23rd Jun 2006 09:30
Friends Provident PLC23 June 2006 23 June 2006 European Embedded Value basis results for the six months ended 30 June 2005 Friends Provident has today published European Embedded Value (EEV) basisresults for the six months from 1 January 2005 to 30 June 2005, for comparisonpurposes only. EEV results for the first half of 2005 were: -------------------------------------------------------------------------------- Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m Contribution to profits from new Life & Pensions business 58 144Life & Pensions underlying profit* before tax 229 434Group underlying profit* before tax 272 524Group pro forma embedded value** 3,282 3,464 -------------------------------------------------------------------------------- The EEV methodology uses the bottom-up market-consistent approach to allow forrisk. The same basis of preparation is used as for the results for the yearended 31 December 2005. * Underlying profit on an EEV basis represents profit (based on expected investment return) attributable to ordinary shareholders of the parent before impairment of Asset Management goodwill, amortisation and impairment of Asset Management acquired intangible assets, and non-recurring items ** Pro forma embedded value is equal to ordinary shareholders' funds on an EEV basis adjusted to include F&C Asset Management plc at market value - Ends - For further information, please contact: Di Skidmore Friends Provident plc 0845 641 7833Chris Ford Friends Provident plc 0845 641 7832Alex Simmons Finsbury Limited 020 7251 3801 Ref: G098 Notes to Editors 1. Friends Provident plc will report its interim results for the six months ending 30 June 2006 on 8 August 2006. There will be a presentation to investors and analysts at 9.30am at JP Morgan Cazenove, 20 Moorgate, London EC2R 6DA. 2. Friends Provident plc Financial Reporting Calendar Group Interim Results 8 August 2006 UK Life & Pensions Presentation 11 October 2006 Friends Provident Life & Pensions Quarter 3 New Business Announcement 31 October 2006 3. About Friends Provident Friends Provident plc is the holding company of the Friends Provident Group of companies and a member of the FTSE 100. With more than 2.5 million customers the Group employs nearly 5,000 staff in its three core businesses: UK Life & Pensions, International Life & Pensions and Asset Management. The business was founded in 1832 on Quaker principles and aimed to alleviate the hardship of families facing misfortune. Friends Provident has embraced corporate governance and achieving high standards of corporate behaviour and accountability to both stakeholders and customers is at the heart of our business. In 2001 the company established the grant-making charity The Friends Provident Foundation with the aim to encourage new ways of thinking about how money can be used to solve a wide range of problems. Fast growing International Life & Pensions: • Friends Provident International - 2005 full-year new business up 32% on 2004 • Lombard - new business compound annual growth rate 28% over last 10 years UK Life & Pensions: • Market share grown in each of last 3 years, from 3.4% in 2002 to 4.7% in 2005 Asset Management: • Funds under management up from c£30 billion at listing to more than £110 billion at 31 March 2006 Financially strong • With Profits Fund surplus £236m and Risk Capital Margin £276m at 31 December 2005 • Life & Pensions excess capital resources in accordance with FRS 27 £1.8 billion at 31 December 2005 • Regulatory solvency: Free Asset Ratio 18.3% at 31 December 2005 For more information on Friends Provident including, images, awards, fast facts,presentations, and media contacts please visit the media section atwww.friendsprovident.com/media Summary consolidated income statement on an EEV basisFor the half year ended 30 June 2005 Half year Year ended ended 30 June 31 Dec 2005 2005 Notes £m £m-------------------------------------------------------------------------------- Contribution from new business 58 144Profit from existing business: Expected return 91 196 Experience variances 16 22 Operating assumption changes (i) 30 16Development costs (10) (25)Expected return on shareholders' net assets within the Life & Pensions business 44 81--------------------------------------------------------------------------------Life & Pensions underlying profit 2(a) 229 434Asset Management underlying profit 52 108Expected return on net pension liability - (2)Expected return on corporate net assets (3) (7)Corporate costs (6) (12)Operating assumption changes for corporate costs - 3--------------------------------------------------------------------------------Underlying profit before tax 272 524Investment return variances 207 550Effect of economic assumption changes (134) (238)Non-recurring items (29) (59)Amortisation of Asset Management acquired intangible assets (28) (56)Impairment of Asset Management acquired intangible Assets - (112)Variation in value of option on convertible debt (9) (9)--------------------------------------------------------------------------------Profit before tax 279 600Tax (104) (196)--------------------------------------------------------------------------------Profit after tax for the period 175 404--------------------------------------------------------------------------------Attributable to: Ordinary shareholders of the parent 175 441 Minority interest - (37)--------------------------------------------------------------------------------Profit after tax for the period 175 404-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Earnings per shareBased on EEV profit after tax (pence) 5 8.5 21.2Based on EEV underlying profit (pence) 5 8.5 16.3-------------------------------------------------------------------------------- (i) The positive net operating assumption change of £30m (for half year ended 30June 2005) is due to updating With Profits realistic balance sheet non-economicassumptions (such as the proportion of cash taken by deferred annuitants withguaranteed options at the time of vesting). Consolidated statement of recognised income and expense on an EEV basisFor the half year ended 30 June 2005 Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Actuarial gains/(losses) on defined benefit plans net of tax 7 (28)Foreign exchange adjustments (16) (9)--------------------------------------------------------------------------------Net loss recognised directly in equity (9) (37)Profit after tax for the period 175 404--------------------------------------------------------------------------------Total recognised income and expense for the period 166 367--------------------------------------------------------------------------------Attributable to: Ordinary shareholders of the parent 174 417 Minority interest (8) (50)--------------------------------------------------------------------------------Total recognised income and expense for the period 166 367-------------------------------------------------------------------------------- Consolidated movement in ordinary shareholders' equity on an EEV basisFor the half year ended 30 June 2005 Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Total recognised income and expense for the period attributable to ordinary shareholders of the parent 174 417Dividends on equity shares (103) (157)Share based payments (impact on EEV reserves) 9 14Conversion option on convertible bond 51 51--------------------------------------------------------------------------------Increase in EEV reserves for the period 131 325Increase as a result of business combinations 148 148Share based payments (impact on share capital and share premium) 2 5--------------------------------------------------------------------------------Net addition to ordinary shareholders' equity 281 478At beginning of period 2,968 2,968--------------------------------------------------------------------------------At end of period 3,249 3,446-------------------------------------------------------------------------------- Summary consolidated balance sheet on an EEV basisAt 30 June 2005 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Life & Pensions - long-term funds 723 621Life & Pensions - shareholders' funds 324 429--------------------------------------------------------------------------------Life & Pensions net assets 1,047 1,050Corporate net (liabilities)/assets (46) 14--------------------------------------------------------------------------------Shareholders' invested net assets 1,001 1,064Attributable net asset value of the Asset Management business net of minority interest 466 423Net pension asset/(liability) of Friends ProvidentPension Scheme 3 (13)--------------------------------------------------------------------------------Shareholders' net worth 1,470 1,474Provision for future corporate costs (48) (47)Value of in-force Life & Pensions business 1,827 2,019--------------------------------------------------------------------------------Ordinary shareholders' net assets on an EEV basis 3,249 3,446--------------------------------------------------------------------------------Called-up share capital 214 214Share premium account 2,035 2,038EEV reserves 1,000 1,194--------------------------------------------------------------------------------Ordinary shareholders' equity on an EEV basis 3,249 3,446-------------------------------------------------------------------------------- Value of in-force Life & Pensions business on an EEV basisAt 30 June 2005 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Value of in-force allowing for market risk (excluding time value of options and guarantees) 2,014 2,215Time value cost of options and guarantees (including theimpact of non-market risks) (75) (75)Cost of regulatory solvency capital, plus excess economiccapital requirements (39) (34)Provision for operational risks (73) (87)--------------------------------------------------------------------------------Value of in-force Life & Pensions business 1,827 2,019-------------------------------------------------------------------------------- Pro forma embedded valueAt 30 June 2005 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Ordinary shareholders' equity on an EEV basis 3,249 3,446Adjustment to the value of