10 Mar 2016 10:10
INFORMATION FOR FRIENDS LIFE HOLDINGS PLC SUBORDINATED DEBT HOLDERS
FRIENDS LIFE HOLDINGS PLC
Preliminary Announcement of results for the year ended 31 December 2015
These results are published for the benefit of the subordinated debt holders of Friends Life Holdings plc ("the Company") for the year ended 31 December 2015. The Company has three debt instruments, subordinated debt due in 2021 (LT2, £162 million principal), Subordinated debt due 2022 (LT2, £500 million principal) and reset perpetual subordinated debt (UT2, $575 million) listed on the London Stock Exchange.
On 19 January 2015, Friends Life Group Limited ("FLGL"), the ultimate parent company of the Company at that time, published a Scheme of Arrangement ("the Scheme") document in relation to the proposed acquisition by Aviva plc of the entire ordinary share capital of FLGL by way of a Scheme of Arrangement in accordance with Guernsey company law.
Following approval by FLGL's shareholders, Aviva's shareholders and the Guernsey Court, the Scheme became effective on 10 April 2015 and at that point the Company became part of the Aviva Group. FLGL became a wholly-owned subsidiary of Aviva plc.
On 13 April 2015 the former Friends Life Group companies were restructured within the Aviva group of companies. A key part of this restructuring involved the Company's interests in its principal subsidiaries being transferred to other Aviva Group companies. The Company disposed of 100% of its interest in Friends Life FPG Limited ("FPG"), Friends Life Investments Limited ("FLI") and Friends Life Funds Limited ("FLFL"), representing the main operating segments of the Group, related service companies and staff pension scheme. FPG, FLI and FLFL and their subsidiary undertakings are presented as discontinued operations in the Group's results for twelve months to 31 December 2015, and the prior period comparatives have been restated to reflect this classification. Following the transfer, the Group has no direct employees as all directors and employees who provide services to the Group are employed by the transferred service companies.
The Company's shareholdings in FLI and FLFL plus 68% of the Company's interest in FPG were transferred to the Company's parent undertaking, FLG Holdings Limited, by way of a dividend in specie of £3,297 million. The Company's remaining 32% shareholding in FPG was transferred to Aviva Group Holdings Limited ("AGH") in exchange for consideration of £1,544 million in the form of an interest bearing loan payable by AGH. This loan was fully settled as at 31 December 2015.
The principal risks and uncertainties facing the Company are (1) credit risk, as the Company is exposed to potential default on its holdings of syndicated loans; (2) interest rate risk, as the net asset value of the Company's financial resources is exposed to potential fluctuations in interest rates; and (3) foreign exchange risk through the Company's issuance of US$575 million reset perpetual subordinated notes. Exposure to credit and interest rate risk is managed through the monitoring of several risk measures. Exposure to foreign exchange risk in respect of the USD loan has been fully hedged and foreign exchange risk in respect of the EUR and USD denominated syndicated loans has been partially hedged.
Equity shareholders' funds of the Aviva Group, prepared using accounting policies under IFRS, increased during the period by £5,746 million from £10,218 million at 31 December 2014 to £15,964 million at 31 December 2015. Operating profit of the Aviva Group at £2,665 million was 20% higher than for the twelve months to 31 December 2014 (£2,123 million restated).
