Friends Life Grp 35PG Interim results 30 June 2012

  Friends Life Grp (35PG) - Interim results 30 June 2012

RNS Number : 0318K
Friends Life Group plc
15 August 2012

                            FRIENDS LIFE GROUP plc


                                 30 JUNE 2012


Integration and business optimisation delivering results

· Operational delivery on track to meet key performance targets:

- Annualised synergies of £65 million achieved in the first half of  2012; 
on track to hit the published target

- Improved Group new business IRR of 10% as UK business migrates to higher
margin target platforms

- Material  outsourcing  contract and  launch  of in-house  asset  manager 
successfully delivered in Heritage business

-  Friends  Provident  International  ("FPI")  and  Lombard  impacted   by 
challenging economic  environment; FPI  strategic review  to rebalance  value, 
volume and risk

· IFRS based operating profit before  tax of £178 million (including  £27 
million of one-off items) (30 June  2011: £406 million including £216  million 
of one-off items) reflecting lower expected investment returns on the in-force
book, a  disappointing  performance  in the  International  businesses  partly 
offset by reduction in costs of new business

Robust capital position maintained

·  IGCA  surplus  of  £1.9  billion  (31  December  2011:  £2.1  billion) 
reflecting the  payment  of  £250  million  dividend  to  Resolution  Holdings 
(Guernsey) Limited in March 2012; representing a coverage ratio of 204%

· Balance sheet has  low exposure to higher  risk European sovereign  and 
corporate debt

Andy Briggs, Chief Executive Officer said;  "The Group has delivered a  strong 
performance over  the past  six months,  particularly in  our core  UK  market 
despite the ongoing difficulties in the  wider economy. We have continued  to 
successfully implement our  strategy to  build a stronger  and more  efficient 
business, achieving key milestones including the launch of our new  investment 
management operation, Friends Life Investments, and delivering cost  synergies 
and efficiencies throughout our business.

The UK  'Go-to-Market' offerings  have  gained significant  momentum,  driving 
improved profitability despite continuing tough trading conditions, which have
also extended to our International division. We will maintain a strong  focus 
on controlling  our costs  and  driving efficiencies  across our  business  to 
deliver our cash and synergy targets.

Friends Life  has a  clear  strategy to  build  a sustainable  and  profitable 
long-term business and  we are well  placed to benefit  both from the  current 
momentum we  have  built and  from  the opportunities  in  the UK  market,  as 
auto-enrolment and the RDR are implemented later this year."

Notes to the editors

1. Friends Life Group are  the holders of a  large number of industry  awards, 
showing continued recognition of the quality of our products and service.

2. This announcement contains certain forward-looking statements with  respect 
to the Friends  Life Group  and its  outlook. These  statements and  forecasts 
involve risk  and uncertainty  because they  relate to  events and  depend  on 
circumstances that may or may not occur  in the future. There are a number  of 
factors that could cause actual  results or developments to differ  materially 
from those  expressed  or  implied by  these  forward-looking  statements  and 
forecasts. Nothing  in  this announcement  should  be construed  as  a  profit 

3. For more information on the  Friends Life Group including, photos,  awards, 
fast facts, presentations, and media  contacts please visit the media  section 

4. For more information on Resolution Limited, including, photos, awards, fast
facts, presentations, and  media contacts  please visit the  media section  at


Friends Life  Group ("the  Group")  continues to  make  good progress  in  the 
pursuit of its strategic objectives in the  first half of 2012. The Group  has 
improved the underlying performance of the operating businesses,  particularly 
in the UK, where management actions have driven strong growth in new  business 
profits with  reduced cash  strain. This  improved operating  performance  has 
however been impacted  by the  challenging economic  environment resulting  in 
weaker investment markets and  lower interest rates  compared to the  previous 
period and the  Group's expectations.  These have  adversely affected  overall 

The Group's capital position remains robust with an estimated IGCA surplus  at 
30 June 2012 of £1.9 billion.

Notwithstanding the more  challenging environment  a number  of core  projects 
were delivered  in  the first  half  of  the year,  including  the  previously 
announced Diligenta outsourcing transaction,  which commenced successfully  at 
the beginning of March 2012. The  separation and integration activity is  also 
making good progress with separation from Bupa completed at the end of January
2012. The  separation  from  AXA  remains on  track  with  three  quarters  of 
transitional service  arrangements ("TSAs")  now exited.  Synergy delivery  as 
part of the  integration process  has achieved  £65 million  of run-rate  cost 
savings, up from the £45 million at the end of 2011. As expected, the bulk  of 
the additional synergies  recognised in  the first  half of  2012 reflect  the 
realisation of  contractualised  savings  through  the  Diligenta  outsourcing 
transaction,  with  the  closure  of  a  number  of  the  Group  offices  also 
contributing to  the improved  run-rate.  Total run-rate  and  contractualised 
synergies amount to £112 million at the 30 June 2012, up from the £105 million
reported in the 2011 full year results.

On 2  July 2012  the Group  launched an  in-house asset  management  business, 
Friends Life  Investment Limited  ("FLI") with  £6 billion  of fixed  interest 
assets. This business has  been built around  the current in-house  investment 
team augmented  with  key hires  bringing  to  the Group  the  capability  and 
expertise needed to manage these asset  portfolios. FLI will continue to  seek 
to accumulate fixed interest assets over time and is expected to add value  to 
the group  through  savings on  external  management fees,  VAT  and  improved 
investment portfolio construction over time.

Resolution Limited, the ultimate parent company of Friends Life Group plc  has 
announced that it will no  longer seek a specific exit  event for its UK  Life 
project and consequently  the previously announced  self-managed exit plan  of 
separate IPOs of the UK Go to Market and Heritage business units is no  longer 

Economic and regulatory environment

The economic environment over  the last twelve  months has remained  uncertain 
with lower than  expected global  growth exacerbated  by the  debt crisis  and 
political uncertainty in Europe. In the UK, the uncertainty in Europe has  had 
an adverse impact on customer confidence  and growth, taking the UK back  into 

In the first half of 2012,  lower than expected market levels reduced  returns 
from the  in-force  funds in  the  form  of lower  annual  management  charges 
compared to prior  periods. In the  debt markets, short  and medium term  gilt 
yields, a key driver  of future expected returns,  remained at or around  2011 
year end levels driven in part by the UK's position as a relative safe  haven. 
Corporate bond spreads have remained elevated over the same period.

The Group's  business  units  have  all  been  impacted  by  reduced  consumer 
confidence with customers in the international businesses postponing decisions
regarding investing or saving for the future. This has been compounded in some
regions, notably  Asia, by  increased  competition levels  which have  led  to 
overall margin pressures. Friends Life's UK product markets remain  relatively 
stable with the  principal challenges resulting  from the changing  regulatory 

The UK business's  preparations are  on track for  the forthcoming  regulatory 
changes  towards  the  end  of  2012  including  the  inception  of  the  RDR, 
auto-enrolment and gender neutral pricing. The Group continues to believe that
it is  well-positioned  to  benefit  from the  opportunities  expected  to  be 
generated by these regulatory changes.

The corporate benefits market is large and continues to be a fast-growing  but 
lower margin, market. Competition  on price remains  intense with the  current 
market  continuing  to  have  a  bias  to  paying  commissions  in  a  pre-RDR 
environment. Nevertheless the Group believes opportunities in this market  are 
promising   driven   by   the   ongoing   shift   from   defined-benefit    to 
defined-contribution schemes, whilst the advent of auto-enrolment and the  RDR 
are likely to widen the market and level the competitive playing field.

