Setting new standards - Friends Life

FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS
EEV SUPPLEMENTARY INFORMATION
Notes to the consolidated accounts continued
2. Use of estimates, assumptions and judgements
continued
This represents a change in accounting estimate from that used up to
30 June 2006, and has accelerated the amortisation of the remaining
value of the assets from July 2006. The effect of this change is an increase
of £2m in the amortisation charge in 2006, and £3m per annum in
future periods until such time as the assets become fully amortised.
With effect from 1 January 2007 the estimated useful lives of
Institutional (non-fixed term) management contracts were revised to
4 years, following a further review by management.
(ii) One-off basis change: FSA Policy Statement PS06/14 Prudential
Changes for Insurers (PS06/14)
Regulatory reserving rule changes arising from the adoption of the
Prudential Requirements for Insurers (Amendment) instrument 2006
(2006/62) have been applied to the valuation of Life Protection
Insurance contract liabilities, with the exception of Income
Protection business and other protection business reinsured on a
risk premium basis. Allowance is made for prudent lapse rate
assumptions, reducing overall liabilities (previously such allowance
was only made for with-profits business). Individual contracts may
contribute a negative value, reducing overall liabilities (previously
such contracts were recognised at zero value).
Future margins are reduced as a result of the changes, impacting
the carrying value of Deferred Acquisition Costs (DAC).
The impact of partially adopting PS06/14, on profit before tax is an
increase of £33m, arising from a reduction in liabilities to
policyholders of £237m, a reduction in reinsurance assets of £126m,
and a write-down in DAC of £78m.
3. Segmental information
(a) Summary
Segment information is presented in respect of the Group’s
business and geographical segments. The primary reporting format,
based on the Group’s management and internal reporting structure,
is business segments.
Inter-segment pricing is determined on an arm’s length basis.
Segment results, assets, and liabilities, include items directly
attributable to a segment, as well as those that can be allocated on a
reasonable basis. Segment capital expenditure includes purchases of
property and equipment, investment properties and intangible assets.
Business segments (primary segment)
The Group comprises the following main business segments:
• UK Life & Pensions (including corporate items)
• International Life & Pensions
• Asset Management (including F&C’s Managed Pension
Fund business)
Geographical segments (secondary segment)
In presenting information on the basis of geographical segments,
segment revenue is based on the geographical location of
customers. Segment assets are based on the geographical location
of the assets. The Group has defined two geographical areas:
• UK
• Rest of the world
(iii) One-off basis change: Morbidity
Improved management of the PHI claims process has resulted in a
considerable improvement in morbidity experience and as a
consequence, a change has been made in the morbidity basis,
increasing profit before tax, and reducing the liabilities to
policyholders, by £123m in 2006.
(iv) Actuarial Funding
Capital units in respect of investment contract liabilities have
previously been provided for based on the current value of units in
the fund; this method has been changed to a ‘straight-line’ basis,
bringing the treatment of capital units in line with the treatment of
other front-end charges for investment contracts. The impact on
profit before tax was an increase of £26m in 2006.
84 Friends Provident Annual Report & Accounts 2006