Final Results

28 February 2013

Xchanging plc

Full Year Results for the twelve months ended 31 December 2012

2012: Building the foundations for growth

Financial Summary (continuing operations)

Financial Highlights

• Delivered stated objective of year-on-year improvement in financial performance on all key performance indicators.

• Organic revenue grew by 5.6% on a like-for-like basis.

• Delivered full year cost efficiencies as planned.

• Financial disciplines and strong cash flow enabled investment in the business.

• Board recommends reinstating dividend at 1 pence per share.

Operational Highlights

• Insurance Services performed well again; reinforced position in Lloyd's and the London insurance market (won five year contract to continue running Insurers' Market Repository).

• In Financial Services, acquired AR Enterprise S.r.L. and merged with existing Italian business, Kedrios S.p.A., resolving last loss-making business.

• Launched a number of new products including Xuber (specialist insurance software), Netsett (global net settlement service), Vault and Torque.

• A number of new appointments strengthen both Board and the executive team, bringing depth of technology experience.

Ken Lever, Chief Executive, commented:

"2012 was a year in which we restored the confidence in Xchanging of our investors, our employees, our customers and our partners. It was a year in which we got fit again and demonstrated our ability to compete to win. Moreover, it was a year in which we built a foundation for the future of the business and delivered year-on-year improvement in financial performance. Reflecting the company's progress, the Board feels it is the right time to reinstate the dividend.

Looking forward, we are focussing our resources on what we do best, positioning ourselves strategically in markets where we can compete most effectively, continuing to listen and innovate, and to simplify the business. 2013 will be dedicated to increasing the momentum we started to see in the second half of 2012."

Notes:

1 The 2011 comparator excludes £1.2 million of exceptional revenue items relating to contract settlements. There were no exceptional revenue items in 2012.

2Adjusted operating profit excludes exceptional items (2012: £nil, 2011: £31.8 million), amortisation of intangible assets previously unrecognised by acquired entities (2012: £4.0 million, 2011: £4.8 million) and acquisition-related expenses (2012: £0.4 million, 2011: £nil).

3Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) and dividends to non-controlling interests.

4Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items (2012: £7.8 million, 2011: £14.9 million), acquisition-related expenses (2012: £0.2 million, 2011: £nil) and the movement in customer cash accounts held by FdB, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

5 Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities, finance lease liabilities and loans from related parties.

6 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

7Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate, divided by invested capital. Invested capital is calculated as the Group's net assets, less net cash.

8 Economic profit is adjusted operating profit less a tax charge at the Group's effective tax rate, less a charge for invested capital. The charge for invested capital is calculated as the Group's invested capital (as defined above) multiplied by the Group's weighted average cost of capital, being 10%.

Enquiries

Xchanging plc Tel: +44 (0) 207 780 6999

David Bauernfeind, Chief Financial Officer

Alexandra Hockenhull, Head of Corporate Communications

and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Neil Bennett

George Hudson

Emma Burdett

Executive insight interview with CEO, Ken Lever

To see a short video interview with Ken Lever reviewing the 2012 results and outlook for 2013; click on the link on the home page at www.xchanging.com

A presentation for investors and analysts will be held at the The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED at 10:00 on 28 February 2013. For those unable to attend, there will be a live webcast of the presentation available on the company website www.xchanging.com.

For those not able to join in this way, please dial +44 (0) 1452 321 359, using the ID # 15327361 to listen to the live audio or to the audio recording that will be available after the presentation.

What we are

Xchanging provides business processing, technology and procurement services internationally for customers across multiple industries.

What we do

Xchanging brings innovation, thought leadership and passion to its customers' businesses so as to enhance performance and value. Our values are embedded into everything we do.

What we want to be

Xchanging wants to be regarded as the best provider in its chosen markets by delivering services that are recognised for outstanding quality, reliability and innovation.

Cautionary Statement: 

This announcement contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Xchanging's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are: increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approval or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects

RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2012

EXTRACTS FROM THE CHAIRMAN'S STATEMENT

Strategic progress

Our turnaround process is well underway. The optimisation of our business assets sees Xchanging in much better shape. Many of the issues we faced have been dealt with, and this year, most notably, we have resolved the strategic future of our Italian business. However, more still needs to be done.

Our strategic planning is fundamentally driven by the fact that we must increase the value of our offerings and improve their propensity to become embedded in our customers' processes. Technology-enablement and constant innovation, not just cost effectiveness, are vital if we are to win business and ensure that customer satisfaction remains high.