The UK protection market is  mature, concentrated and has remained  relatively 
stable over the past few years despite the weak macroeconomic climate. In  the 
period following the  introduction of the  RDR, the Group  expects to  benefit 
from any  shift  in the  business  models of  distributors  to focus  more  on 
protection products. Further changes regarding gender neutral pricing and life
tax reforms will have an effect on the price of individual protection and  are 
expected to increase market pricing volatility in the early part of 2013.  The 
Group believes that the Friends Life protection business is well positioned to
succeed in this scenario as it operates a value-based proposition, focused  on 
product quality.

The environment in  the retirement  income market also  remains positive  with 
continued growth expected  to be  driven by population  demographics as  'baby 
boomers'  retire.  Further  to  this  the  competitive  market  reflects   the 
expectations for future capital demands, in  light of Solvency II, as well  as 
persisting low Gilt rates. Despite these factors the Group does not expect the
current cautious pricing levels and associated margins to be maintained in the
second half of  2012 in  which lower margins  are assumed.  On the  regulatory 
front the  business is  meetingthe drive  for increasedtransparency  in  the 
retirement income sector by implementing theABI Code of Conduct, which is due
in March  2013. This  aims toimprove  the customer's  understanding  oftheir 
optionsatretirement, and  highlights  the  importance  of  the  strategy  to 
develop a broader product range in the retirement income space.

The implications of Solvency II remain  a key focus with the Group  monitoring 
the regulations and likely  impacts as they develop.  As stated in March,  the 
uncertainty around a  number of  the key  issues, including  the treatment  of 
matching  adjustments,  could  have  a  material  impact  on  future   capital 
requirements. Over  the  coming period  the  Group will  continue  to  monitor 
legislative developments in Europe and input to the UK's implementation plans.

Business performance

Friends Life's results  in the first  half of 2012  reflect two key  elements: 
improved  financial   discipline  and   the  effects   of  the   macroeconomic 
environment. The  Group has  continued  to make  good progress  in  delivering 
against those elements of the published strategy within management's  control; 
however,  economic  uncertainties  have   impacted  the  results  with   lower 
investment market levels and expected returns reducing surplus generation.

The Group delivered a robust IFRS  operating performance in the first half  of 
2012, with  an operating  profit of  £178 million  in the  period  principally 
reflecting good progress towards reducing acquisition expense levels offset by
the macro economic factors impacting surplus generation.

UK new business cash strain of £60 million in the first half of 2012 has  been 
reduced by an annualised £183 million from the £303 million baseline in  2010, 
representing 92%  of  the  £200  million targeted  new  business  cash  strain 
reduction. The  activity to  migrate  the Go  to  Market businesses  to  their 
respective target  platforms  has  supported this  improvement  alongside  the 
continued focus on operating costs and the delivery of targeted synergies.

                                         2012                             2010
                               2013                2011      2011    Full year
                             Target Half year Half year Full year baseline^(i)
IRR (%)
- UK                 n/a^(ii)       9.4       7.0       7.7          5.9
- International           20+      10.5      13.5      12.7         15.4
- Lombard^(iii)           20+      14.1      19.0       >25          >25
Blended group new business
IRR ^(iii)                      15+      10.0       9.6      10.0          8.6
New business cash strain
(£m)                            192       120       161       278          392

(i) 2010 baseline includes an estimate of 12 months BHA and AXA UK Life
Business results.

(ii) Target IRRs for the Go to Market businesses are set out in the relevant
sections of the UK operating review

(iii) The 2011 Lombard  IRR (and therefore the  blended group IRR) now  takes 
account of  the Luxembourg  regulatory regime  in which  DAC is  an  allowable 

The  International  results   are  relatively   disappointing  although   they 
demonstrate a  resilient  performance,  with stable  funds  under  management, 
against a challenging economic and competitive background. Pricing  discipline 
and shift  in  new  business  mix  to  higher  margin  products  have  largely 
maintained the value of new business  in a period when market and  competitive 
pressures have reduced the overall level of new business volumes.

Lombard's first half performance is  also subdued with lower economic  returns 
and one-off  costs  impacting the  result.  Lombard's sales  are  up 4%  on  a 
constant currency basis  (2% down in  sterling) in a  highly uncertain  market 
environment although the mix of business has resulted in reduced new  business 
contribution levels in the period.

The Business  Review that  follows covers  the 2012  operating performance  in 

Capital strength

Friends Life has maintained a robust balance  sheet in the first half of  2012 
despite continuing difficult  economic conditions.  At the 30  June 2012,  the 
Group had an estimated  IGCA surplus of £1.9  billion (31 December 2011:  £2.1 
billion) reflecting the  payment of  the £250 million  dividend to  Resolution 
Holdings (Guernsey) Limited in March 2012. The June 2012 position represents a
coverage ratio of 204% over the Group capital resource requirement  (excluding 
WPICC). In  addition the  Group also  retains a  highly rated  corporate  bond 
portfolio and has limited exposure to higher risk European sovereign debts.


The Group has continued  to make progress executing  the strategy in 2012  and 
this is reflected in how  the business has been  transformed over the last  18 
months. Whilst there remains a significant  amount still to be completed,  the 
Group believes it is on track  to create a sustainable, profitable, long  term 
business,  driven  by  the  Heritage,  UK  Go  to  Market  and   International 

Group results

Key performance indicators

The Group uses the following key performance indicators.

                                                 Half year Half year Full year
£m (unless otherwise stated)                          2012      2011      2011
IFRS based operating profit before tax                 178       406       722
IFRS (loss)/profit after tax                          (43)        61        10
Estimated IGCA surplus capital (£bn)                   1.9       2.0       2.1
Asset quality^(i) for shareholder-related assets       97%       96%       97%

(i) Corporate debt and asset-back securities at investment grade or above.

· IFRS based operating profit before tax of £178 million is £228  million 
lower than the first half of 2011 principally reflecting the one-off  benefits 
of £216 million reported in 2011. On a comparable basis, after the removal  of 
one-off items in 2012, positive £27 million, the result reflects a fall of £39
million as  good progress  in reducing  UK new  business strain  is offset  by 
difficult  economic  conditions  and  one-off  costs.  The  current   economic 
environment in which interest rates remain low has adversely impacted  surplus 
generation, particularly in International, while lower funds under  management 
have impacted levels of  fee generation in the  UK business. The results  also 
reflect a number  of one-off costs  including costs incurred  as the  business 
invests in operational capability for the future.

· IFRS loss after tax of £43  million (30 June 2011: £61 million  profit) 
principally reflects  the  costs  of separation  and  integration  activities, 
delivering the  Diligenta outsourcing  and preparing  for Solvency  II.  Other 
non-operating items include a marginally reduced amortisation charge  compared 
to  the   original  run-off   on  acquired   intangibles  reflecting   revised 
expectations for  International  acquired  VIF  ("AVIF")  run-off,  while  the 
comparative period includes the  gain on the acquired  BHA business offset  by 
one-off amortisation and impairment of AVIF.

· Estimated IGCA surplus capital of £1.9 billion (31 December 2011:  £2.1 
billion) represents a  coverage ratio of  204% (31 December  2011: 219%).  The 
reduction principally  reflects the  payment  of a  £250 million  dividend  to 
Resolution Holdings (Guernsey)  Limited in  March 2012  which underpinned  the 
payment of the 2011 final dividend to shareholders.

·  The   Group  has   maintained  high   asset  quality,   with  97%   of 
shareholder-related corporate debt and  asset-backed securities at  investment 
grade or  above  (31  December  2011:  97%).  The  Group  has  no  significant 
shareholder exposure  to sovereign  debt  or corporate  bonds of  higher  risk 
European  economies.  No  defaults  were  recorded  in  the  period  and   the 
shareholder share of default provisions remained unchanged at £0.6 billion.