the listed Asset Management business to market value 33 18--------------------------------------------------------------------------------Pro forma embedded value 3,282 3,464-------------------------------------------------------------------------------- --------------------------------------------------------------------------------Pro forma embedded value per share £1.57 £1.65-------------------------------------------------------------------------------- Notes to the EEV results 1. Methodology 1.1 Basis of preparation The EEV results presented in this document have been prepared in accordance withthe European Insurers' Chief Financial Officers Forum's EEV Principles issued inMay 2004 and the Additional Guidance issued in 2005. They provide supplementaryinformation to the results for the period ended 30 June 2005 which werepublished on 13 September 2005. The directors are responsible for thepreparation of the supplementary information in accordance with the EEVPrinciples. The methodology is the same in all material aspects as thatdescribed in the Annual Report & Accounts 2005. The EEV basis of reporting is designed to recognise profit as it is earned overthe term of the policy. The total profit recognised over the lifetime of thepolicy is the same as that recognised under the IFRS basis of reporting, but thetiming of recognition is different. The reported embedded value provides an estimate of the value of shareholders'interest in the covered business, excluding any value that may be generated fromfuture new business. The covered business incorporates the Life & Pensionsbusiness (defined as long term business by UK and overseas regulators) butexcludes the Asset Management Business. This value comprises the sum of theshareholders' net worth, the provision for future corporate costs and the valueof existing business. The shareholders' net worth is the net assets attributableto shareholders, and is represented by the sum of required capital and freesurplus. The value of existing business is the present value of the projectedstream of future distributable profits available to shareholders from theexisting business at the valuation date, on a best estimate basis allowing forrisk, adjusted for the cost of holding required capital. The EEV results should be read in conjunction with the Group's Report & Accountsfor the year ended 31 December 2005. These contain further information on themethodologies applied in preparing the EEV results and information regarding theGroup's financial statements prepared in accordance with IFRS issued by theInternational Accounting Standards Board and adopted for use in the EU. The EEV Principles have been followed in respect of non-covered business. Inother respects the IFRS basis of reporting has been applied unless the EEVPrinciples permit otherwise. In particular the Principles have been applied toreflect Step Up Tier One Insurance Securities (STICS) as debt rather than asequity. In addition, a pro forma embedded value is reported showing ordinaryshareholders' funds on an EEV basis adjusted to include the F&C listedsubsidiary at market value. Shareholders' net assets on an EEV basis for the Group consist of the following: • Life & Pensions net assets; • the Group's share of its investment in the Asset Management business (including its net pension liability) on an IFRS basis; • corporate net liabilities; • the net pension liability of the Friends Provident Pension Scheme on an IAS 19 basis but including holdings in non-transferable securities issued by the Group (both net of deferred tax); • a provision for future corporate costs; • the present value of future profits attributable to shareholders from existing policies of the Life & Pensions business; No provision is made for the cost of future earnout payments in respect of theLombard acquisition. The shareholders' net worth includes the corporate debt of the Group. This debtis valued at market value, consistent with the EEV guidance. EEV and other balance sheet items denominated in foreign currencies have beentranslated to sterling using the appropriate closing exchange rate. The newbusiness contribution and other income statement items have been translatedusing an average exchange rate for the relevant period. The EEV results were approved by the Board of Directors on 22 June 2006. 1.2 New business New business within the covered business includes: • premiums from the sale of new contracts; • payments on recurring single premium contracts, including Department of Work and Pensions rebate premiums, except existing stakeholder-style pensions business where, if a regular pattern in the receipt of premiums for individuals has been established, the regular payment is treated as a renewal of an existing contract and not new business; • non-contractual increments on existing policies; • new entrants in group pensions business. 1.3 Allowance for risk The allowance for risk in the shareholders' cash flows is a key feature of theEEV Principles. The EEV guidance sets out three main areas to allow for risk inan embedded value: • the risk discount rate; • the allowance for the cost of financial options and guarantees; • the cost of holding both prudential reserves and any additional required capital. The market-consistent approach has been used to allow for risks in all threeareas. 