Consolidated Income Statement
For the year ended 31 December 2015 |
| 2015£m | Restated2014£m |
Revenue |
|
|
|
Investment return |
| 145 | 97 |
Total revenue |
| 145 | 97 |
Administrative and other expenses |
| (20) | (31) |
Finance costs |
| (110) | (107) |
Total expenses |
| (130) | (138) |
Profit/(loss) before tax from continuing operations |
| 15 | (41) |
Tax (charge)/ credit from continuing operations |
| (1) | 12 |
Profit/ (loss) after tax from continuing operations |
| 14 | (29) |
Profit/ (loss) after tax from discontinued operations |
| 4 | (88) |
Profit/ (loss) for the year |
| 18 | (117) |
Attributable to: |
|
|
|
Equity holders of the Company: |
|
|
|
- From continuing operations |
| (6) | (60) |
- From discontinued operations |
| 4 | (88) |
Step-up Tier one Insurance Capital Securities ("STICS") holders |
| 20 | 31 |
Profit/(loss) for the year |
| 18 | (117) |
Consolidated Statement of Comprehensive Income
For the year ended 31 December |
|
| Restated |
| 2015 | 2014 | |
| £m | £m | |
Profit/(loss) from continuing operations(i) |
| 14 | (29) |
Profit/(loss) from discontinued operations |
| 4 | (88) |
Profit/(loss) for the year |
| 18 | (117) |
Items that may be reclassified to profit and loss: |
|
|
|
Investments classified as available for sale - fair value losses |
| (35) | - |
Tax relating to items that may be reclassified to profit or loss |
| 6 | - |
Total items that may be reclassified to profit and loss |
| (29) | - |
Other comprehensive loss, net of tax, from continuing operations |
| (29) | - |
Other comprehensive loss, net of tax, from discontinued operations |
| (17) | 53 |
Total other comprehensive loss, net of tax |
| (46) | 53 |
Total comprehensive loss, net of tax, from continuing operations |
| (15) | (29) |
Total comprehensive loss, net of tax, from discontinued operations |
| (13) | (35) |
Total comprehensive loss, net of tax |
| (28) | (64) |
(i) The profit/(loss) from continuing operations includes £20 million (31 December 2014: £31 million) attributable to STICS holders. There are no amounts included in other comprehensive income which are attributable to STICS holders (2014: £nil).
Consolidated Statement of Changes in Equity
| Attributable to equity holders of the Company |
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For the year ended 31 December 2015 |
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| Non- |
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Share | Other |
| STICS | controlling |
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| ||||||||
capital | reserves | Total | holders | interests | Total |
| ||||||||
£m | £m | £m | £m | £m | £m |
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At 1 January 2015 | 515 | 3,860 | 4,375 | 318 | 1 | 4,694 |
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(Loss)/profit for the year | - | (2) | (2) | 20 | - | 18 |
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Other comprehensive income | - | (46) | (46) | - | - | (46) |
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Total comprehensive (loss)/income | - | (48) | (48) | 20 | - | (28) |
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Dividends paid | - | (4,858) | (4,858) | - | - | (4,858) |
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Interest paid on STICS | - | - | - | (7) | - | (7) |
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Appropriations of profit | - | (4,858) | (4,858) | (7) | - | (4,865) |
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Capital contribution(i) | - | 1,229 | 1,229 | - | - | 1,229 |
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Reclassification of STICS as a financial | - | (93) | (93) | (192) | - | (285) |
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liability(ii) |
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Tax on reclassification of STICS as a | - | 17 | 17 | - | - | 17 |
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financial liability |
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Tax relief on STICS interest | - | 4 | 4 | - | - | 4 |
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Share-based payments, net of settlement (iii) | - | (3) | (3) | - | - | (3) |
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Funding of Employee Benefit Trust(iv) | - | 8 | 8 | - | - | 8 |
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Attributable to non-controlling interest | - | - | - | - | (1) | (1) |
| |||||||
Transfer of STICS to Aviva plc(v) | - | (85) | (85) | (139) | - | (224) |
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Tax on the transfer of STICS to Aviva plc | - | 15 | 15 | - | - | 15 |
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At 31 December 2015 | 515 | 46 | 561 | - | - | 561 |
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| Attributable to equity holders of the Company |
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| For the year ended 31 December 2014 | Sharecapital£m | Otherreserves£m | Total£m | STICSholders£m | Non-controllinginterests£m | Total£m |
| ||||||
| At 1 January 2014 | 515 | 4,550 | 5,065 | 318 | 2 | 5,385 |
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| (Loss)/profit for the year | - | (148) | (148) | 31 | - | (117) |
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| Other comprehensive income | - | 53 | 53 | - | - | 53 |
| ||||||
| Total comprehensive (loss)/income | - | (95) | (95) | 31 | - | (64) |
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| Dividends paid | - | (610) | (610) | - | - | (610) |
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| Interest paid on STICS | - | - | - | (31) | - | (31) |
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| Appropriations of profit | - | (610) | (610) | (31) | - | (641) |
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| Tax relief on STICS interest | - | 20 | 20 | - | - | 20 |
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| Share-based payments, net of settlements(iii) | - | 8 | 8 | - | (1) | 7 |
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| Funding of Employee Benefit Trust(iv) | - | (13) | (13) | - | - | (13) |
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| At 31 December 2014 | 515 | 3,860 | 4,375 | 318 | 1 | 4,694 |
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(i) The profit on disposal arising from the group reorganisation is recognised as a capital transaction.