Group IFRS profit

The Group's IFRS results  are set out below,  including a reconciliation  from 
IFRS based operating profit to the IFRS  result after tax. The Group uses  the 
operating profit measure as  the Board considers  that this better  represents 
the underlying performance of the business and the way in which it is managed.

                                                      Half            Full 
                                              year year^(i) year^(ii)
£m             UK Int'l   Lombard Corporate   2012     2011             2011
New business                                                                 
strain       (41)  (24)      (18)         -   (83)    (103)            (181)
surplus       196    51        28         -    275      323              572
return       (26)     -         -         9   (17)     (14)             (26)
changes and                                                                  
items          27     -         -         -     27      216              404
costs        (18)   (4)         -         -   (22)     (14)             (36)
Other income                                                                 
and charges   (1)   (2)         -         1    (2)      (2)             (11)
IFRS based
before tax    137    21        10        10    178      406              722
Short-term fluctuations in investment return    18      (2)              (261)
Non-recurring items                          (118)     (79)              (293)
STICS interest adjustment to reflect IFRS
accounting for STICS as equity                  16       16                 31
IFRS profit before acquisition accounting
adjustments and shareholder tax                 94      341                199
Gain on acquisition of businesses                -       68                116
Costs associated with business acquisitions      -      (1)                (3)
Amortisation and impairment of acquired
in-force business                            (204)    (453)              (675)
Amortisation of other intangible assets       (42)     (41)               (84)
IFRS loss before shareholder tax             (152)     (86)              (447)
Shareholder tax                                109      147                457
IFRS (loss)/ profit after tax                 (43)       61                 10

(i) Half year 2011 results comprise  six month results for Friends  Provident 
and the AXA UK Life Business, five months for BHA, six months for GOF and TIP.
The GOF and TIP businesses were sold on 1 November 2011.

(ii) Full year 2011 results comprise  12 months results for Friends  Provident 
and the AXA UK Life  Business, 11 months for BHA,  ten months for GOF and  TIP 
and two months for WLUK.

The Group IFRS based operating profit in  the period to 30 June 2012  totalled 
£178 million, a reduction of £228 million on the same period in 2011 (30  June 
2011: £406  million). After  the removal  of principal  reserving changes  and 
one-off items (30 June 2012: £27 million, 30 June 2011: £216 million) the 2012
half year result is £39 million lower  than the first half of 2011  reflecting 
the Group's focus on financial discipline within the operating companies in  a 
challenging macro  economic environment.  The  economic conditions,  in  which 
expected returns  remain low,  have adversely  affected the  results with  the 
International business in particular impacted  by lower interest rate  levels. 
The results also reflect a number  of one-off costs in both the  International 
and Lombard businesses,  including the strategic  review, while other  one-off 
development costs have  been incurred  in the UK  as the  business invests  in 
operating capabilities for the future.

The result  comprises the  operating profit  of the  life businesses  of  £168 
million and £10 million of corporate income. Further details of the  operating 
performance of the Group are included in the relevant business unit  operating 

Non-operating items

Short-term  fluctuations  in  investment   returns,  on  assets  backing   the 
shareholder and non-profit funds, were a favourable £18 million in the  period 
to 30  June 2012.  This benefit  principally reflects  the release  of  credit 
default allowances as default experience on assets backing annuity liabilities
was better than assumed. In addition, an £8 million benefit has resulted  from 
annuity portfolio mismatches  reflecting the fact  that these liabilities  are 
matched on a  realistic basis  as opposed  to the  reported regulatory  basis. 
Partially offsetting these positive items is a £7 million adverse variance  on 
shareholder assets, which  mainly reflects the  difference between actual  and 
expected longer-term return on the external debt.

Non-recurring items of £118 million include:

· separation and integration costs of £39 million;

· costs, net  of provision  releases, on the  separation and  integration 
programmes totalled £39  million in the  period and take  cumulative spend  on 
these projects to £89 million and £83 million respectively (31 December  2011: 
£72 million and £67 million before £6 million provision release).

· outsourcing implementation costs of £27 million;

·  costs  of   £84  million   relating  to   the  Diligenta   outsourcing 
implementation were provided for  as at 31 December  2011. In the period,  £13 
million of these provisions  have been released against  costs of £40  million 
resulting in net costs  in the period  of £27 million.  The costs incurred  to 
date therefore amount to £111 million. Total implementation costs are expected
to be £250 million with the remainder being incurred in the period to the  end 
of 2014.

· finance  transformation  costs  of  £48  million  largely  relating  to 
Solvency II;

·  capital  optimisation   project  costs  of   £13  million  and   other 
non-recurring costs of £1 million; and

· other non-recurring  income of  £10 million relating  to a  curtailment 
gain on the Group  pensions scheme, resulting  from the Diligenta  outsourcing 

Interest payable on  the STICS of  £16 million  is included as  a £11  million 
deduction to corporate  long-term investment  return in  the operating  profit 
analysis, and a £5  million adverse investment fluctuation.  As the STICS  are 
accounted for as  equity in IFRS  (with interest being  recorded as a  reserve 
movement), £16 million is  added back to the  non operating result to  reflect 
the requirements of IFRS.

Acquisition accounting  adjustments,  totalling £246  million,  represent  the 
amortisation of the  intangible assets recognised  on the acquisitions.  These 
charges comprise £204 million of  amortisation of acquired in-force  business, 
and £42 million of amortisation  of other intangible assets. The  amortisation 
of acquired  in-force business  in  2011 included  a  one-off charge  of  £201 
million (£130 million for the AXA UK Life Business, £71 million for BHA) which
reflected  the  accelerated   run-off  of  in-force   surplus  following   the 
recognition of negative reserves in  these businesses. The Group continues  to 
monitor the expected run-off  profile of the  acquired in-force business  with 
this adjusted in 2012  to reflect changes to  the expected run-off profile  of 
the International business's acquired in-force book.

A shareholder tax credit of £109 million has been recognised in the period and
is higher than the loss before tax of £152 million would imply. The  principal 
differences between the implied and actual shareholder tax credit relate to:

· £47  million  shareholder tax  credit  for tax  reliefs,  expenses  and 
exemptions predominantly in relation  to the life  insurance companies in  the 
Group which are taxed on the 'I minus E' basis;

· £30 million shareholder tax credit relating to the reduction in the  UK 
corporation tax rate; offset by

· £5 million shareholder tax charge in respect of provisions.

The tax credit includes £87 million  credit in respect of the amortisation  of 
AVIF and other acquired intangibles in the period.

Summary IFRS balance sheet

                                                     30 June 31 December
£m                                                      2012        2011
Acquired value of in-force business                    4,219       4,437
Other intangible assets                                  366         410
Financial assets                                     102,945     103,643
Cash and cash equivalents                              8,567       8,690
Other assets                                           8,592       8,132
Total assets                                         124,689     125,312
Insurance and investment contracts                   112,130     112,455
Loans and borrowings                                     952         972
Other liabilities                                      5,763       5,737
Total liabilities                                    118,845     119,164
IFRS net assets                                        5,844       6,148
Equity attributable to equity holders of the Company   5,514       5,825
STICS                                                    327         318
Attributable to non-controlling interests                  3           5
Total equity                                           5,844       6,148

At 30  June 2012,  IFRS total  equity was  £5,844 million  (31 December  2011: 
£6,148 million), with equity attributable to equity holders of the Company  of 
£5,514 million (31 December 2011: £5,825 million).

Financial assets are predominantly invested  in listed shares, other  variable 
yield securities,  corporate bonds,  asset  backed securities  and  government 
securities. Asset quality has been maintained with 97% of  shareholder-related 
corporate bonds and asset-backed securities held at investment grade or  above 
and there is limited exposure to European sovereign debts.

