Securing your tomorrow, today Annual report and accounts 2013 Resolution Limited is a Guernsey incorporated Company with a premium listing on the London Stock Exchange. The Company holds its investment in the Friends Life group, a provider of pensions, investment and insurance with a heritage of over 200 years, through Resolution Holdco No. 1 LP, a Guernsey registered Limited Partnership. Further details on our group structure can be found on pages 72 to 74. In March 2013 we sought shareholders’ approval for changes to the Company’s constitution that enabled the Group to adopt a simplified governance structure. In practice this meant unifying the board membership of both Resolution Limited and its key operating subsidiary, Friends Life Group plc. We also stated that the Company would no longer target a specific exit event, but would seek to secure maximum value from each part of the Group and retain its focus on rigorous financial discipline and generating returns. This annual report includes an update to the Company’s strategy. In May 2014 we will seek permission from our shareholders at the Annual General Meeting (AGM) to change the Company name to Friends Life Group Limited to align this with our trading brand. We have described our restructuring and transformation journey on the following pages. Finding your way around the 2013 annual report and accounts: Strategic report Governance IFRS financial statements Pages 04 – 69 Pages 70 – 125 Pages 126 – 236 04 Chairman’s statement 72 Company structure and the 128 Independent auditor’s report partnership model 06 Evolving customer needs 130 IFRS consolidated financial 74 How the Value Share works statements 08 Organised around our market 75 Chairman’s governance letter 136 Notes to IFRS consolidated 10 How we create value financial statements 76 Board of directors 12 Business environment changes 79 Compliance with Corporate 14 Group Chief Executive’s review MCEV financial statements Governance Code Pages 237 – 275 22 Key performance indicators 80 Leadership 237 Statement of directors’ 25 Chief Financial Officer’s review 84 Effectiveness responsibilities 32 Financial review 84 – Nomination Committee report 238 Independent auditor’s report 32 – Group results 86 – Effectiveness (continued) 239 MCEV consolidated financial statements 35 – Divisional performance review 91 Accountability 244 Notes to MCEV consolidated 52 – Corporate 92 – Audit Committee report financial statements 54 – Cash and capital 95 – Risk and Compliance 60 Corporate responsibility Committee report Additional information Pages 276 – 281 64 Risk management 97 Relations with shareholders 276 Definitions 98 Directors’ remuneration report 278 Abbreviations 100 – Remuneration policy 280 Shareholder information 108 – Implementation report 122 Directors’ report 125 Directors’ statement of responsibilities Resolution Limited Annual report and accounts 2013 01 Financial highlights eP+10% eP eP+28% Sustainable free surplus IFRS based operating profit MCEV operating profit eP eP eP eP+8% eEQXQFKDQJHG SXQFKDQJHG Available shareholder assets IGCA surplus Full year dividend per share eP eEQ S eP eEQ+3% eP Value of new business Assets under administration Run-rate savings achieved eP eEQ eP Operational highlights Ź 5HVWUXFWXULQJRIWKHWKUHH Ź ,QYHVWPHQWPDQGDWHV Ź 0DMRUQHZVWUDWHJLF EXVLQHVVHVLVFRPSOHWH SODFHGIRUeEQFRPPHUFLDO SDUWQHUVKLSZLWK6FKURGHUV FRVWVDYLQJVVHFXUHG UHDOHVWDWHDQG DQQRXQFHG Ź 6XFFHVVIXOGHOLYHU\RINH\ LQIUDVWUXFWXUHORDQV Ź 3URSRVHGFKDQJHRI ILQDQFLDOWDUJHWV Ź 'HOLYHU\RIVLPSOLILHG QDPHbWR)ULHQGV/LIH FRUSRUDWHJRYHUQDQFH *URXSb/LPLWHGWRDOLJQ Ź &RPSOHWLRQRIFLUFDeEQ structure WKHb&RPSDQ\ZLWKLWV ZLWKSURILWVDQQXLW\ UHDOORFDWLRQ WUDGLQJEUDQG Strategic report Pages 04 – 69 04 Chairman’s statement 06 Evolving customer needs 08 Organised around our market 10 How we create value 12 Business environment changes 14 Group Chief Executive’s review 22 Key performance indicators 25 Chief Financial Officer’s review 32 Financial review 32 – Group results 35 – Divisional performance review 52 – Corporate 54 – Cash and capital 60 Corporate responsibility 64 Risk management Strategic report Securing your tomorrow, today Our strategy is focused on meeting the needs of our customers, colleagues and shareholders by providing high quality propositions delivered by the best people, to ensure returns for our investors. Resolution Limited 04 Annual report and accounts 2013 Chairman’s statement A year of change This is my first report as Chairman of the Company in what Successfully has been a significant year of change for the organisation. The Company completed the final phase of the three-year restructuring programme, made a number of changes to its governance arrangements and achieved strong operating profits for the year. navigating