1.4 Derived risk discount rates A market-consistent embedded value has been calculated for each product line byvaluing the cash flows in line with the prices of similar cash flows traded onthe open market. In principle, each cash flow is valued using the discount rate consistent withthat applied to such a cash flow in the capital markets. The 'certaintyequivalent approach' has been applied whereby for liabilities where the payoutsare either independent or move linearly with market movements, assets areassumed to earn the risk-free rate and all cash flows are discounted using therisk-free rate. For presentational purposes, a set of risk discount rates has been derived thatwould give the same value under a traditional embedded value approach as thatfrom the market-consistent embedded value determined above. 1.5 Other assumptions Allowance has been made for the costs of financial options and guarantees topolicyholders, burn-through costs to the shareholders of assets in the WithProfits Fund being insufficient to meet guarantees, and the costs of non-marketrisks. 1.6 Financial options and guarantees The burn-through cost at 30 June 2005 of £75m (31 December 2005: £75m) is splitbetween £43m (31 December 2005: £40m) market risk and £32m (31 December 2005:£35m) non-market risk. 1.7 Required capital and the cost of capital In aggregate, the economic capital requirements at a product level at 30 June2005 were higher than regulatory requirements by approximately £100m (31December 2005: £100m). Capital requirements under EEV amounted to £704m (31 December 2005: £551m). Thisincludes shareholders' assets required to support the With Profits Fund. 1.8 Non-market risk A provision of £73m (31 December 2005: £87m) has been made for operational risksin the shareholders' funds. This provision of £73m is equivalent to a 0.4% (31 December 2005: 0.4%) increasein the derived risk discount rate for UK Life & Pensions business and 0.8% (31December 2005: 0.8%) for International Life & Pensions business, recognising thehigher operational risk in International business. 1.9 Expenses (a) Corporate costsFor the half year to 30 June 2005, £3m (year ended 31 December 2005: £6m) ofcorporate costs were regular ongoing corporate costs and £3m (year ended 31December 2005: £6m) were development or one-off costs. The ongoing costs havebeen capitalised under EEV Principles. The impact is a provision of £48m (31December 2005: £47m). (b) Service costsF&C service fee profits in respect of covered Life & Pensions business,approximately £9m (year ended 31 December 2005: £15m), are brought into theconsolidated income statement on an IFRS basis, and F&C is brought into the proforma embedded value at market value. Productivity gains have been assumed within the EEV results in respect ofInternational business. The Lombard EEV has been reduced by £9m (31 December2005: £8m) for a projected expense overrun for the period to 2009 and a lowerrate of expense inflation has been assumed for Friends Provident InternationalLimited business. These make allowance for anticipated future productivity gainsas these businesses grow. 2. Segmental analysis(a) Life & Pensions EEV profitHalf year ended 30 June 2005 Half year Half year Half year Year ended ended ended ended 30 June 30 June 30 June 31 Dec 2005 2005 2005 2005 UK Intn'l Total Total Notes £m £m £m £m--------------------------------------------------------------------------------Contribution from new business 2(b),3(a) 35 23 58 144Profit from existingbusiness: Expected return 79 12 91 196 Experience variances 19 (3) 16 22 Operating assumption changes 30 - 30 16Development costs (10) - (10) (25)Expected return on shareholders' net assets within the Life & Pensions business 43 1 44 81--------------------------------------------------------------------------------Life & Pensions EEV underlying profit before tax 196 33 229 434Non-recurring items (1) (1) (2) (13)Investment return variances 3(b) 281 9 290 641Effect of economic assumption changes (131) (3) (134) (236)--------------------------------------------------------------------------------Life & Pensions EEV profit before tax 345 38 383 826Attributed tax charge 3(c) (104) (7) (111) (232)--------------------------------------------------------------------------------Life & Pensions EEV profit after tax 241 31 272 594-------------------------------------------------------------------------------- (b) New business marginHalf year ended 30 June 2005 Half year Half year Half year Year ended ended ended ended 30 June 30 June 30 June 31 Dec 2005 2005 2005 2005 UK Intn'l Total Total--------------------------------------------------------------------------------Contribution from new business £35m £23m £58m £144m--------------------------------------------------------------------------------Volume of new businessAnnualised Premium Equivalent (APE) £226m £80m £306m £727mMargin - APE 15.3% 29.3% 