UK operating review

The  UK  business  has  evolved  rapidly  since  2009,  making  good  progress 
separating  and   integrating  the   acquired  businesses   and   subsequently 
reorganising the business units into the Heritage and Go to Market units.  The 
Heritage business  unit  forms the  bulk  of the  UK  business by  assets  and 
in-force value, as illustrated  below, while the Go  to Market business  units 
are focused on scale  markets where good margins  are generally available  and 
where the Group has strong market positions enabling access to those margins.

                    Assets under management

UK by business unit                       %
UK Heritage                              80
Corporate Benefits                       18
Protection                                -
Retirement income                         2
Total                                   100

Profitability of new business

                            2012 Half year
£m (unless                    Go to Market                 2011  2011     Full
otherwise            Corporate            Retirement       Half  Full     year
stated)     Heritage Benefits Protection     Income Total year  year baseline
cash strain     (20)      (32)       (23)         15  (60) (98) (169)    (303)
IRR (%)          4.2       6.8        9.8        >25   9.4  7.0   7.7      5.9
APE               60       291         44         19   414  372   721      677

The profitability of new business delivered in the first half of 2012 reflects
the  significant  progress  made  in  delivering  operating  cost   synergies, 
continued migration of new  business to target  platforms and the  outsourcing 
arrangement with Diligenta.

New business cash strain has decreased period on period with a 39% improvement
compared to the first half  of 2011. This improvement  is a reflection of  the 
material progress made  by each of  the business units  as they drive  forward 
their respective strategies.

The profitability of UK  new business with an  IRR of 9.4% similarly  reflects 
the  good  underlying  business  unit  performance  with  the  improvement  in 
Protection and Retirement  Income feeding into  the overall result.  Corporate 
Benefits profitability also reflects  an upward trend on  the first half  2011 
although the  improvement has  been partly  offset  by the  lower IRR  on  the 
current not-yet-scale new  corporate platform and  the acquired WLUK  business 
which has not yet transferred to the target platform.

Financial performance

UK IFRS based operating profit

                                            2012          2011           2011
                                        Half year Half year^(i) Full year^(ii)
New business strain                          (41)          (66)          (112)
In-force surplus                              196           214            402
Long-term investment return                  (26)             4            (5)
Principal reserving changes and one-off
items                                          27           222            416
Development costs                            (18)          (10)           (28)
Other income and charges                      (1)             -            (1)
IFRS based operating profit before tax        137           364            672

(i) Half year 2011  results comprise six month  results for Friends  Provident 
and the AXA UK Life Business, five months for BHA, six months for GOF and TIP.
The GOF and TIP businesses were sold on 1 November 2011.

(ii) Full year 2011 results comprise  12 months results for Friends  Provident 
and the AXA UK Life  Business, 11 months for BHA,  ten months for GOF and  TIP 
and two months for WLUK.

The interim 2012  UK operating profit  of £137 million  is £227 million  lower 
than the same period  in 2011 (30 June  2011: £364 million) mainly  reflecting 
the significant one-off benefits reported in the comparative period. After the
removal of principal reserving  changes and one-off items  (30 June 2012:  £27 
million, 30 June 2011: £222 million) the  UK result is £32 million lower  than 
2011. This underlying result reflects a number of factors with strong progress
made in reducing the costs of writing new business offset by the impacts of  a 
low return environment, increased intragroup interest costs and one-off costs.
One-off costs of £3 million have been incurred in respect of the establishment
of FLI, with £3  million benefits being recognised  through reduced levels  of 
reserves for future  investment management fees.  The increase in  development 
costs incurred in  the period  include an increase  in spend  as the  business 
invests in the retirement income strategy as well as operational  capabilities 
in the lead up to RDR and auto-enrolment implementation.

Reconciliation of new business cash strain to IFRS new business strain

                                                 2011      2011
£m                                Half year Half year Full year
Total UK new business cash strain      (60)      (98)     (169)
DAC/DFF adjustments                      19        33        60
Other IFRS adjustments                    -       (1)       (3)
Total UK IFRS new business strain      (41)      (66)     (112)

In the period, IFRS new business strain has been reduced by 38% to £41 million
(30  June  2011:  £66  million)  reflecting  the  Group's  actions  to  reduce 
acquisition expense  levels. The  reduction  in IFRS  new business  strain  is 
principally driven  by  the  underlying  new business  cash  strain  which  is 
detailed in the Go to Market and Heritage operating sections that follow.

Deferred acquisition costs ("DAC") are  recognised on pensions and  investment 
new business  with the  lower  level of  deferral  compared to  prior  periods 
reflecting the  reduced  commission  levels following  the  decision  to  stop 
selling investment bonds in 2011.

Reconciliation of in-force cash surplus to IFRS in‑force surplus

                                      2011      2011
£m                     Half year Half year Full year
Total UK cash surplus        166       207       354
DAC/DFF adjustments          (1)       (1)       (7)
Other IFRS adjustments        31         8        55
Total UK IFRS surplus        196       214       402

In-force surplus of £196 million reduced  from £214 million in the first  half 
of  2011  principally  reflecting  the  impact  of  the  challenging  economic 
environment. The reduced level of funds  under management, driven by both  low 
period on period market  levels and net outflows  from the Heritage  business, 
reduced the amount of fees  generated in the first  half of 2012. In  addition 
the effect of year end basis changes made at 31 December 2011 has resulted  in 
the non-recurrence of the benefit of favourable experience variances  included 
in the first half of 2011.

The overall contribution to in-force surplus of the acquired WLUK business  is 
£12 million  in  the  first  six  months  of  2012  following  the  business's 
acquisition in November 2011. Maintenance  expenses incurred by WLUK were  £11 
million, excluding these maintenance expenses are flat period on period.

The £1 million  net amortisation of  DAC and deferred  front end fees  ("DFF") 
reflects the relatively small value of these costs that have been  capitalised 
in the post-acquisition period.

The other  IFRS  adjustments  mainly  relate to  the  reversal  of  investment 
contract reserve movements which are not allowable under IFRS.

Longer-term investment return

                                                                2011      2011
£m                                               Half year Half year Full year
Longer-term return on life and pension

funds - excluding debt                                  27        35        70
Longer-term return on life and pension

funds - debt                                          (53)      (31)      (75)
Total                                                 (26)         4       (5)

The decrease  in  longer-term  investment  return in  the  UK  business  is  a 
reflection of the reduced expected rates of return combined with the increased
cost of debt compared to  the same period in 2011.  In the first half of  2012 
rates of expected  return for  gilts, corporate  bonds and  cash have  reduced 
significantly resulting in a £8 million reduction in investment return.

The increased debt costs in the first half of 2012 reflect a full six  month's 
interest charge on the internal LT2  subordinated debt issued by Friends  Life 
Limited to Friends Life holding companies in 2011 (with £500 million issued in
April 2011 and a further £200 million issued in December 2011). The benefit of
the interest received is reflected in the Corporate business unit's  operating 

Principal reserving changes and one-off items

Principal reserving changes and one-off items include a benefit of £17 million
relating to revised transfers on  guaranteed annuity options triggered by  the 
vesting of pensions business within the with-profit funds. Other one-off items
of £10 million  mainly reflect the  favourable impact of  a refinement of  the 
reserving for attributable expenses as well as the recognition of benefits  to 
be achieved following the set up of FLI.

UK operating expenses

                 2012          2011      2011     Full year
£m          Half year Half year^(i) Full year baseline^(ii)
Acquisition        77            89       178           220
Maintenance       141           130       263           256
                  218           219       441           476
Development        18            10        28            23
Total             236           229       469           499

(i) 2011 half  year operating  expenses do  not include  the acquired  WLUK 
business as this was  acquired on 7  November 2011, but  include BHA from  the 
date of acquisition.