This performance has been led by a motivated and committed executive management team, which has navigated the Company through a period of exceptional change, and turned its financial performance around. Under their guidance, Sustainable Free Surplus (“SFS”) has risen from less than £100 million in 2010 to change £331 million in 2013, and the value of UK new business has increased from a loss of £10 million to a profit of £184 million. Their disciplined focus has created shareholder value by delivering ‘cash today’ and ‘cash tomorrow’. Maintaining a strong balance sheet has enabled the Board to propose a final dividend of 14.09 pence per share (unchanged from 2012) making a total dividend for the year of 21.14 pence per share. 2013 was also significant in that we have achieved most of the key financial targets, and the Company has revisited its financial framework to ensure the way we measure the business performance supports the strategic direction of the Group. Further information on this is contained on page 29 . The executive management team has presided over a very ambitious restructuring programme. The three-year programme has had its challenges; separating IT infrastructures and undertaking customer migrations of legacy platforms is a complex process and not without risk to the control environment; however the executive management team has delivered against these operational challenges and secured the synergies six months earlier than anticipated. Where issues have arisen during the year which impacted the control environment, the team responded quickly providing remediating actions and procedures to minimise risks to customers and shareholders. Sir Malcolm Williamson Chairman Resolution Limited Annual report and accounts 2013 05 Strategic report Strategic Change of name Managing regulatory change Now that the restructuring programme has come to a close, the The regulatory background has been as challenging as the Board believes it is time to change the name of the Company to economic background. There have been significant changes in the Friends Life Group Limited. Becoming Friends Life, a name known to industry approach to customers as a result of the Retail Distribution over five million customers, is a logical step in our strategy to Review, the commencement of Auto-Enrolment Pensions and the consolidate our position as a sustainable provider of pensions, reviews into the operation of the annuity market. We are fully investments and insurance. As such we will ask shareholders for supportive of the efforts being made by the government and the Governance statements financial IFRS MCEV approval to change the name of the Company at the forthcoming FCA to help people achieve adequate retirement provision and to AGM, details of which are set out in the directors’ report within the give consumers confidence that the advice they are given and Governance section of this report. The Board and I recommend that products and services we sell are appropriate for their needs. shareholders vote in favour of these changes. We work across our teams to respond to these developments and deliver our ambition of providing high quality products and services for our customers. Board changes The Company is also embracing the changes required in preparing The Company and Friends Life Group plc (“FLG”) boards unified for Solvency II. It has invested significantly in its enterprise wide risk their membership in March 2013. We explain the changes in detail management approach, covered in the strategic report on pages 4 on page 81 and I encourage you to read about the structure of to 69. As part of the transformation process the Group undertook a the Group, on page 72. I took over as Chairman from Mike Biggs review of the governance structures in the organisation, in particular following the AGM in 2013 and I want to thank Mike for steering the the delegated authority framework and matters reserved for the Board through a period of change. I would also like to thank all of boards across the Group, underscoring our commitment to the the non-executive directors who stepped down in 2013. We took control framework and effective risk management. the opportunity to refresh the Board in May to provide further independent balance. I am therefore delighted to welcome both Roger Perkin and Marian Glen as independent non-executive Shareholder consultation directors. Roger brings considerable financial acumen to the Since my appointment I have met a significant proportion of our boardroom and Marian contributes corporate finance and merger top institutional shareholders and I hope to meet some of our and acquisitions expertise. retail shareholders at the AGM this year. The Chairman of the An effective board develops and promotes its collective