This was reflected during the year in the appointment of new Heads of Innovation and of Technology, the introduction of the new role of Chief Information Officer and the signing of a joint venture with our customer YTL Communications Sdn. Bhd. ("YTL") in Malaysia. Following new appointments, we now also have significant technology expertise at Board level.

Board

There have been a number of changes to the composition of the Board during 2012.

In May, after a long period of illness, Pat O'Driscoll stepped down from the Board, and sadly passed away shortly afterwards.

In July, Stephen Wilson joined the Board as a Non-executive Director and in August he became Chairman of the Audit Committee, taking over from Dennis Millard.

In September, Saurabh Srivastava joined the Board as a Non-executive Director and Dennis Millard stepped down to enable him to move at short notice to be Executive Chairman at Halfords plc.

In October, Ian Cormack joined the Board as a Non-executive Director and was appointed Senior Independent Non-executive Director.

I believe the Board and its newly constituted committees now have the appropriate balance of skills, experience, independence and knowledge necessary for the long-term success of Xchanging, and its challenge to drive the regeneration of profitable growth in the next phase of our development.

People

It has been another year of change in the make-up of our leadership team, at both Board and Executive levels. We have significantly increased the talent to execute our strategy, drive the pursuit of growing economic value and, crucially, improve relationships with our customers and the value we provide to them.

We have reviewed our remuneration structure to ensure our leadership is motivated to succeed, and that incentives are linked to the right measures of value creation.

Dividend

The year was more rewarding for investors with the share price, which almost doubled, reflecting growing confidence in our business prospects and the impact of our turnaround plan on the intrinsic value of the business. The Board has duly considered whether the time is right to re-introduce the dividend.

After due consideration, the Board is pleased to recommend a dividend of 1 pence. This reinstatement of the dividend reflects progress to date, the significantly healthier financial condition of the company and its cash generation capabilities.

CHIEF EXECUTIVE OFFICER'S REPORT

2012 was a year in which we restored the confidence in Xchanging of our shareholders, our employees, our customers and our partners. It was a year in which we got fit again and demonstrated our ability to compete to win. Moreover, it was a year in which we built a foundation for the future of the business and delivered year-on-year improvement in financial performance.

In a year of intense activity we made good progress. At the beginning of the year we set out our four objectives for the year, and said our performance for the period should be judged against these. I can now report on what we have achieved.

Compete to win

From a low base historically it has been paramount to build our sales and marketing capability. Under the new global sales and marketing leadership of Stephen Scott, we are much more customer and market focused.

We reviewed and consolidated our product and service offerings to provide focus for our customers, our account directors and our growing sales force. Amongst other marketing collateral developed, our newly defined service offerings have been incorporated into a sales and marketing mobile application, harnessing technology to improve delivery.

Early in the year we established a 'Bid Factory' based in India which has reduced the time taken to respond to Requests for Proposals ("RFPs") considerably whilst improving the quality and consistency of our documentation. The Bid Factory also provides research information, competitor analysis and supports the development of service solutions.

We developed an account management group and a system to nurture, and where necessary rebuild, existing relationships and to develop new relationships in a methodical way. We introduced Salesforce.com to track and cross reference sales activity. Sales pipeline information is now available in real time to senior management.

Our Third Party Adviser ("TPA") programme is now well established, and has driven the increased flow of RFPs into Xchanging. We are continuing to develop this channel to market.

These measures have started to have an effect, and during the year we won a number of new contracts, which I refer to in the business sections below. Although many are small or medium sized, these demonstrate our ability to compete successfully. Experience shows that strong customer relationships can grow from the initial small contracts. Most importantly, we are seeing a much higher level of interest and RFPs across all our businesses than was previously the case. This suggests our renewed focus on sales and marketing is bearing fruit.

Grow revenue from existing customers

Last year we recognised that we have been missing growth opportunities by not assiduously developing valuable existing customer relationships. The sales and marketing activity I describe above has supported our efforts here.

However, to generate new business with existing customers we must innovate, bringing fresh ideas and ways to add value to our customers' businesses. During 2012 we put greater focus on 'Inspiring Innovation', developing channels to stimulate and capture innovative thinking. We established a cross-company Innovation Group, holding an 'Innovation Olympics' mid-year and rolling out the first 'Ken's Den' innovation competition. The response has been very encouraging and we have taken a first set of ideas into development.