(ii) 2010 full  year baseline includes  an estimate of  12 months  operating 
expenses for AXA UK Life Business, BHA and WLUK.

UK operating  expenses, which  exclude commission  payments and  non-recurring 
costs, totalled £236 million in the period,  up £7 million on the same  period 
in 2011. The increase in  development spend, up £8  million in the period,  is 
the  principal  driver  of  this  period  on  period  increase  and   reflects 
preparations by the UK business for the forthcoming regulatory changes such as
the  RDR  and  auto-enrolment.  Development  costs  also  include  expenditure 
associated with the recently launched corporate platform 'My Money' as well as
the Retirement Income strategy.

Acquisition and  maintenance costs  amounted to  £218 million  in the  period, 
marginally lower  than  the same  period  in  2011. After  adjusting  for  the 
inclusion of  the  acquired WLUK  business  (£15 million)  and  inflation  (£7 
million), costs in  the period have  been reduced by  £23 million  principally 
reflecting the in year delivery of £65 million run-rate savings.

Maintenance expenses  have increased  in the  period by  £11 million,  largely 
reflecting the inclusion of the acquired WLUK business in the 2012 results. In
addition, costs of £3 million have been incurred in relation to the set up  of 
FLI although these costs have been offset by a benefit in principal  reserving 
changes and one-off items. Excluding  these impacts, maintenance expenses  are 
lower than the comparative 2011 period with further reductions expected as the
business completes the  integration process  and delivery of  the target  £143 
million synergies by 2015.

UK other income and charges

Other income and  charges of  £(1) million include  the trading  profit of  £1 
million in  Sesame Bankhall  Group  ("SBG"). SBG  is a  broad-based  financial 
services group and the  UK's largest distributor  of retail financial  advice, 
operating three  market  leading  brands.  Sesame  is  the  leading  appointed 
representative network, Bankhall is the  largest support service provider  for 
directly  regulated  IFAs   and  PMS   is  the  biggest   mortgage  club   for 
intermediaries. SBG's result  is in line  with expectations in  the first  six 
months as  the  business continues  to  make significant  investments  in  its 
technology infrastructure and in a range of new services for its customers  to 
strengthen its market-leading position in advance of the RDR implementation.

UK Heritage

Market environment

The Heritage business is making good progress in preparing for the significant
number of changes facing the UK life and pensions market.

The Heritage business has a broad range  of products that will be impacted  by 
the RDR, gender neutral pricing  and auto-enrolment of pensions.  Consequently 
the Heritage  business is  undertaking the  product and  systems  enhancements 
necessary to fulfil the Group's regulatory obligations in particular  Treating 
Customers Fairly. In doing so,  the business is applying commercial  judgement 
to the  need for  investment, taking  account  of the  scale of  products  and 
planned longer term outsourced platform developments.

Strategy implementation

The UK Heritage business unit serves over four million customers. It manages a
significant proportion of the funds under management of the Group, relating to
a large  suite  of products  that  are no  longer  actively marketed  and  are 
administered on  complex legacy  systems. Consequently  the business  is  very 
different to  the UK  Go  to Market  businesses.  Good progress  continues  in 
embedding a  dedicated  management  team focused  on  the  Heritage  business, 
consistent with the aim  to be the UK's  leading legacy business manager  with 
the knowledge and expertise to maximise the value created from these books.

The value drivers for the Heritage business are:

· management of an efficient cost base in line with business scale;

· minimisation of capital required for the business; and

· retention of in-force business.

The Heritage business has previously identified six strategic themes to  begin 
to harness these value drivers. Progress on the themes prioritised in 2012  is 
set out  below.  The  Heritage  business  expects  to  address  the  remaining 
strategic themes, fund rationalisation and  customer value management, over  a 
longer timeframe.


The significant policy administration and  IT outsourcing deal with  Diligenta 
which commenced on 1  March 2012 is operating  as expected. Combined with  the 
existing outsource arrangement with Capita, materially all of Heritage  policy 
administration is  now  outsourced. This  means  a considerable  part  of  the 
Heritage cost base is now directly variable, and will decrease as policies run

Since the initial  transfer of 1,900  staff and smooth  transition of work  to 
Diligenta with  effect from  1  March 2012,  implementation  of the  deal  has 
continued to progress well. The customer  service work of circa 400 full  time 
employees ("FTE") transitioned  seamlessly from WIPRO  (an existing  outsource 
provider) to  TCS  (Indian parent  company  of  Diligenta) in  May,  again  on 
schedule and with  no disruption to  service. The IT  application and  support 
work of circa 200 FTE also transferred to TCS in May without disruption.

Building an in-house asset manager

Building in-house asset management  capability supports the  aim of running  a 
lean  cost  base  with  the  expectation  that  assets  can  be  managed  more 
efficiently in the longer term. FLI successfully launched on 2 July 2012  with 
£6  billion  of  fixed  interest  assets  under  management.  This  successful 
development of  in-house capability  demonstrates the  opportunity to  deliver 
more value from the existing  book through optimised investment strategies  at 
lower cost.

FLI is set to continue growing and aims to recapture a further £3-5 billion of
assets over  the remainder  of  2012. The  current  phase of  development  is 
focused on the recapture of the core non-linked and shareholder assets of  the 
Group. Subsequent  phases  are  expected  to  focus  on  fixed  income  assets 
currently managed in the Group's with-profits and unit-linked funds.

To achieve maximum business efficiency,  FLI's middle and back office  support 
functions  are  outsourced.  This  also   provides  the  benefits  of   future 
scalability and flexibility while achieving certainty on costs.

Capital optimisation programme and with-profits fund management

The current  capital  optimisation programme  ("COP")  to simplify  the  legal 
structure of  the  business and  remove  capital inefficiencies  continues  to 
progress well. The Group has five UK life companies within the Group and  the 
ultimate result of the programme  will be to reduce  these in order that  they 
are broadly aligned to the Heritage business and Go to Market business  lines. 
The most significant steps of this project are expected to be completed by the
end of 2012. The Group is confident  that the costs to be incurred to  deliver 
this restructure will be exceeded by benefits.

The programme to develop and implement a uniform capital management  framework 
for the  six with-profits  funds  within the  Heritage business  is  currently 
underway. This  programme  is  closely linked  to  the  COP, as  a  number  of 
with-profits funds are included in the planned COP transfers of business.

Financial performance

UK Heritage unit-linked funds under management

The challenging economy over the first half of 2012 has not had a  significant 
negative impact on  the Heritage  results. The operating  performance to  date 
during 2012 indicates the lapse experience  of the book is performing in  line 
with  the  business's  assumptions  including  the  provision  set  aside  for 
increased scheme  re-broking activity  prior to  RDR becoming  effective on  1 
January 2013.

The business has seen net outflows of both unit-linked pensions and investment
business. Unit-linked  investment business,  primarily single  premium  bonds, 
reflects the positive action taken in  2011 to close Investment Bond  products 
and the  maturity of  this  book. Whilst  net  outflows are  significant,  the 
Heritage business expects to be able to manage these books of business  within 
the current assumptions.

£bn                  Pensions Investments Total
31 December 2011          18.9        16.3  35.2
Inflows                    0.3         0.1   0.4
Outflows                 (1.2)       (0.9) (2.1)
Net investment return        -       (0.1) (0.1)
30 June 2012              18.0        15.4  33.4

New business

                                  2012      2011      2011
£m (unless otherwise stated) Half year Half year Full year
New business cash strain          (20)      (30)      (54)
IRR                               4.2%      6.8%      6.0%
APE                                 60        87       157

The Heritage  business  specifically  focuses  on  those  products  no  longer 
actively marketed.  It does  not actively  drive new  business, but  the  book 
delivers a significant  level of ongoing  incremental business written  across 
all product types.