(ii) Fair value revaluation on reclassification of 2005 STICS as a financial liability, as a result of the Company giving notice to the STICS holders on 29 May 2015 of intent to redeem on 1 July 2015.
(iii) The movement in other reserves for share-based payment schemes of £(3) million for the year represents an expense of £1 million for all schemes that vested early on the acquisition of the Group by Aviva and £(4) million for the reclassification of the FLG LTIP from an equity-settled scheme to a cash-settled scheme as rewards will now be paid in cash. The movement in 2014 of £8 million represents the expense, net of scheme settlements for the year.
(iv) During 2014 the Group provided funding of £13 million to an EBT which purchased and held shares of Friends Life Group Limited (FLG) for delivery to employees under various share-based payment schemes. In April 2015, the EBT repaid cash of £8 million to the Group.
(v) Fair value on transfer of 2003 STICS to Aviva plc on 2 October 2015.
Consolidated Statement of Financial Position
As at 31 December |
| 2015 | 2014 |
£m | £m | ||
Assets |
|
|
|
Intangible assets |
| - | 3,110 |
Property, plant and equipment |
| - | 44 |
Investment properties |
| - | 2,690 |
Investment in associate |
| - | 4 |
Financial assets |
| 1,539 | 92,768 |
Deferred acquisition costs |
| - | 853 |
Reinsurance assets |
| - | 1,231 |
Current tax assets |
| 14 | 17 |
Deferred tax assets |
| 9 | - |
Insurance and other receivables |
| 65 | 880 |
Cash and cash equivalents |
| 95 | 7,503 |
Total assets |
| 1,722 | 109,100 |
Liabilities |
|
|
|
Insurance contracts |
| - | 35,750 |
Unallocated surplus |
| - | 692 |
Financial liabilities: |
|
|
|
- Investment contracts |
| - | 64,087 |
- Loans and borrowings |
| 1,054 | 1,051 |
Net asset value attributable to unit-holders |
| - | 589 |
Provisions |
| - | 176 |
Pension scheme deficit |
| - | 7 |
Deferred tax liabilities |
| - | 961 |
Insurance payables, other payables and deferred income |
| 107 | 1,093 |
Total liabilities |
| 1,161 | 104,406 |
Equity attributable to equity holders of the Company |
|
|
|
- Share capital |
| 515 | 515 |
- Other reserves |
| 46 | 3,860 |
|
| 561 | 4,375 |
Attributable to STICS holders |
| - | 318 |
|
| 561 | 4,693 |
Attributable to non-controlling interests |
| - | 1 |
Total equity |
| 561 | 4,694 |
Total equity and liabilities |
| 1,722 | 109,100 |
|
|
|
|
Consolidated Statement of Cash Flows
For the year ended 31 December 2015 |
| 2015 £m | 2014 £m |
Operating activities |
|
|
|
Profit/ (loss) for the year |
| 18 | (117) |
Adjusted for: |
|
|
|
- loss on remeasurement to fair value of discontinued operations |
| - | 14 |
- recycling of cumulative translation differences on discontinued operations |
| - | 46 |
- profit after tax from discontinued operations |
| (4) | - |
- net realised and unrealised gains on assets at fair value |
| (22) | (5,610) |
- finance costs |
| 110 | 131 |
- amortisation and impairment of intangible assets |
| - | 390 |
- depreciation of property and equipment |
| - | 2 |
- movement in deferred acquisition costs |
| - | (10) |
- total tax charge |
| 1 | 125 |
- purchase of shares and other variable yield securities |
| - | (27,477) |
- proceeds from sale of shares and other variable yield securities |
| - | 28,653 |
- purchase of loans, debt securities and other fixed income securities |
| - | (28,520) |
- proceeds from sale of loans, debt securities and other fixed income securities |
| - | 29,927 |
- purchase of investment properties |
| - | (53) |
- proceeds from sale of investment properties |
| - | 214 |
- increase in insurance liabilities |
| - | 1,160 |
- increase in investment contract liabilities |
| - | 957 |
- increase in unallocated surplus |
| - | 65 |
- decrease in provisions |
| - | (46) |
- net movement in receivables and payables |
| (26) | 583 |
Cash flow generated from operating activities |
| 77 | 434 |
Income tax receipt/(payment) |
| 25 | (27) |
Net cash inflow from operating activities |
| 102 | 407 |
Investing activities |
|
|
|
Disposal of held for sale assets, net of cash transferred |
| (6,954) | (1,539) |
Net disposal of financial investments |
| 57 | - |
Additions to internally generated intangible assets |
| - | (2) |
Net disposals of property and equipment |
