Annual report and accounts 2011 Value driven restructuring in financial services Good progress towards building a sustainable business Significant strategic momentum in 2011 Good progress in the UK, International impacted by weak markets • Strategic and financial clarity on value creation from underlying acquired businesses • IFRS operating profit before tax of £681 million • Run-rate synergies ahead of target, £45 million (2010: £275 million) (including the benefit of achieved; material outsourcing de-risks costs £404 million of one-off items from management actions) • VNB of £151 million with improvements driven primarily by cost savings • MCEV operating profit before tax of £517 million (2010: £412 million) (including £140 million of • New business platforms delivering returns at positive one-off assumption changes) or above targets • UK operations made good progress reflecting • Capital optimisation programme delivered actions on capital and costs £281 million of synergies against £235 million guidance • International operations impacted by difficult markets and modelling improvements • Creation of investment management business announced • Lombard affected by tough markets but increased market share in difficult year for sector • £476 million of cash returned to shareholders through dividends and share buy-back • Full year dividend per share of 19.89 pence, up 10% Prudent cash levels and resilient capital Looking forward position maintained • Further update on cash return no later than • Sustainable free surplus generation of 2012 interim results £291 million contributed to achievement • Base case exit plan to divide underlying of £400 million distributable cash target business into two separately listed businesses • Overall cash generation impacted by investment markets, but £400 million buffer maintained • Balance sheet retains low exposure to higher risk European sovereign and corporate debt • Robust IGCA surplus of £2.1 billion representing a surplus of 219% Resolution Limited online: www.resolution.gg Register for online annual reports To receive shareholder communications electronically in future, including your annual reports and notices of meetings, please go to: www.resolution.gg If you currently do not receive communications electronically but would like to, please register your email address online at: http://www.resolution.gg by going to the Investor Relations page and clicking on the “Shareholder Information” link on the left-hand side of the screen. Contents Overview Overview Chairman’s statement 4 Operating report by Resolution Operations LLP 7 Business review Introduction 14 Key performance indicators 16 IFRS results 20 MCEV results 23 Business review Operating segment results 26 WLUK acquisition 57 Cash and capital 59 Principal risks and uncertainties 73 Governance Report of the directors 77 Board of directors 80 Corporate governance report 83 Remuneration report 96 Corporate responsibility 107 IFRS financial statements IFRS financial statements Independent auditor’s report 111 IFRS consolidated financial statements 112 Notes to IFRS consolidated 118 financial statements MCEV financial statements Statement of directors’ responsibilities 216 Independent auditor’s report 217 MCEV consolidated financial statements 218 Notes to the MCEV consolidated 223 financial statements MCEV financial statements Additional information Definitions 262 Abbreviations 264 Shareholder information 267 Additional information 1 Resolution Limited Annual report and accounts 2011 Who we are Resolution Limited was incorporated in Guernsey to provide public markets with a series of restructuring opportunities in the financial services industry within UK and Western Europe. The Company’s current restructuring project is the UK Life Project. The Company decided in January 2012 that it would not commence a further restructuring project until completion of the UK Life Project. Our structure today Resolution Operations LLP Operating agreement Friends Life Group plc AXA UK Life Bupa Health Friends Provident Business Assurance Limited What we do M&A execution Optimised business model Value delivery Acquire well Establish strong governance and management Focus new business on sustainable value not volume Optimise operating model Deliver expense synergies Deliver financial synergies Rationalise business Value maximisation/return to long-term owners Optimise leverage and cash flow 2 Resolution Limited Annual report and accounts 2011 Overview Chairman’s statement 4 Operating report by Resolution Operations LLP 7 Chairman’s statement Final dividend Total dividend 13.42p 19.89p +7% +10% • provided a detailed update on Friends Life’s business units 2011 was an important year that focused on the execution of strategy and delivery of for Resolution Limited. It made the financial targets; and significant progress driving value • announced a transformational outsourcing agreement; the intention to create an in-house asset manager; and the from the businesses acquired in creation of separate ‘Heritage’ and ‘Go to Market’ business units for existing business and new business to increase its UK Life Project. The Company management accountability. is committed to returning surplus The Operating Report that follows this statement will provide cash not required by the business a more comprehensive summary of these strategic updates. to shareholders subject to market The full year 2011 results highlight that incremental progress is being made towards achieving the Company’s financial targets. conditions and receiving the The integration of the acquired businesses is substantially on track with the planned full year run-rate savings achieved by appropriate regulatory approvals. the end of 2011. The Group’s new business strategy is focused on the three product areas of Protection, Corporate Benefits Overview and Retirement Income in the UK market where the Group has the advantage of scale and where good margins should In 2011, Resolution Limited (the “Company”) moved from the be achievable. Returns for new business written on the chosen acquisition phase of its UK Life Project to the integration phase platforms are attractive and close to or ahead of the targets which is primarily focused on delivering value from the acquired for 2013. Actions taken within the UK businesses resulting in businesses. The Company also confirmed that it would not the benefits of capital synergies and the successful merger of undertake any additional projects until after completion of the funds have had a positive impact on the Group’s cash delivery. UK Life Project. The Friends Life group continues to make steady progress towards its target operating return on embedded value but The Company has sought to articulate a clear strategy for the much work is still needed to achieve the target. enlarged Friends Life business to demonstrate to shareholders how it proposes to achieve the overarching goals of the UK Life The net Market Consistent Embedded Value (“MCEV”) Project of building a sustainable business and achieving cash of the Group as at 31 December 2011 was £5,796 million. returns to shareholders. In market updates on strategy in February, June and November, the Company, among other things: • set out its plans to create value in the UK Life Project with a focus on three product areas for new business and with measurable financial targets for costs, cash flow and returns for the enlarged group; • announced the results of its work on the cash and capital position of Friends Life and the commencement of a £250 million share buy-back which completed in October 2011; 4 Resolution Limited Annual report and accounts 2011 Overview Cash returns to shareholders Exit At the time of the announcement of the full year 2010 results The February 2011 investor update summarised the exit in March 2011, the Company gave guidance of its intention to options that the Company might consider in relation to the UK increase the 2011 dividend to 18.85 pence per share, up 15% Life Project. These included: a cash sale, together or in parts; on the 2010 level. a direct listing as a standalone entity; a merger with another life company; or separation of the UK open business from the back On 7 June 2011, the directors announced that they had Business review book leading to separate sales or listings. reviewed the Company’s dividend policy and concluded that the aggregate value of the dividend payable by the Company It remains the Company’s intention to look for exit options on all shares in issue should not reduce as a result of the involving mergers and acquisitions (“M&A”) which would allow planned £250 million share buy-back in the second half of shareholders to benefit from the synergies arising from further 2011 also announced that day. This meant that the proposed consolidation. Whilst Resolution Operations LLP (“ROL”) dividend per share was expected to increase as a result of is actively investigating such opportunities on behalf of the the £250 million share buy-back. The share buy-back was Company, and has advised the Company that it believes completed on 26 October 2011. Accordingly, the proposed that consolidation of the UK life industry will continue and 2011 final dividend declared by the Board, consistent with that attractive transactions may be available, the Company the policy of dividends being paid one-third in respect of the considers it important to have a “self-managed” exit plan interim dividend and two-thirds in respect of the final dividend, which is not reliant on M&A opportunities and could be