New business strain is  £(20) million compared to  £(30) million in the  first 
half of 2011 reflecting the  closure of bond products  to new business in  the 
second half of 2011.

The IRR from  UK Heritage  new business  in the first  half of  2012 was  4.2% 
representing a fall from 6.8% in the first half of 2011. This change reflects:

· a benefit from a marginal  increase in Department of Work and  Pensions 
("DWP") rebate business in the first  half of 2012. Further rebates have  been 
received in July but thereafter are expected to be minimal. The UK  Government 
has determined  that 2012  is the  final year  in which  DWP rebates  will  be 
provided; offset by

· the closure of bond products referred to above, leading to a  reduction 
in sales and value generated.

Key priorities

The key priorities for the Heritage business for the remainder of 2012 are the
successful delivery  of  the  Capital  Optimisation  Programme  and  continued 
expansion of  FLI  whilst  continuing  to  deliver  value  from  the  in-force 

Go to Market: Corporate Benefits

Market environment

Corporate Benefits operates in a large, fast-growing but relatively low-margin
market with intense price competition and, currently, commission bias.

The Group believes opportunities exist as  a result of the ongoing shift  from 
defined benefit to defined  contribution schemes, auto-enrolment,  demographic 
changes and the advent of the RDR.

Strategy implementation

The Group will continue to improve profitability through four key levers:

· retaining  and developing  the existing  portfolio of  schemes  through 
dedicated Client  Relationship  Managers  and  workplace  marketing  operation 
focusing on key clients and distributors;

· cost  reduction  through focusing  on  the business's  more  efficient, 
cost-effective target platforms, including the new, "My Money" Corporate  Wrap 
platform, the deployment of a small,  focused new sales team and the  benefits 
secured from the outsourcing deal with Diligenta;

· positioning the business  optimally for the forthcoming  auto-enrolment 
and RDR market changes: the development  of the auto-enrolment hub which  will 
seek to ease the  legislative and administrative burden  on employers for  the 
significant volumes of business expected from this change. The timing of this
business depends upon scheme size and the Group, with a balanced portfolio of
mid to large schemes,  expects the flow of  auto-enrolment for its schemes  to 
commence in January 2013, slightly after the very earliest staging schemes  in 
the last quarter of 2012; and

· selectively writing  profitable new  business within  the Friends  Life 
target range of mid to large schemes; these will be primarily through a  small 
number of key  distribution relationships. The  Group have observed  increased 
pressure on pricing, reflecting the competition for commission-paying business
before RDR  closes this  opportunity, but  expects a  normal environment  from 
2013. Indeed,  as a  business  which does  not  currently pay  commission  in 
respect of new schemes, the Group  expects a greater number of  opportunities 
from 2013  from  when  it can  compete  for  all business  and  not  just  non 
commission-paying business.

Financial performance

                                          2013      2012      2011      2011
£m (unless otherwise stated) Full Year target Half year Half year Full year
New business cash strain                  (75)      (32)      (35)      (51)
IRR                                       10%+      6.8%      6.6%      8.3%
APE                                        n/a       291       219       440

Corporate Benefits again  delivered improved new  business results  reflecting 
the increased level of  business written (up  33% on the  first half of  2011, 
including 15% from the transfer of WLUK business), the more commercial pricing
approach and the benefits of cost reduction. New sales include £19 million APE
on "My Money",  the new corporate  platform launched on  31 January. In  this 
period, 79% of new business  was written on the  target platforms, NGP and  My 

New business cash strain of £32 million is  at a higher run rate than the  £26 
million implied from the full year 2011 results (noting the step-down  between 
first and second half of the 2011 numbers being due to modelling  improvements 
which were introduced in December). This reflects the higher sales volumes  in 
2012 including  the introduction  of  the WLUK  business  but offset  by  cost 
reductions. Sales volumes of £291  million in the first  half of 2012 in  turn 
reflect the healthy  pipeline of  business built up  following the  successful 
merger of the Friends Provident and AXA UK Life Business and the  recognition, 
including by NMG and Greenwich Associates, of the quality of the Friends  Life 
proposition. In  addition,  the  workplace  marketing  operation  has  had  a 
successful first half through the attention given to key relationships by  the 
Client Relationship  Management  team  and  buoyed by  the  seasonal  peak  of 
employer-driven salary reviews in January and April.

Cost savings and  increased volumes  continue to  drive the  IRR on  Corporate 
Benefits business with an IRR of 6.8% in  the first half of 2012 up from  6.6% 
in the first  half of 2011.The  steady upward trajectory  through the  second 
half of 2011 has however  been offset by the  lower IRR on the  transferred-in 
WLUK business (which is not yet on target platform) and the lower initial  IRR 
on the not-yet-scale My Money platform.  The Group expects the favourable  IRR 
trajectory to continue and for 2013 market commitments to be achieved  through 
continued cost savings and pricing discipline and the benefits of the  volumes 
of auto-enrolment business.  The Group  expects an increase  in new  business 
activity as a  result of  both auto-enrolment itself  and also  auto-enrolment 
consultancy activity triggering scheme reviews. This is expected to result  in 
a change  in  market focus  with  the quality  providers,  with  comprehensive 
auto-enrolment solutions, taking market share.

Corporate Benefits funds under management

31 December 2011       15.4
Inflows                 1.3
Outflows              (0.9)
Net investment return     -
30 June 2012           15.8

Net fund inflows of £0.4 billion have been generated in the first half of 2012
whilst investment markets have been flat over that period.

Key priorities

The Group will  continue the development  and promotion of  My Money  (already 
rated best corporate  platform in  a platform survey  of 70  advice firms)  to 
achieve scale on this  platform. The business will  continue to champion  the 
NGP platform to deliver  growth through the  Worksite Marketing operation  and 
write profitable new business governed by robust pricing discipline.

The Corporate  Benefits  business  is  on track  to  complete  and  prove  the 
auto-enrolment hub as well  as the supporting business  processes in time  for 
the arrival of the  first tranches of  this business. Similarly,  preparation 
continues to ensure that systems and processes are updated to be ready for the
regulations and opportunities arising from RDR.

The business continues to  focus on moving existing  business onto the  target 
platforms but following the clear message  from clients that they do not  want 
to manage a  migration at  the same time  as the  legislative requirements  of 
auto-enrolment, together with the opportunity  to extend the Embassy  platform 
servicing arrangement with AXA,  the business has decided  not to migrate  the 
book of business from this platform in the short term and is concentrating  on 
ensuring the auto-enrolment solution will also support these clients. This  is 
not expected  to  have  a material  effect  on  the business  or  delivery  of 
financial targets.

Go to Market: Protection

Market environment

The UK protection market is mature and has remained relatively stable over the
past few years despite the turbulent macroeconomic climate. In 2011 the market
size was circa £1 billion APE, of which three-quarters consisted of individual
protection  and  one-quarter  group  protection.  The  protection  market  is 
forecast to have modest growth  over the next few years  with a number of  key 
factors driving  increases  for example  the  RDR, recovery  in  the  mortgage 
market, and growth in the Whole of Life market.