| - | 4 |
Net cash outflow from investing activities |
| (6,897) | (1,537) |
Financing activities |
|
|
|
Receipt of repayment of loan to AGH |
| 145 | - |
Repayment of 2005 STICS |
| (285) | - |
Funding of EBT |
| 8 | (13) |
Finance costs |
| (88) | (133) |
STICS interest |
| (7) | (31) |
Net movement in other borrowings, net of expenses |
| (13) | (19) |
Dividends paid to equity holders of the Company |
| (376) | (610) |
Net cash outflow from financing activities |
| (616) | (806) |
Decrease in cash and cash equivalents |
| (7,411) | (1,936) |
Balance at beginning of year |
| 7,503 | 9,530 |
Exchange adjustments on the translation of foreign operations |
| 3 | (91) |
Balance at end of year |
| 95 | 7,503 |
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Business disposals
(a) Disposal of discontinued operations
On 13 April 2015 the former Friends Life Group companies were restructured within the Aviva group of companies. As part of this restructuring the Company disposed of its interests in FPG, FLI and FLFL. The Company's shareholdings in FLI and FLFL plus 68% of the Company's interest in FPG were transferred to the Company's parent undertaking, FLG Holdings Limited, by way of a dividend in specie of £3,297 million. The Company's remaining 32% shareholding in FPG was transferred to Aviva Group Holdings Limited ("AGH") in exchange for consideration of £1,544 million in the form of a loan payable by AGH. The Company retained its interest in £500 million of STICS of Friends Life Limited ("FLL") ("internal STICS"), an insurance undertaking of the disposal Group.
The profit on the restructure is recognised as a capital contribution:
| 13 April2015£m |
Disposal group equity attributable to shareholders | (3,612) |
Dividend in specie | 3,297 |
Residual equity attributable to shareholders | (315) |
Loan consideration | 1,544 |
Capital contribution | 1,229 |
The results of FPG, FLI and FLFL and their subsidiary undertakings are classified as results from discontinued operations in the Group's results for 2015.
(i) Profit/(loss) after tax from discontinued operations
|
| 2015 Period to 13 April£m | 2014£m |
FPG, FLI and FLFL |
| 4 | (17) |
Lombard |
| - | (71) |
Profit/(loss) after tax from discontinued operations |
| 4 | (88) |
(ii) Results of discontinued operations
|
| 2015 Period to 13 April | 2014
| |
|
| FPG, FLI, FLFL£m | FPG, FLI, FLFL£m | Lombard £m |
Revenue |
|
|
|
|
Gross earned premiums |
| 380 | 1,766 | - |
Premiums ceded to reinsurers |
| (170) | 1,000 | - |
Net earned premiums |
| 210 | 2,766 | - |
Fee and commission income and income from service activities |
| 164 | 693 | 83 |
Investment return |
| 6,109 | 7,593 | 1,300 |
Total revenue |
| 6,483 | 11,052 | 1,383 |
Other income(i) |
| - | 22 | - |
Claims, benefits and expenses |
|
|
|
|
Gross claims and benefits paid |
| (998) | (4,065) | - |
Amounts receivable from reinsurers |
| 168 | 672 | - |
Net claims and benefits paid |
| (830) | (3,393) | - |
Change in insurance contract liabilities |
| (352) | (2,729) | - |
Change in investment contract liabilities |
| (4,526) | (2,869) | (1,215) |
Transfer to unallocated surplus |
| - | (65) | - |
Movement in net asset value attributable to unit-holders |
| (36) | (60) | - |
Movement in policyholder liabilities |
| (4,914) | (5,723) | (1,215) |
Acquisition expenses |
| (129) | (426) | (39) |
Administrative and other expenses |
| (299) | (1,357) | (148) |
Finance costs |
| (15) | (45) | - |
Total claims, benefits and expenses |
| (6,187) | (10,944) | (1,402) |
Profit/(loss) before tax from discontinued operations |
| 296 | 130 | (19) |
Policyholder tax |
| (279) | (222) | - |
Profit/(loss) before shareholder tax from discontinued operations |
| 17 | (92) | (19) |
Shareholder tax |
| (13) | 75 | 8 |
Profit/(loss) after tax from discontinued operations |
| 4 | (17) | (11) |
Loss on remeasurement to fair value |
| - | - | (14) |
Recycling of cumulative translation differences |
| - | - | (46) |
Profit/(loss) from discontinued operations |
| 4 | (17) | (71) |
Other comprehensive (loss)/income, net of tax |
| (17) | 26 | 27 |
Total comprehensive (loss)/income, net of tax |
| (13) | 9 | (44) |
(i) Represents internal recharges on pension deficit reductions of £22 million in 2014.
