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 Shareholders’ equity Our aim is to grow shareholder value in line with the Group’s strategies which are summarised on page 9. Our Life & Pensions new business results for 2006 show both UK and International operations growing strongly with total new business up 31%. The prospects for Asset Management, whilst challenging in the short term, have the potential to generate significant organic growth and new diverse revenue streams. We anticipate investing £40m-£50m in both 2007 and 2008 to achieve our Life & Pensions objectives and we are accelerating our investment plans to achieve our Asset Management objectives. We believe that these ambitious growth plans are the right way forward for the Group to deliver increasing profitability and increasing shareholder value. The total equity interest in the Group has increased by 6% to £4,165m (2005: £3,940m). This is made up of equity attributable to ordinary shareholders of £2,807m (2005: £2,688m), to other equity holders (STICS holders) of £810m (2005: £810m) and minority interest of £548m (2005: £442m). The ordinary shareholders’ equity comprises share capital of £214m (2005: £214m), share premium of £2,051m (2005: £2,038m) and other reserves (mainly retained earnings) of £542m (2005: £436m). The company’s allotted and fully paid share capital at 31 December 2006 consists of 2,139m ordinary shares of 10 pence each (including 23m treasury shares). Details of the shares issued in the year are set out in note 37 to the financial statements. The holders of ordinary shares are entitled to vote at company meetings and are entitled to receive dividends. There are no rights attaching to treasury shares until they are reissued. Issues of shares in 2007 are anticipated to include employee share schemes, final earn-out payment in respect of Lombard and the £290m convertible bonds due 2007. Friends Provident share register at 31 December 2006 Size of investment No. of holdings No. of shares % (Millions) Shares Up to 100,000 705,876 576 27 100,001 to 1,000,000 173 64 4 1,000,001 to 5,000,000 80 189 9 5,000,001 to 25,000,000 53 551 26 25,000,001 to 50,000,000 4 156 7 50,000,001 and over 4 580 27 Total 706,190 2,116 100 Excluding treasury shares The substantial shareholdings in the company at 31 December 2006 are set out in the Directors’ Report on page 48 with details of the directors’ shareholdings in the company set out in note 43 on page 162. The entire share capital of the company is free float. The major shareholders in F&C, our listed Asset Management subsidiary, at 31 December 2006 were FP plc which held 52% and Eureko BV which held 20%. At 31 December 2006, the free float of F&C shares was 27% and there were approximately 2,500 F&C shareholders. The company’s share price increased by 15% during 2006 (2005: 23%) and was 217p at 31 December 2006 (2005: 189p). In 2006 the FTSE 100 Index increased by 11% (2005: 17%). The share price of F&C increased by 19% during 2006 (2005: decreased by 29%) and was 211p at 31 December 2006 (2005: 177p). In 2006, the FTSE 250 Index increased by 27% (2005: 27%). The total shareholder return for the company’s shareholders for the year was 19.0% compared with 14.4% for the FTSE 100 and 22.4% for the FTSE 350 Life Insurance Sector. Cumulatively for the past 4 years, the total shareholder return was 119% compared with 81% for the FTSE 100 and 109% for the FTSE 350 Life Insurance Sector. The total dividend for 2006 of 7.85 pence per share (including the proposed final dividend of 5.2 pence per share) represents an increase over 2005 of 2%. This is covered 2.3 times (2005: 1.1 times) by IFRS underlying profit after tax and minority interests. After deducting the basis and regulatory changes discussed above, the dividend cover is approximately 1.5 times. The 2006 dividend is covered more than 5 times by available distributable reserves in the company and FPLP. The increase in dividend is in line with our policy of providing dividend growth up to the rate of inflation. The company’s market value at 31 December 2006 amounted to £4,603m (2005: £3,970m). The market value of our listed Asset Management subsidiary amounted to £1,018m (2005: £845m). Our 52% holding in this company (and included in the pro forma embedded value) has increased by 21% to £534m (2005: £441m). The embedded value, on a pro forma basis, has increased by 6% to £3,660m (2005: £3,464m) as set out below: Figures in £m 2006 2005 Shareholders’ invested net assets 1,164 1,064 Value of in-force Life & Pensions business 2,031 2,019 Market value of Asset Management business 534 441 Other (mainly provision for future corporate costs) (69) (60) 3,660 3,464 As at 31 December 2006, the Shareholders’ net assets were invested broadly in a mix of 44% equities and 56% fixed interest securities and cash. The difference between the embedded value and the market value represents the value that the market places on the future prospects of the company to generate profits from writing new business and other intangible assets such as goodwill. 34 Friends Provident Annual Report & Accounts 2006
