Setting new standards - Friends Life

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FINANCIAL STATEMENTS IFRS FINANCIAL STATEMENTS EEV SUPPLEMENTARY INFORMATION Notes to the consolidated accounts continued 27. Insurance contracts continued (f) Mortality/morbidity rates Insurance liabilities allow for mortality and morbidity risk by making assumptions about the proportion of policyholders who die or become sick. Allowance for future mortality has been made using the following percentages of the standard published tables below: 2006 2005 Term assurances: Smoker 95% TM92(5) 100% TM92(5) 116% TF92(5) 110% TF92(5) Non-smoker 58% TM92(5) 65% TM92(5) 74% TF92(5) 85% TF92(5) Other life assurances 80% AM/F80ult 80% AM/F80ult Unitised life policies 80% AM/F80ult 80% AM/F80ult Pension policies 35% AM/F80ult 35% AM/F80ult Individual annuities: in payment 75% RM/FV92U2006* 75% RM/FV92U2005* Group annuities: in payment 95% PM/FA92U2006* 95% PM/FA92U2005* *Plus additional 0.25% per annum and 0.5% per annum for individuals and group males only respectively from 31 December 2003 onwards. Income protection sickness experience is based on recent experience with a 10% margin (2005: 10% margin) for recovery rates, and a 10% margin (2005: 39% margin) for inception rates. Rates differentiate by smoker status. Lapse rates are based on recent experience with the equivalent of a 20% margin, ie for each policy the liability is based on the higher of the results based on 80% and 120% of experience. (g) Increase/(decrease) in pre-tax shareholder profit from changes in assumptions 2006 2005 £m £m Mortality and morbidity 127 (20) Other non-economic assumptions 106 58 Total assumption changes 233 38 This table shows the effect on pre-tax profit of the changes in assumptions described above. (i) Impacts are reduced to allow for with-profits policyholders sharing in the profits and losses of some products (see (h)). (ii) Changes in the economic assumptions will be largely offset by corresponding changes in the assets backing the liabilities. (iii) The most significant item within mortality and morbidity assumption changes relates to morbidity assumptions. Further details of the impact of changes in morbidity assumptions in 2006 are set out in note 2(h). (iv) The main item within other non-economic assumption changes in 2006 is the impact of partial adoption of PS06/14, being a reduction in policyholder liabilities and reinsurance assets, as set out in note 2(h). (h) Apportionment of surplus between shareholders and with-profits policyholders Shareholders are entitled to 100% of surplus emerging from companies within the Group, with the exception of surplus emerging in the two with-profits funds. (i) The Group’s main With-Profits Fund is within FPLP, and is open to new business. The Fund is run on a mutual basis and managed so that over time the working capital is sufficient to provide most of the risk capital but not to exceed the risk capital margin. The entitlements of shareholders to share in surplus differ for policies written before and after demutualisation on 9 July 2001. In respect of pre-demutualisation conventional with-profits policies, shareholders are entitled to one ninth of the cost of bonuses added to policies. In respect of pre-demutualisation non-profit and unitised business (excluding the investment element), shareholders are entitled to 60% of the surplus arising. 136 Friends Provident Annual Report & Accounts 2006
PARENT COMPANY ACCOUNTS ABBREVIATIONS AND DEFINITIONS Notes to the consolidated accounts continued 27. Insurance contracts continued Post-demutualisation with-profits policyholders are only entitled to surplus from the return on their investments; other sources of surplus are wholly owned by shareholders including policies written by FPLA and Friends Provident Pensions Limited, where the investment element is reinsured to the FPLP With-Profits Fund. (ii) The With-Profits Fund of FPLA is closed to new business. The Fund’s policyholders are entitled to all the surplus of that fund. In addition, FPLA has a closed unitised with-profits fund. Shareholders are entitled to all profits from the unitised with-profit fund other than investment profits, which are wholly owned by with-profits policyholders. The investment element of the contract is wholly reinsured to the FPLP With-Profits Fund. The effect of this fund structure is that investment risk, in respect of assets backing with-profits policies, is largely borne by policyholders; shareholders bear 10% of the investment risk from conventional with-profits policies. Expense risk is borne by the shareholders, other than in the FPLA closed fund. Until 2009, the FPLP With-Profits Fund is charged a fixed amount for managing policies, adjusted by an inflation index, irrespective of actual costs. The charges will be reviewed in 2009 to reflect market rates at the time. Other forms of risk are shared between shareholders and policyholders as described above. 28. Realistic balance sheet The main UK with-profits fund is in FPLP and the capital position of this fund has been determined in accordance with the RBS regulations prescribed by the FSA. There is also a small UK with-profits fund in FPLA. The capital position of this fund has been calculated on a regulatory basis as this fund is closed to new business, and is significantly below the £500m level that the FSA has determined should be applied for calculating liabilities under the realistic methodology. The RBS for FPLP’s with-profits business can be summarised as follows: 2006 2005 £m £m Total net assets 16,087 17,366 Less non-profit liabilities including share of resilience capital reserves and required minimum margin (2,670) (2,774) Total regulatory assets 13,417 14,592 Additional assets arising on realistic basis 265 253 Total assets 13,682 14,845 Policyholder liabilities: Asset shares 11,365 12,342 Financial guarantees (net of charges) 101 149 Options (guaranteed annuities) 747 796 Other liabilities 1,249 1,322 Total liabilities 13,462 14,609 Excess of assets over liabilities 220 236 At 31 December 2006, the surplus of realistic assets over realistic liabilities initially amounted to £254m (2005: £236m) with a Risk Capital Margin (RCM) of £220m (2005: £276m), the surplus assets have subsequently been reduced by £34m via a reduction in future guarantee charges leaving the working capital at £220m fully covering the RCM. This results in an excess of realistic assets over realistic liabilities of £220m (2005: £236m). After adding back the shareholders’ share of future bonuses totalling £95m (2005: £85m) and deducting adjustments to eliminate double counting of acquired PVIF of £19m (2005: £20m), the excess in accordance with FRS 27 amounted to £296m (2005: £301m). The main element of the realistic liabilities is the asset shares of with-profits business. This represents the premiums received to date together with the investment return earned less expenses and charges. This is mainly calculated on an individual policy basis using historic information and in line with the company’s PPFM. Assets and realistic liabilities are closely matched since the realistic liabilities move with the value of the underlying assets. Policyholder liabilities (including options and guarantees) are then valued using a market consistent stochastic model. Included in other liabilities are provisions for specific items such as mortgage endowment reviews and other liabilities of the fund. Realistic valuations also allow for future profits of non-profit business written in the With-Profits Fund to be included. In accordance with FRS 27, the value of future profits of non-profit business has been deducted from policyholder liabilities in the balance sheet. Friends Provident Annual Report & Accounts 2006 137
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Setting new standards Friends Provi
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ANNUAL REVIEW CORPORATE GOVERNANCE
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Group financial highlights Group
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INTERNATIONAL LIFE & PENSIONS ASSET
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DIRECTORS’ REPORT CORPORATE GOVER
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FINANCIAL STATEMENTS Independent Au
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PARENT COMPANY ACCOUNTS ABBREVIATIO
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Friends Provident plc Pixham End Do
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