Other opportunities to grow business with existing customers lie in cross-selling, since the collective spectrum of our offerings are relevant to the vast majority of medium to large scale businesses.

To cross-sell successfully we must behave as 'One Xchanging'. I talk more about this below. Of the supporting practical measures we introduced this year, our new Account Management programme provides a structure for routinely exploring new sales opportunities within existing relationships; and our marketing mobile application provides our sales force with both a mobile database on our offerings and subject matter experts, and a prompter to ensure opportunities are not missed.

One Xchanging

Many multi-faceted businesses suffer from 'silo mentality'. We recognised the need to break down silo barriers, to drive business growth through collaborative working and business efficiencies, to optimise innovative thinking and promote a good working environment for employees.

We started by introducing our six corporate values last year, and during 2012 we have continued to promote these in all we do. Group wide initiatives such as 'Values Months' have helped individual employees work through what each value means to them in their role. At our two internal conferences, Business Week India 1 in February and Business Week India 2 in October, awards were presented to employees who have shown excellence in 'Living the Values'.

Our efforts have been underpinned in a very pragmatic way by the introduction at the year end of a pilot Enterprise Social Network. Named 'Leapfrog' for its potential contribution to our business efficiencies, this platform facilitates communication, collaborative working and knowledge sharing, right across the company.

Cultural change takes time; but we have made a good start and we are seeing the mantra 'One Xchanging' being translated into behaviours. Our 2011 'Changing Xchanging' programme led to 'Xchanging is Changing' in 2012.

Entering 2013 we have launched 'Going for Gold'. This is a programme of six work streams designed to support achievement of our business objectives: year-on-year improvement in financial performance; increased sales to existing customers; compete to win increased sales to new customers.

Based on 'One Xchanging' teamwork, the work streams focus on: differentiating our service offering through innovation; world class selling and customer engagement; creating an organisation with customer focus built around our industry sectors and our service lines, which will ensure all our capabilities can be taken to market; developing talent for the future; enhancing our competitive edge by establishing shared services, optimising cost of delivery through standardisation and simplification, and enhancing provision of management information for decision-making; and the simplification and standardisation of internal IT processes and systems.

The 'Going for Gold' programme will continue to hone our business, aiming to make the way we operate leaner, more efficient and more productive whilst we focus on delivering innovative offerings to customers.

Year-on-year improvement in financial performance

Year-on-year improvements in revenue, profit, cash flow and return on invested capital have been achieved in challenging markets. With our focus on building our sales and marketing infrastructure, developing our position with the TPA channels and on our new integrated sales platform, our pipeline has been steadily strengthening and we have started to see the benefits through the second half of the year. As set out at the beginning of the year, profit growth has been supported by sustaining the cost reductions achieved in 2011.

Business Sector Review

Business Processing Services

a) Insurance Services

Our insurance business had a good year, with higher volumes in the UK market, good progress winning new customers, and an increased market share granted to our Australian State of Victoria contract. Developing our US strategy around the existing Xuber customer base has meant costs have been kept under control as we enter that market.

As the London Market Modernisation programme moved forward, we continued to work closely with the Lloyd's and London market. We believe we have demonstrated the strength of our business processing and technology capabilities and the integrity of our trusted partner status, as evidenced by winning a five year £65.5 million contract to continue providing the IMR service, previously an annual contract.

We also won accreditation as one of the two Lloyd's market Volume Claims Providers and, towards the year end, the contract to develop Lloyd's market Claims Reporting Suite. The publication of high level Governance Principles mid-year placed us firmly at the centre of the service provisioning process for the Lloyd's market going forward.

More recently, the announcement that the Darwin project - the part of the Market Modernisation programme relating to the provision of central services - is being replaced with the more evolutionary Central Services Review has provided further, significant reassurance of Xchanging's position.

Two new products were launched. In October, our insurance software suite was re-launched under the brand name 'Xuber' - this is reported below under Technology.

We also launched a pilot for our new global net settlement service, 'Netsett'. Primarily aimed at the global insurance market, Netsett is also suitable for other settings such as large global enterprises where high volumes of two-way intra-party settlements are being made daily. In December, we launched a live Netsett pilot with RSA, the multi-national insurance company.

To support the protection and growth of our existing London insurance business we established a dedicated product and service development function. In February 2013, this team introduced a mobile application, 'X-presso', linked to our Electronic Claims File database for agents and brokers, enabling mobile data loading and viewing.