INTERNATIONAL LIFE & PENSIONS ASSET MANAGEMENT GROUP FINANCIAL PERFORMANCE CONCLUSIONS AND OUTLOOK Cash generation and long-term borrowings Shareholder cash generation is set out below: 2006 2005 Cash consumption Cash generation Cash consumption Cash generation UK Life & Pensions New business strain In-force surplus Taxation £295m International Life & Pensions New business strain In-force surplus Taxation £65m £1m Sub total: Life & Pensions net cash operating surplus Other operating surplus/(deficit) Investment return F&C dividend received Sub total: cash generated by the business before finance items Dividends paid Securitisation Financial reinsurance Other finance items £164m £86m £69m £76m Total movement £55m £507m £35m £99m £280m £1m £31m £28m £340m £261m £253m £102m £63m £71m £2m £100m £8m £87m £27m £206m £157m £49m £17m £40m £36m £13m Total cash generated before application to financing items increased to £340m up from £206m in 2005. Significant contributions to this increase are: £151m from the impact of implementing the reserving rule changes in PS06/14 for some products, and £123m from the release of excess prudence in morbidity reserves on income protection business. When we complete the implementation of the changes in PS06/14 for the remainder of the affected products, we expect there to be a similar in-force item for 2007. The new business strain has increased to £295m (2005: £261m) due to increased levels of new business, partially offset by lower new business strain due to the reserving basis changes. The in-force surplus has increased to £507m (£2005: £253m) mainly as a result of the above impacts. The tax credit of £34m (2005: £100m) arises from the offset of taxable profits against increased expenses following losses on the fixed interest investment portfolio. The 2005 figure benefited from relief for brought forward tax losses. We expect tax credits to arise in future periods, albeit at a lower level than in 2006. After application of this surplus to repaying financial engineering, capital payments (including the Lombard earn-out) and payment of the 2006 dividend, there was a modest cash outflow of £55m (2005: £13m outflow) which reconciles to shareholder cash resources as follows: Shareholders’ invested net assets Securitisation Financial reinsurance Shareholder cash resources 2006 2005 Movement £m £m £m 1,164 1,064 100 93 179 (86) - 69 (69) 1,257 1,312 (55) The Group’s long-term borrowings, including STICS (which are treated as equity in IFRS) are set out below: Long-term borrowings Coupon % 2006 £m 2005 £m Subordinated liabilities: £215m FP Finance PLC undated subordinated guaranteed bonds (repaid 2006) 9.125 - 215 £260m F&C subordinated debt Various 258 - £10m Lombard undated subordinated loans Various 10 10 £10m F&C subordinated loan 6m LIBOR + 1.05 - 10 Debenture loans: £280m Box Hill Life Finance plc securitisation notes – class A-1 due 2016 3m LIBOR + 0.20 198 280 £100m Box Hill Life Finance plc securitisation notes – class A-2 due 2019 3m LIBOR + 0.23 100 100 £6m Friends Provident Investment Holdings plc loan notes due 2006 LIBOR - 0.50 - 6 £230m F&C Commercial Property Trust (a policyholder investment) secured bonds due 2017 5.23 229 229 €35m Lombard financial reinsurance treaty LIBOR + 2.00 24 22 £18m Friends Provident plc loan notes due 2011 LIBOR - 0.75 18 - Convertible bonds: £290m Friends Provident plc convertible bonds due 2007 5.25 283 276 Total long-term borrowings 1,120 1,148 Subordinated borrowings (designated as equity under IFRS) £300m Friends Provident plc STICS callable 2019 6.875 297 297 £500m Friends Provident plc STICS callable 2015 6.292 495 495 Total long-term borrowings including STICS 1,912 1,940 Borrowings are net of capitalised issue costs. Full details of the Group’s long-term borrowings are set out in note 32 to the financial statements. Friends Provident Annual Report & Accounts 2006 35
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
Page 35: INTERNATIONAL LIFE & PENSIONS ASSET
Page 43 and 44: DIRECTORS’ REPORT CORPORATE GOVER
Page 71 and 72: FINANCIAL STATEMENTS Independent Au
Page 73 and 74: PARENT COMPANY ACCOUNTS ABBREVIATIO
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