19.0% 19.8%--------------------------------------------------------------------------------Volume of new businessPresent Value of New Business Premiums (PVNBP) £1,510m £675m £2,185m £5,397mMargin - PVNBP 2.3% 3.5% 2.7% 2.7%-------------------------------------------------------------------------------- (c) Summary consolidated balance sheet on an EEV basisHalf year ended 30 June 2005 30 June 30 June 30 June 31 Dec 2005 2005 2005 2005 Segmental Intra-group Total Total Analysis Debt £m £m £m £m--------------------------------------------------------------------------------Life & Pensions - long-term funds 723 (180) 543 441Life & Pensions - shareholders' funds 324 770 1,094 1,199--------------------------------------------------------------------------------Life & Pensions net assets 1,047 590 1,637 1,640Corporate net assets (46) (795) (841) (781)--------------------------------------------------------------------------------Shareholders' invested net assets 1,001 (205) 796 859Attributable net asset value of the Asset Management business net of minority interest (i) 466 205 671 628Net pension liability of Friends Provident Pension Scheme 3 - 3 (13)--------------------------------------------------------------------------------Shareholders' net worth 1,470 - 1,470 1,474--------------------------------------------------------------------------------Provision for future corporate costs (48) (47)Value of in-force Life & Pensions business 1,827 2,019--------------------------------------------------------------------------------Ordinary shareholders' net assets on an EEV basis 3,249 3,446--------------------------------------------------------------------------------Called-up share capital 214 214Share premium account 2,035 2,038EEV reserves 1,000 1,194--------------------------------------------------------------------------------Ordinary shareholders' equity on an EEV basis 3,249 3,446-------------------------------------------------------------------------------- (i) The attributable net asset value of the Asset Management business includesgoodwill of £327m at 30 June 2005 (31 December 2005: £333m) and other intangibleassets, net of related tax, of £203m (31 December 2005: £154m) Intra-group debt consists of: Debt Interest payable Half year Year ended ended 30 June 31 Dec 30 June 31 Dec 2005 2005 2005 2005 £m £m £m £m--------------------------------------------------------------------------------Due from F&C to FPLP long-term funds 180 180 5 11Due from F&C to FPLP Shareholders' fund 25 25 1 1Due from FPLP Shareholders' fund to Friends Provident plc 795 795 7 30-------------------------------------------------------------------------------- (d) Life & Pensions net assets segmental information by business segment Half year Half year Half year Year ended ended ended ended 30 June 30 June 30 June 31 Dec 2005 2005 2005 2005 UK Intn'l Total Total £m £m £m £m--------------------------------------------------------------------------------Life & Pensions net assets 1,028 19 1,047 1,050Value of in-force Life & Pensions business 1,428 399 1,827 2,019-------------------------------------------------------------------------------- 2,456 418 2,874 3,069-------------------------------------------------------------------------------- 3. Life & Pensions EEV profit (a) Contribution from new business Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Contribution from new business before cost of capital and share based payments 62 152Cost of share based payments (1) (2)Cost of capital (3) (6)--------------------------------------------------------------------------------Contribution from new business 58 144-------------------------------------------------------------------------------- (b) Investment return variance Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------In respect of net assets at the start of year 47 84Value of in-force business 157 373--------------------------------------------------------------------------------Investment return variance after tax 204 457--------------------------------------------------------------------------------Investment return variance before tax 290 641-------------------------------------------------------------------------------- (c) Attributed tax charge Half year Year ended ended 30 June 31 Dec 2005 2005 £m £m--------------------------------------------------------------------------------Contribution from new business 15 35Profit from existing business 42 69Development costs (3) (8)Expected return on shareholders' net assets within the Life & Pensions business 13 24Non-recurring items - (3)Investment return variances 86 184Effect of economic assumption changes (42) (69)--------------------------------------------------------------------------------Attributed tax charge 111 232-------------------------------------------------------------------------------- 5. Earnings per shareBasic and underlying earnings per share Half year Half year Year Year ended ended ended ended 30 June 30 June 31 Dec 31 Dec 2005 2005 2005 2005 Earnings Per share Earnings Per share £m pence £m