Setting new standards - Friends Life

INTERNATIONAL LIFE & PENSIONS ASSET MANAGEMENT GROUP FINANCIAL PERFORMANCE CONCLUSIONS AND OUTLOOK
Group EEV underlying profit before tax has reduced by 3% to £509m (2005:
£524m). Overall profit from our life & pensions businesses is unchanged but
there has been an 18% decrease in profit at our Asset Management business,
where we have seen a net outflow of funds and resulting lower revenues.
Group EEV profit before tax has reduced by 34% to £398m (2005: £600m). This
profit measure takes into account the impacts of investment return variances,
economic assumption changes, non-recurring items and other costs. In net
terms these were negative by £111m in 2006 but positive by £76m in 2005,
as discussed below.
Group EEV underlying profit
2006 -3% £509m
2005 £524m
Group EEV profit before tax
2006 -34% £398m
2005 +60% £600m
Underlying profit before tax – There was a reduction in underlying profit (excluding
corporate items) in UK Life & Pensions of 4%, an increase in International Life &
Pensions of 12% and a reduction in Asset Management of 8%. Included in underlying
profit before tax is a charge for persistency of £68m with £21m in respect of the current
pension products, and the balance relating to legacy products. This charge has largely
been offset by a lower cost of burnthrough in 2006 of £36m and favourable morbidity
and mortality assumption changes of £27m. Commentary on the segmental results is
given on pages 17, 23 and 29.
Corporate items included in underlying profits total £14m negative (2005: £18m
negative). These costs include STICS interest. Details are shown in the table on page
30 with the main item being corporate costs which amount to £13m (2005: £12m).
The expected return on the net pension liability has increased in 2006 mainly because
the calculation includes the expected return on derivative assets for the first time.
Underlying profit by business segment
2006
2005
Business segment 2006 2005
UK Life & Pensions 58% 60%
International Life & Pensions 23% 20%
Asset Management 19% 20%
The contribution from total Life & Pensions new business, (included in underlying
profit), has increased by 42% to £204m (2005: £144m). The new business margin as a
percentage of PVNBP has increased from 2.7% to 2.9%, largely driven by 30% sales
growth in the UK where operational leverage increased the margin from 2.0% to 2.6%.
Contribution from Life & Pensions
new business
2006 +42% £204m
2005 +85% £144m £144m
The Life & Pensions return on embedded value has decreased from 11.2% to 9.9%
reflecting unchanged underlying profit and higher opening net assets on an EEV basis.
The UK return is 7.9% (2005: 9.4%) and the International return is 19.8% (2005: 21.5%),
which reflects the much higher proportion of new business profit to embedded value
compared with the UK business.
Life & Pensions return on embedded value
2006 -12% 9.9%
2005 11.2%
The other profit items excluded from underlying profit but included in profit before tax
are shown in the table on page 30 and total £111m negative (2005: £76m positive).
The main factors impacting 2006 were good equity returns which generated a positive
impact, but these were offset by an increase in fixed interest yields which resulted in a
negative impact. In addition, investment return variances were negatively impacted by
an increase in the market value of our £290m convertible bond (reflecting the increase
in Friends Provident’s share price over the year) and by an increase in the investment
related costs of options and guarantees. The positive variance was significantly higher
in 2005 as equity returns were higher and fixed interest yields fell – both of which
generated significant positive impacts. The risk free rate used for Sterling was 4.6%
(2005: 4.1%) and 4.1% for the Euro (2005: 3.6%).
Other profit items
2006 negative £111m
2005 positive £76m
Non-recurring items comprise: F&C integration costs of £7m (2005: £24m), F&C
Reinvestment Plan costs of £12m (2005: £22m) relating to the share schemes put in
place at the time of the merger, FPI integration costs of £nil (2005: £6m), a release of
mis-selling provisions of £4m (2005: charge of £7m) and costs associated with the
closure of the Appointed Representative sales channel of £2m (2005: £nil).
The reduced amortisation of Asset Management intangible assets of £43m (2005:
£56m) reflects a lower book value of these assets as a result of impairments, partially
offset by a higher amortisation rate implemented during 2006. The impairment charge
of £58m (2005: £112m) arises from reviewing the fair value of the intangible assets
associated with F&C investment management contracts following the loss of mandates.
Friends Provident Annual Report & Accounts 2006 31