We won a number of industry awards, including the Insurance Day's London Market Technological Initiative of the Year Award (for our work on the Electronic Claims File), Treasury Today's Adam Smith Award for 'One to Watch' (for Netsett) and Post Magazine's Major Loss Award (for our handling of claims in the Japanese earthquake aftermath).

In Australia we won the Top Performing Agent Award in the State of Victoria. This contract continues to perform well, winning the grant of additional market share. The New South Wales contract has been profitable but remains challenging. During the year we also won an extension to our contract with Crawford. Our aim is to pursue more business in the self-insured market.

In December, we appointed a new Executive Director for Insurance Services, Adrian Guttridge.

b) Financial Services

The Financial Services business performance was flat as cost control measures, particularly in Xchanging Transaction Bank GmbH ("XTB"), offset the impact of the weak securities market volumes. In our FdB operations, we continued to balance core activity for Allianz Global Investors with new customers, which now account for approximately half the business's revenue.

We continued to build a broader base to our Financial Services business, serviced from our Indian operations, with the second half of the year continuing to add new customers. We have also started to establish a financial services presence in Spain, building on the initial Xchanging footprint established there in 2011 to service the L'Oréal procurement contract won that year.

In November, we announced the acquisition by our Italian subsidiary Kedrios of securities market software company AR. AR provides Kedrios with important technology, and the combined business will have a leading position in the Italian market. The transaction accelerates our plan to bring Kedrios to profitability and resolves the strategic challenge to this operation. It also means we no longer have any loss making businesses. The two businesses formally merged under the new name, Xchanging Italy S.p.A., in January 2013.

c) Enterprise Services (business sectors other than Insurance Services and Financial Services)

We continued to build our customer base in the other industry sectors we serve, both internationally and in the growing domestic Indian market. Contract wins included a UK transport company and a national ministry of education.

July saw the formal opening of our new global delivery centre in Shimoga, Karnataka. Located in a Special Enterprise Zone, this centre forms part of our strategy to sustain our ability to offer lower cost offshore processing capabilities. Seating nearly 600 employees by the end of the year, the facility has a capacity of 1000.

Technology

Our Technology business made steady progress in 2012. The Application Management Services business (formerly 'Information Technology Outsourcing') returned to profit and our Software business benefitted from encouraging early interest in the newly launched Xuber insurance software products.

At the beginning of the year we appointed Andrew Binns as Executive Director, Technology. During 2012 we reshaped the business, with the primary focus being to accelerate completion of the development and launch of our insurance software suite of four products. This was done in October under the brand name 'Xuber'.

The Xuber products will sit at the core of the insurance offering we provide in the UK as well as in markets we are developing outside the UK, namely the US and Bermuda.

We have won a number of technology contracts with new customers, including Visa, and some substantial new business with existing customers, including Gatwick Airport.

Our Application Management Services business based in India, the UK, Singapore and Malaysia performed much better following some reorganisation and sales reinvigoration. During the year we launched a new product, Torque; a product that helps reduce testing time for new software in development by as much as 40%. Our Infrastructure Management Services business had a particularly successful year of contract wins, and we made good progress within our new Joint Venture with YTL in Malaysia.

Procurement

The procurement business has had a busy year. The two large contracts won in 2011 made slower progress than expected working through to completion of their implementation phases.

This business sector also gained new leadership during the year with the appointment of Ed Cross as Executive Director. We reorganised the senior management team and re-oriented marketing strategy on a global basis, building a sales team to support this and establishing an office in Chicago. In 2013, we will focus on winning additional contracts for our new US platform to establish the critical mass needed for a sustainable business.

In the UK, we rationalised our operating model to achieve greater efficiencies to match the lower margin on the BAE Systems procurement contract that was renewed in February.

The sector successfully renewed maturing contracts with all its existing customers and won a number of new customers including a leading Financial Services company in the UK and G4S in Continental Europe, and with Cerebos, Sydney Water, University of South Australia and ACH Group in Australia. A new contract with Grupo Panrico is helping to develop our procurement presence in Spain, building on the existing L'Oréal contract. Earlier, I referred to our aim to promote cross-selling and we saw a good example of this, winning a procurement project in Australia with existing insurance customer Aon.

We developed and launched a new analytics technology, 'Vault', designed to track and reconcile activity to ensure planned cost savings are being achieved. The new product has been well received.