pence--------------------------------------------------------------------------------Profit after tax attributable to ordinary shareholders of the parent 175 8.5 441 21.2Investment return variances (207) (10.0) (550) (26.4)Variation in value of option on convertible debt 9 0.4 9 0.4Effect of economic assumption changes 134 6.5 238 11.4Amortisation and impairment of Asset Management acquired intangible assets 28 1.4 168 8.1Non-recurring items 29 1.4 59 2.8Tax charge on items excluded from underlying profit 27 1.3 46 2.2Minority interest on items excluded from underlying profit (19) (1.0) (72) (3.4)--------------------------------------------------------------------------------Underlying profit after tax attributable to ordinary shareholders of the parent 176 8.5 339 16.3-------------------------------------------------------------------------------- 30 June 31 Dec 2005 2005 millions millions-------------------------------------------------------------------------------- Weighted average number of ordinary shares 2,065 2,082-------------------------------------------------------------------------------- 6. EEV assumptions 6.1 Principal economic assumptions - deterministic Economic assumptions are actively reviewed and are based on the market yields onrisk-free assets at the valuation date. Assumptions 30 June 31 Dec 2005 2005UK and International (excluding Lombard): % %--------------------------------------------------------------------------------Risk-free rate (i) 4.2 4.1Investment returns before tax: Fixed interest 3.7-5.0 3.8-4.7 Equities 7.2 7.1 Properties 6.2 6.1Future expense inflation: UK business 3.7 3.9 International business 3.3 3.15UK corporation tax rate 30.0 30.0Risk discount rate (average): In-force (UK business) 7.7 7.4 In-force (International business) 6.3 6.3Risk discount rate: New business (UK business) 6.7 6.5 New business (International business) 6.1 6.0-------------------------------------------------------------------------------- (i) For UK and International business (excluding Lombard) the risk-free rate isset with reference to the gilt yield curve at the valuation date. For annuityand with-profits business, a term dependent rate allowing for the shape of theyield curve is used as this can significantly impact value. For other business,a rate based on the annualised 15-year gilt yield is used. 30 June 31 Dec 2005 2005Lombard: % %--------------------------------------------------------------------------------Risk-free rate 3.6 3.6Investment returns before tax 4.8 4.9Future expense inflation 3.3 3.5Tax rate 25.8 25.8Risk discount rate (average) - in-force 6.2 6.3Risk discount rate (average) - new business 6.2 6.3-------------------------------------------------------------------------------- The key exchange rates used in respect of Lombard business were a closingexchange rate of 1 Euro = £0.675 (31 Dec 2005: £0.687). Margins are added to the risk-free rates to obtain investment return assumptionsfor equity and property. For corporate fixed interest securities the investmentreturn assumptions are derived from an AA-bond yield spread, limited to theactual return on the underlying assets. As we have followed a market-consistentapproach, these investment return assumptions affect only the derived riskdiscount rates and not the embedded value result. Maintenance expenses are assumed to increase in the future at a rate of 1% perannum for UK business and 0.25% per annum for International business (excludingLombard) in excess of the assumed long-term rate of retail price inflation. Thisis derived from the difference between the risk-free rate of return and theaverage of the FTSE Actuaries over 5-year index-linked gilt at 5% and 0%inflation. For Lombard the risk-free rate is the average of the 10-15 year and the over 15year yields using the EuroMTS indices. The investment return assumption is theweighted average (based on asset mix) of returns of fixed interest securities,equities and cash. The Lombard investment return assumption is shown gross oftax, but net of fund management charges. Average derived risk discount rates are shown below for the embedded value andthe contribution from new business. The average derived risk discount rate forin-force has reduced over the half-year to 30 June 2005 due mainly to a lowerrisk-free rate and a lower risk margin on annuities. A more detailed split ofthe derived risk discount rates is given in the following table. Derived risk discount rates by product type30 June 2005 International UK With- UK Other Sterling Euro profits Annuity UKEmbedded Value % % % % %--------------------------------------------------------------------------------Risk-free rate 4.2 4.2 4.2 4.2 3.6Market risks (non-options) 3.0 6.3 1.5 1.3 1.8Options - market risks 4.9 - - - -Options - non-market risks 3.6 - - - -Other non - market risks 0.4 0.4 0.4 0.8 0.8--------------------------------------------------------------------------------Risk discount rate 16.1 10.9 6.1 6.3 6.2-------------------------------------------------------------------------------- Contribution from new business: International UK Sterling Euro % % %--------------------------------------------------------------------------------Risk-free rate 4.2 4.2 3.6Market risks 2.1 1.1 1.8Non-market risks 0.4 0.8 0.8--------------------------------------------------------------------------------Risk discount rate 6.7 6.1 6.2-------------------------------------------------------------------------------- These tables show that with-profits and annuity business is subject to moreinvestment risk than the remaining business, and so the appropriate riskdiscount rates are higher. 