Protection products are not  directly impacted by  RDR, nevertheless there  is 
expected to be a positive impact  on Protection sales. The industry  consensus 
view is that there  is likely to be  a short term growth  in sales of  advised 
protection products as  distributors transition  their business  model to  the 
post-RDR landscape. The business expects other growth, in the medium term,  to 
come from  non-advised sales  and  this trend  is  starting to  be  evidenced. 
Changes regarding gender neutral pricing (effective from 21 December 2012) and
life tax reforms (implemented on 1 January 2013) will almost certainly have an
effect on the price  of Individual Life Protection;  as a result the  business 
expects to see increased market pricing volatility in the early part of 2013.

Over the next  year the  group protection proposition  will be  affected by  a 
number of significant regulatory changes in addition to the RDR. These include
the welfare reforms and pension auto-enrolment with the business continuing to
monitor and develop towards the implementation of these.

Strategy implementation

The Group's overall  approach is  to deliver  the strategic  change agenda  to 
fulfil the 2013 market commitments, whilst maintaining proposition quality and
innovation. Delivery in 2012 to date includes the successful implementation of
the  partnership  with  Connells,  which  both  increases  the   proposition's 
distribution footprint and  provides capability on  the Protect+ platform  for 
migration of  other  strategic partners  later  in the  year.  The  Protection 
business  continues  to  deliver  capability  and  proposition   enhancements, 
including piloting  an improved  rehabilitation  claims service  within  Group 
Protection and recent critical illness product enhancements within  Individual 

The  business  has  also  made  progress  in  developing  selective  strategic 
distribution partnerships  within  both  businesses,  such  as  Intrinsic  for 
Individual Protection and Mercer for Group Protection.

Friends Life Individual Protection  has prepared for  the expected outcome  of 
the RDR, developing a selective range of distribution relationships as well as
innovative propositions such as the new Simple range of products, which extend
the Group's  distribution capabilities  with products  that are  suitable  for 
non-advised sales through a  variety of channels  and partnerships. The  Group 
Protection proposition is  continuing its selective  approach to the  channels 
and products which  offer acceptable  levels of return,  whilst continuing  to 
innovate with proposition  enhancements such as  on-line scheme servicing  and 
growing employee benefits consultant ("EBC") relationship strength.

As referred to above,  the implementation of gender  neutral pricing and  life 
tax reforms is expected to result  in some pricing volatility. The  business's 
focus on a value-based high quality proposition in this market is expected  to 
reduce its exposure to price volatility, compared to some other UK  providers, 
when these changes are implemented.

Financial performance

                             Full year      2012      2011      2011
£m (unless otherwise stated)    target Half year Half year Full year
New business cash strain          (30)      (23)      (43)      (77)
IRR                                20%      9.8%      3.9%      5.5%
APE                                n/a        44        50        92

The progress in financial performance achieved in the second half of 2011  has 
continued into 2012 with increased IRR of  9.8% (30 June 2011: 3.9%) and  with 
new business strain reducing by almost half.

All intermediary partner individual protection  new business has now  migrated 
to the Protect+ proposition, continuing the business's strategy of focusing on
value over  volume  and  migrating  new  business  capability  to  the  target 
platforms to achieve productivity benefits. 81% of new business is now written
on the  three target  platforms (Individual  Protect+, Individual  Simple  and 
Group). Although new  business APE is  lower than the  equivalent period  for 
2011, profitability is significantly improved. The focus remains on  achieving 
value through product mix and managing profitability during continued  subdued 
economic conditions.

Group  protection  has  benefited  both  from  increased  volumes  during  the 
(traditionally strong) first half of the year, following early integration  of 
the business, and  also from  an increased  proportion of  higher value  group 
income protection  business  where the  Group  has strong  claims  management 

Key priorities

New business profitability  and IRR  in the first  half of  2012 continues  to 
progress towards the  2013 market  commitments. Further  improvements will  be 
driven by  a  clear  focus  on key  priorities,  including  the  migration  of 
strategic partners, such as Countrywide, to the target Friends Life  platforms 
by the end of 2012. The  Protection business continues to target  improvements 
in existing relationships and selected  new partnership opportunities, and  to 
maintain the overall quality of the Group and Individual propositions.  During 
the second half of 2012  the Group will also seek  to manage and benefit  from 
the high volume of impending regulatory and tax changes in both the Individual
and Group Protection businesses.

Go to Market: Retirement Income

Market environment

The annuity market continues to show underlying growth with the first  quarter 
of 2012 up  16% on  the same  period in  2011. The  market is  proving to  be 
resilient in the face of the volatile economic environment and the  associated 
fall in annuity rates driven by falling UK gilt yields. Growth in baby boomer
retirements are expected to contribute to additional annuity sales in 2012 and
over the coming years.

Sales in the open market continue to show the trend towards enhanced annuities
which now account for half of total  open market sales. The strong growth  in 
enhanced annuities over recent years  supports the Retirement Income  strategy 
to broaden the product  proposition to take account  of lifestyle and  medical 
factors in pricing.

The regulatory environment continues  to evolve with the  ABI Code of  Conduct 
due to come  into force  in March  2013. This  will require  all providers  to 
prominently highlight  enhanced  annuities  and the  higher  income  they  can 
potentially offer. The Code  will ensure that  providers continue to  explain 
the benefits  of  advice  and  support, including  the  benefits  of  shopping 
around. The Code also seeks to increase transparency in the annuity market so
that customers  have a  clear  picture of  how individual  providers'  product 
offerings fit in with the wider market.

Solvency II requirements  and timing  remain uncertain  although the  industry 
focus on efficient use of capital is expected to ensure a rational  commercial 
response to the final rules.

Strategy implementation

Progress on each of the five key  strategic initiatives has been in line  with 
the strategic  plan over  the first  half of  2012 providing  confidence  over 
delivery of the 2013 financial commitments for Retirement Income. A series of
further improvements to the proposition are set to be delivered over the  next 
few quarters that will progressively improve the business's ability to  retain 
retiring customers.

Provision of broader product proposition

At the beginning of  June 2012 Retirement Income  launched an annuity  product 
incorporating lifestyle  and medical  underwriting. This  is expected  to  be 
rolled out to  maturing pension  policyholders over  the second  half of  2012 
leading to an  expected increase in  retention rates towards  target over  the 
course of 2013. The development of  the enhanced annuity product ensures  that 
maturing  pension  policyholders  can  take  advantage  of  this  option  when 
appropriate. The growth in the enhanced annuity market over recent years  and 
the promotion of  this option within  the ABI Code  of Conduct illustrate  the 
importance of this component of the Retirement Income strategy.

Development of sophisticated pricing and underwriting

The longevity team was strengthened further in the first half of 2012 and  has 
now developed the  lifestyle underwriting capability  required to support  the 
enhanced annuity proposition.  In addition, the  business is partnering  with 
Swiss Re on the medical proposition thereby benefiting from their underwriting
expertise and tools in this field.

Improving customer engagement

The launch  of  an enhanced  annuity  follows  a number  of  successful  pilot 
initiatives during the  first half  of 2012.  The pilots  have helped  inform 
product development and the approach to  customer engagement in the run up  to 
retirement. With  this proposition  becoming established,  the business  will 
increasingly focus  on  enhancing  operational capability  to  raise  customer 
awareness and encourage customer engagement in this important option that  can 
enhance their income for life.

Optimising and developing the investment strategy

The launch of  FLI will  enable the business  to leverage  its investment  and 
asset liability management capability  to support the  growth of core  product 
areas such as annuities. The Retirement Income business will benefit from the
fixed income investment expertise within the FLI team to ensure that the asset
strategy supports competitive rates  for customers whilst managing  investment 
risk within appetite.

