Setting new standards - Friends Life

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ANNUAL REVIEW CHAIRMAN’S STATEMENT GROUP CHIEF EXECUTIVE’S REVIEW ABOUT THE FRIENDS PROVIDENT GROUP UK LIFE & PENSIONS Our trading performance and outlook UK total new business increased 30% to £4,162m and our share of this market increased from 5.2% to 5.5%. Our trading performance reflected in particular our growing reputation in the pensions arena, and the trend towards this business, both group and individual, continued throughout the year. Total UK new business 2006 +30% £4,162m 2005 £3,192m 2004 £2,641m 2003 £2,535m Protection – new business increased by 8% to £432m at a margin of 7.4%, up from 5.4% in 2005. As anticipated, we slightly increased our share of this very competitive market, up from 7.6% to 7.8%, as the impact from some of the already secured distribution agreements began to be felt. As well as exploring further distribution opportunities, we intend to continue to grow our share in the group protection segment. We expect to grow our market share in the second half of the year as the outlined initiatives begin to take effect. We will remain price competitive, which may bring downward pressure on margin. Protection new business 2006 +8% £432m 2005 £400m 2004 £437m 2003 £402m Investments – new business increased by 2% to £687m at a margin of 1.5%, slightly down from 1.6% in 2005. Bearing in mind the 15% growth we achieved in 2005, we lost some ground in 2006, which we hope to regain this year in this increasingly competitive market. In early 2007 we re-entered the guaranteed bond market, reflecting growing customer interest. Additionally, a number of product enhancements are planned for 2007, and we are on track to launch our wrap proposition by the end of the year, which is an important element of our future growth prospects in this segment. The outlook for sales remains positive for the year as a whole, particularly over the second half. Investments new business 2006 +2% £687m 2005 £672m 2004 £582m 2003 £473m Group pensions – new business increased by 46% to £2,298m at a margin of 1.6%, up from 1.1% in 2005, and accounted for well over half of our total UK new business. Our performance in 2006 reflected the quality and flexibility of our proposition and lifted our market share to 12.8%, bolstered by the effect of the Pensions ‘A-Day’ regulation changes in April. Underlying growth, both for our business and the group pensions market generally, looks set to continue over the medium term and we will continue to benefit from the transition in the market away from defined benefit schemes to defined contribution schemes. We will also increasingly benefit from incremental business forming a greater proportion of future new business volumes, thereby reducing volatility. Group pensions new business 2006 +46% £2,298m 2005 £1,577m 2004 £1,065m 2003 £1,046m Individual pensions – new business increased by 63% to £490m. Excluding contracting-out rebate payments from the Department of Work & Pensions (DWP), new business increased 74% to £336m. This reflected the heightened public interest in pensions and primarily comprised the more profitable ‘single premium’ business, which we target. Margin was 1.3%, slightly down on the 1.4% achieved in 2005. We have achieved good growth since relaunching into this market in 2005, which we expect to continue into 2007. Beyond this, we expect future growth to be steady. DWP rebate payments will steadily decline through to 2012. Individual pensions new business 2006 +63% £490m 2005 £301m 2004 £277m 2003 £322m Annuities – new business increased by 5% to £255m at a strong margin of 5.3%, up from 2.8% in 2005. Our approach to this market segment remains cautious, primarily serving our existing customers only, although we continue to keep the balance of risk and reward under active review. Annuities new business 2006 +5% £255m 2005 £242m 2004 £280m 2003 £292m The new business figures on this page are reported on the Present Value of New Business Premiums (PVNBP) basis, defined as single premiums plus the expected present value of new regular premiums. The 2003 bars on the charts have been estimated on this basis to indicate a comparison. 16 Friends Provident Annual Report & Accounts 2006
INTERNATIONAL LIFE & PENSIONS ASSET MANAGEMENT GROUP FINANCIAL PERFORMANCE CONCLUSIONS AND OUTLOOK Our financial performance UK Life & Pensions EEV underlying profit before tax decreased by 4% to £315m (2005: £328m) with the increase in new business profits being more than offset by lower returns on the in-force business and shareholders’ net assets. EEV underlying profit comprises (figures in £m): 2006 2005 Contribution from new business 108 64 Profit from existing business 183 209 Development costs (26) (25) Expected return on shareholders’ net assets 50 80 The return on embedded value, based on underlying profit after tax, decreased to 7.9% (2005: 9.4%) with largely unchanged profits on an increased embedded value. EEV underlying profit 2006 -4% £315m 2005 £328m Return on embedded value 2006 -16% 7.9% 2005 9.4% The contribution from new business has increased by 69% to £108m (2005: £64m) with group pensions amounting to 35% and protection 30% of the total. The contribution is stated net of the cost of solvency capital of £6m (2005: £5m) and share based payments of £2m (2005: £2m). The overall margin has increased from 2.0% to 2.6% as a result of the gearing effect of higher volume and relatively flat expenses. Individual product margins are shown on page 16. The Internal Rate of Return (IRR) has increased to 10.3% pa during 2006 (2005: 8.6% pa), again primarily as a result of operational gearing. The overall payback period (discounted) has reduced from 17 years to 12 years. Contribution from new business 2006 +69% £108m 2005 £64m The profit from existing business reduced by 12% to £183m (2005: £209m). The expected return on the value of the in-force book increased by 2% to £173m (2005: £170m), reflecting the increase in the value of the in-force business offset by lower discount rates. The profit includes positive experience variances of £9m (2005: £20m) and positive operating assumption changes of £1m (2005: £19m). Within operating assumption changes and experience variances, the total UK in-force charge for persistency is £53m and this has been offset by profits from a change in morbidity and mortality assumptions of £27m and a reduction in the cost of burnthrough of £36m. Profit from existing business 2006 -12% £183m 2005 £209m Development costs have increased to £26m (2005: £25m), reflecting continued investment in our market leading protection and group pensions e-commerce propositions, infrastructure to support our strategic distribution relationships and the development of a wrap platform. Development costs in 2007–2008 are expected to be higher than in 2006 (in the range of £30m – £40m per annum) in support of our growth strategy. Development costs 2006 +4% £26m 2005 £25m The expected return on shareholders’ net assets decreased by 37% to £50m (2005: £80m), partly due to a reduction in the expected rates of return on equities and fixed interest securities and changes in the mix of assets. Part of this decrease results from a change in the tax gross-up basis. Expected return on shareholders’ net assets 2006 -37% £50m 2005 £80m Operating expenses* have increased by 4% to £253m (2005: £243m). Since 2003, operating expenses have increased by only 2% against an increase in PVNBP of 64% over the same period. This demonstrates the efficiency of our processes and power of our technology to deliver substantial new business growth whilst maintaining excellent levels of service, with only a small increase in cost. We believe there are further opportunities to leverage future efficiencies due to the scalability of our solutions and the continued development of our self-service offering. Operating expenses 2006 +4% £253m 2005 £243m *Operating expenses exclude: commission, deferred acquisition cost adjustments, non-recurring items, investment fees, amortisation and impairment of intangibles and expenses of policyholder investments which are consolidated under IFRS. The 2005 comparative has been adjusted principally to remove corporate costs. Friends Provident Annual Report & Accounts 2006 17
Page 1 and 2: Setting new standards Friends Provi
Page 3 and 4: ANNUAL REVIEW CORPORATE GOVERNANCE
Page 5 and 6: Group financial highlights Group
Page 7 and 8: INTERNATIONAL LIFE & PENSIONS ASSET
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Page 43 and 44: DIRECTORS’ REPORT CORPORATE GOVER
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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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