £210 million @ 6.875% redeemable from 2019 and £268m @ 6.292% redeemable from 2015. Under IFRS, STICS are treated as equity hence this interest is added back to profit before tax

(ii) Comprising £162 million @ 12% repayable 2021 plus £2 million amortisation of fair value adjustment (as the loan is held at fair value under IFRS)

2010 Activity

■ In 2010, FLG holding companies received dividends of £350 million (net of internal loan repayments) from the life businesses, of which £65 million was subsequently paid to Resolution. The remainder was held in FLG holding companies to fund integration and other costs

■ Mark to market adjustment on external STICS and lower tier 2 debt was £7 million, shown as an adverse non operating item

■ £8 million fee was paid in respect of the revolving credit facility which is in place to June 2013. This has an expected annual cost of £4 million

■ Corporate costs include LTIP and other head office costs.

2011 Developments

■ £500 million lower tier 2 debt issued at 8.25%

■ Repaid £500 million of internal debt to Resolution

Resolution holding companies

2010 Activity

■ £500 million DCNs issued with £300 million at 6% and £200 million at 7.25% reducing to 6.5%

■ £400 million acquisition finance facility drawn down with interest rate based on LIBOR plus margin

2011 Developments

■ £400 million acquisition financing facility repaid

■ £142 million cash final dividend paid in respect of 2010 - scrip take up was 22%

■ £500 million of internal LT2 debt repaid by FLG leaving £200 million at 9%