(iii) Cash flows of discontinued operations
| 2015 Period to 13 April | 2014
| |
| FPG, FLI, FLFL£m | FPG, FLI, FLFL£m | Lombard £m |
Operating cash flows | (45) | 391 | 98 |
Investing cash flows | - | (1,536) | (1) |
Financing cash flows | (295) | (706) | (6) |
Total cash flows | (340) | (1,851) | 91 |
(iv) Major classes of assets and liabilities at disposal date (FPG, FLI and FLFL in aggregate)
|
| 13 April 2015£m |
Intangible assets |
| 3,026 |
Property, plant and equipment |
| 42 |
Investment properties |
| 2,685 |
Investment in Associates |
| 4 |
Financial assets |
| 97,359 |
Deferred Acquisition costs |
| 849 |
Reinsurance assets |
| 1,269 |
Insurance and other receivables |
| 1,653 |
Cash and cash equivalents |
| 6,954 |
Assets |
| 113,841 |
Insurance contracts |
| 36,081 |
Unallocated surplus |
| 693 |
Financial liabilities |
|
|
- Investment contracts |
| 68,789 |
- Loans and Borrowings |
| 868 |
Net asset value attributable to unit-holders |
| 212 |
Provisions |
| 135 |
Pension deficits |
| 26 |
Deferred tax liabilities |
| 1,125 |
Current tax liabilities |
| 51 |
Insurance payables, other payables and deferred income |
| 1,724 |
Liabilities |
| 109,704 |
Equity attributable to shareholders |
| 3,612 |
Equity attributable to STICS holders |
| 524 |
Total equity attributable to equity holders of the parent |
| 4,136 |
Equity attributable to non-controlling interest |
| 1 |
Total equity |
| 4,137 |
Total equity and liabilities |
| 113,841 |
(b) Disposal of Friends ASLH Limited
On 30 June 2015 the Group transferred 100% of its holding in Friends ASLH Limited to another Aviva Group company for consideration of £7 million, resulting in a £nil profit or loss on the disposal.
Basis of preparation
The preliminary announcement for the year ended 31 December 2015 was approved by the Board of Directors on 9 March 2016. The preliminary announcement for the year ended 31 December 2015 is prepared on the basis of the accounting policies set out in the annual accounts. Audited statutory accounts, together with the auditor's report thereon, will be filed with the Registrar of Companies when approved and published.
The Company's Annual Report and Accounts for 2014 have been filed with the Registrar of Companies. The results for the year ended 31 December 2015 were audited by PricewaterhouseCoopers LLP (31 December 2014: Ernst & Young LLP). The auditor's report was unqualified and did not contain a statement under section 498(2) or section 498(3) of the Companies Act 2006.
The audited annual reports and accounts of both the Company and of Aviva plc for the year ended 31 December 2015, once published, will be available on application to the Group General Counsel and Company Secretary, Aviva plc, St Helen's, 1 Undershaft, London, EC3P 3DQ, and on the Aviva plc website at www.aviva.com/reports/2015ar.
Enquiries: Chris Esson, Investor Relations Director, Aviva plc 020 7662 8115