6.2 Principal economic assumptions - stochastic The cost of options and guarantees is determined using The Smith Model economicscenario generator. The model is calibrated to market conditions at thevaluation date and correlations between the asset classes are derived fromhistoric data, consistent with the model used for the Realistic Balance Sheet. Risk-free rates are calibrated to the gilt yield curve. Equity volatility iscalibrated to replicate the implied volatility of FTSE 100 put options held bythe With Profits Fund. Property holdings are modelled as a mix of equity andgilt assets, calibrated to derive a level of running yield and volatility asobserved in historical data. Bonus rates are set at levels which fully utilise the assets supporting thein-force business over its lifetime and are consistent with the economicassumptions and the Group's bonus policy. 6.3 Other assumptions Other assumptions are regularly reviewed having regard to past, current andexpected future experience, and any other relevant data. These are set so as tobe best estimate assumptions. The assumed rates of mortality, morbidity, lapse, surrender, conversion topaid-up and early retirement, which are reviewed annually, have been derivedfrom analyses of the Group's operating experience and industry studies. Inparticular, improvements in annuitant mortality have been assumed to follow themedium cohort for males and 75% of this for females. Allowance for commission is based on the Group's experience. Special Purpose Review Report of KPMG Audit Plc to Friends Provident plc ('theCompany') on its Preliminary European Embedded Value ('EEV') InterimSupplementary Information for the six months to 30 June 2005 *We have reviewed the preliminary EEV interim supplementary information for thesix month period ended 30 June 2005 ("the preliminary EEV interim supplementaryinformation"). The preliminary EEV interim supplementary information has beenprepared in accordance with the European Embedded Value Principles issued in May2004 by the European CFO Forum as supplemented by the Additional Guidance onEuropean Embedded Value Disclosures issued in October 2005 (together the EEVPrinciples) using the methodology and assumptions set out in notes 1 and 6. The EEV supplementary information presented for the 12 month periods ending 31December 2005 and 2004, which has previously been published, is excluded fromthe scope of this report. This report is made solely to the Company in accordance with the terms of ourengagement. Our work has been undertaken so that we might state to the Companythose matters we have been engaged to state in this report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the Company for our work, this report, orfor the opinions that we have formed. Respective responsibilities of directors and KPMG Audit Plc As described in the basis of preparation, the directors of the Company areresponsible for the preparation of the preliminary EEV interim supplementaryinformation on an EEV basis in accordance with the EEV Principles. Our responsibilities under the terms of our engagement are to report to theCompany our review conclusion as to whether we are aware of any materialmodifications that should be made to the preliminary EEV interim supplementaryinformation. Basis of review conclusion We conducted our review having regard to Bulletin 1999/4: Review of interimfinancial information issued by the Auditing Practices Board for use in theUnited Kingdom. A review consists principally of making enquiries of groupmanagement and applying analytical procedures to the preliminary EEV interimsupplementary information and underlying financial data and, based thereon,assessing whether the EEV Principles have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel of assurance than an audit. Accordingly, we do not express an auditopinion on the preliminary EEV interim supplementary information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the preliminary EEV interim supplementary information aspresented for the six month period ended 30 June 2005. Emphasis of matter Without qualifying our opinion we draw your attention to the following matter. The Company has prepared the EEV basis supplementary information for the sixmonth period ended 30 June 2005 to provide the comparative supplementaryinformation expected to be included in the Company's EEV basis supplementaryinformation to be included in the interim report for the six months ending 30June 2006. KPMG Audit PlcChartered AccountantsLondon22 June 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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