Development of capabilities to support an open market offering

The next phase of the strategic  plan involves developing the operational  and 
technological  capacity  to  support  additional  business  derived  from  the 
enhanced annuity products.  These developments  create the  capability for  a 
potential future entry into the open  market. Competition in the open  market 
remains concentrated  among  a  small number  of  established  and  specialist 
players. The opportunity to  enter into the open  market remains additive  to 
the Retirement Income 2013  full year targets. The  timing of any launch  has 
not been  decided  and will  take  account of  impending  regulatory  changes, 
including the RDR and gender neutral pricing.

Financial performance

                             Full year      2012      2011      2011
£m (unless otherwise stated)    target Half year Half year Full year
New business cash strain           n/a        15        10        13
IRR                               15%+      >25%      >25%     22.0%
APE                                n/a        19        16        32

Uncertainty in fixed income markets throughout  the first half of 2012 led  to 
cautious pricing levels that resulted in strong new business margins, with IRR
above 25%  in the  period.  However, whilst  the business  remains  cautious, 
margins are expected to reduce to more  normal levels over the second half  of 

Sales volumes of £19 million in the period reflect stable retention rates  and 
the acquisition of the WLUK business in November 2011.

New business cash strain has also  benefited from the cautious pricing  levels 
and strong volumes in the  first half of 2012 resulting  in a cash release  of 
£15 million compared to a full year contribution of £13 million in 2011.

Key priorities

The Retirement Income business has a number of key priorities which will  lead 
the business towards the 2013  financial targets. These include the  promotion 
of the  new  enhanced annuity  propositions  to a  significant  proportion  of 
Friends Life customers as  they prepare for retirement.  This is expected  to 
benefit the  level  of  internal  vesting although  retention  rates  are  not 
expected to start increasing  materially until 2013 due  to the lead time  and 
the gradual nature of the roll out.

In order to support the additional business derived from the enhanced  annuity 
products, operational  and technological  capacity  will be  developed.  These 
developments will also underpin the development of an option for the  business 
to enter the open market in the future.

International operating review

The International segment comprises:

· Friends Provident International Limited ("FPIL"), an Isle of Man  based 
company manufacturing  unit-linked savings  and single  premium bond  products 
with a focus on affluent expatriates via hubs in Hong Kong, Singapore,  Dubai, 
as well as serving UK customers with offshore products;

· Overseas Life Assurance Business ("OLAB"), the overseas branch business
of Friends Life Limited,  benefiting from EU freedom  of services rules  which 
allow regulated EU insurers to trade anywhere within its borders;

· Financial Partners Business  AG ("FPB"), a  German distributor of  OLAB 
unit-linked pensions business;

· 30% interests in both  AmLife Insurance Berhad ("AmLife"), a  Malaysian 
life insurance company, and AmFamily Takaful Berhad ("AmFamily"), a  Malaysian 
family takaful business. Both businesses are majority owned by AmBank Berhad,
a major Malaysian banking group.

                                            2012      2011      2011
£m                                     Half year Half year Full year
IFRS based operating profit before tax        21        41        40

IFRS based operating profit of £21 million in the first half of 2012  reflects 
a £20 million reduction from £41 million reported in the same period of  2011. 
This reduction largely reflects the  impact of lower valuation interest  rates 
which have increased new business reserving  strain and increased the cost  of 
guarantees on some  German business.  The 2011 full  year result  is a  better 
comparator in  assessing  operating  performance as  these  factors  are  also 
reflected in the  2011 full  year result.  In addition  to these  economically 
driven factors, the  2012 half  year result  also includes  one-off costs  for 
strategic reorganisation and implementation.

Profitability of new business

                                    2012      2011      2011
£m (unless otherwise stated)   Half year Half year Full year
New business cash strain            (48)      (52)      (89)
IRR                                10.5%     13.5%     12.7%
APE (at actual exchange rates)       104       132       252

Sales volumes are 22% lower than the equivalent period in 2011, driven  mainly 
by a significant reduction in regular  premium business. This has been due  to 
maintenance of  pricing  discipline  and increased  controls  around  business 
acceptance. Single premium business is below last year in most regions due  to 
reduced investor confidence, although the  UK offshore business has  performed 
above expectations. Protection  business has had  a particularly strong  first 
half year as a result of IFAs moving away from savings to risk products.

New business cash strain is lower principally due to the reduced volumes,  but 
has increased  relative  to premiums  due  to  an increase  in  higher  strain 
protection products and negative economic impacts.

The International  IRR has  reduced from  13.5% to  10.5% due  to the  adverse 
impact of  lower new  business  volumes, increased  expenses due  to  improved 
controls, as well as year end basis and modelling changes.

Future improvements  are  expected to  be  driven  by the  completion  of  the 
continued roll-out  of  the  new  higher  margin  product  structures  to  all 
international regions and a review of the  cost base as part of the  strategic 
review described below.

Market environment

The business is facing challenging economic  and market conditions in most  of 
its key markets.  The economic environment  in Europe is  continuing to  prove 
challenging and is impacting sentiment in Asia affecting single premium  sales 
in particular. Protection business has however had a particularly strong first
half year with growth in most regions.

The largest market is the North Asia  region. This is a relatively mature  and 
competitive market.  The  region  has strong  medium  term  growth  prospects, 
however in the  short-term, due to  the current economic  environment and  its 
impact on investment markets, there is a shift towards non-linked business and
sales are likely to remain under competitive pressure.

The South East Asia region  is managed through Singapore. Singapore  continues 
to evolve  as  a wealth  management  hub  and offers  good  growth  potential. 
Singapore's economic and competitive backdrop  appears to be more benign  than 
North Asia but the current economic uncertainty is still expected to constrain
growth in the short-term.

The United Arab Emirates and the  wider Middle East region are immature  local 
markets, however they have  a large number of  high net worth expatriates  and 
continue to provide good growth prospects.

In Germany, the business participates  in the unit-linked individual  pensions 
market. The  market environment  is  challenging in  the  short term,  as  low 
investment market  confidence  drives  consumers towards  the  still  dominant 
traditional with-profits business. Guaranteed  rates of return on  traditional 
products are  expected to  reduce due  to the  impact of  the introduction  of 
Solvency II.  In the  medium-term the  unit-linked sector  has good  prospects 
through demand for private  sector savings and investments  and the move  from 
state to private pension provision.

AmLife participates in  the Malaysian market  through both an  agency and  the 
bancassurance channel. This is a fast moving market which is currently  closed 
to further entrants through the rationing of available licences. AmFamily  was 
established in 2011 but is not expected to contribute materially to results in

Strategy implementation

The International business is currently in the process of a strategic  review, 
the results of which will be announced before the end of 2012. The aim of  the 
review  is  to  enhance  value  by  developing  a  sustainable  portfolio   of 
international businesses in regions with sound regulatory positions,  focusing 
on  the  growth  of  profits  and  cash  delivery.  Reducing  unit  costs   by 
implementing  process  improvements,  increased  outsourcing  and  a  narrower 
geographical footprint will underpin the new strategy.

The business  has continued  to invest  in building  capability and  four  new 
executives and a new non-executive chairman have been appointed.

The roll-out of new higher margin product structure continues. The launch into
Singapore in the second quarter of 2012 was successful and the Middle East and
Hong Kong launches will be completed by the end of 2012.

Key priorities

Key priorities for the business include the completion of the roll out of  the 
new higher margin product  structures, completion of  the strategic review  to 
build a  sustainable portfolio  with sound  regulatory positions,  focused  on 
growth in profits and cash delivery, and the reduction of unit costs.

Financial performance

International IFRS based operating profit

                               2012      2011                             2011
£m                        Half year Half year                        Full year
New business strain            (24)      (20)                             (36)
In-force surplus                 51        69                               97
Long term investment
return                            -         -                                1
                                              The story  has  been  truncated, 
Principal reserving                          
Press spacebar to pause and continue. Press esc to stop.