Strategic direction

As our markets grow and become more developed, they are reflecting a spectrum of activities with varying degrees of added value. With our depth of expertise in managing complex processes and critical technology, Xchanging sits towards the upper end of this spectrum. Our aim is to move further up this Value Curve.

To achieve this we need to increase the use of technology in our offerings, for example through mobile delivery, analytics and Cloud services. Our commitment to this area is reflected in the formalisation of our Joint Venture with YTL in Malaysia, the dedicated product and service development function we have set up to serve our insurance services in the UK, and our participation in the Frankfurt Cloud project.

We are making better use of our existing technology assets - for example accelerating completion of Xuber - and prioritising the development of new ones. We also recognise that ownership of Intellectual Property will become increasingly important, both to provide an offering and a barrier to entry. Our new five year contract to continue managing the IMR is an example.

To retain existing customers as well as to attract new ones, we must constantly innovate to generate new offerings, and to differentiate ourselves from our competitors. In 2012 we embedded channels for stimulating, capturing and developing innovative ideas and saw the first results of putting our new system in place. Examples of innovation in the year are our procurement analytics product Vault and our software testing system Torque. Technology-enablement and innovation will remain central to our business plans going forward.

Outlook

We set out at the beginning of the year to build the foundations for growth. We have made good progress and have started to see the benefits, with much higher levels of interest in our offerings, the award of new contracts and the successful renewal of existing ones. We have started our transition from the founding business model, based on a small number of large contracts, to a more broadly-based model.

The challenges we face as we go into 2013 are the more familiar ones of any business: innovation and new product and service development, differentiation in the market, sales and marketing capabilities, attracting and retaining talent and effective management of costs.

Our agenda for 2013 will be to maintain the pace and press ahead with efforts started in 2012 to compete to win, contributing further to the momentum we saw in the second half of 2012.

BUSINESS REVIEW

Insurance Services

Financial Highlights 

Insurance Services external adjusted revenue increased 4.5% to £197.5 million (2011: £189.0 million), including a positive foreign exchange impact of £0.3 million related to movements in the Australian Dollar. Adjusted operating profit increased 2.5% to £37.5 million (2011: £36.6 million), representing an adjusted operating profit margin of 19.0% (2011: 19.3%), including an adverse foreign exchange impact of £0.5 million.

Revenues for the sector increased due to a number of factors. The sector benefitted from an increase in the volume of insurance premiums processed by our UK insurance businesses in the Lloyd's and London Insurance market, the expansion of the IMR services, higher development income, and a significant new customer win in Homecare Insurance Limited. The Australian Workers' Compensation business benefitted from both improved performance fees and discretionary payments received under the terms of the contract with the New South Wales state government, and from an increase in market share following the renewal of the contract with the Victoria state government, that came into effect from 30 June 2011. Revenue for the Broker Services business declined compared to prior year primarily as a result of an increase in contractual discounts.

Adjusted operating profit performance increased marginally year-on-year due to a number of factors. The UK insurance business continued to deliver a stable and profitable result from the increase in processing volumes and higher margin revenue from development income, mitigating salary inflation and investment in the development of Netsett, a global (re)insurance and settlements service, which is now in a pilot phase. In the Australian business, the benefit of incremental revenue has had a positive impact at the adjusted operating profit level, as performance fees have had a direct impact on profitability. Overall, the sector has also benefitted from the impact of restructuring activities implemented in 2011 reducing senior management layers. A portion of the cost savings achieved has been re-invested in sales and marketing, the continued investment in developing a global insurance strategy, and establishing a presence in the US insurance sector. The profitability of the sector was also reduced by the performance of the Broker Services business, which has been impacted by a £1.0 million increase in contractual discounts, and £2.0 million of additional costs incurred in relation to the transformation of the operating model to meet changing customer demands.

Financial Services

Financial Highlights

Financial Services external adjusted revenue decreased 9.3% to £163.0 million (2011: £179.8 million), including an adverse foreign exchange impact of £11.3 million related to the Euro and £1.9 million of revenue from AR. Adjusted operating profit decreased 13.8% to £10.6 million (2011: £12.3 million), representing an adjusted operating profit margin of 6.5% (2011: 6.8%), including adverse foreign exchange impact of £1.0 million and a £0.3 million profit contribution from AR.

On a like-for-like basis, revenue for the sector declined 4.4%. In our securities processing business, XTB, the impact of indexation on key contracts has had a positive impact on revenue for the year. The impact of this was partially offset by lower processing volumes. However, in our investment account administration business, FdB, a decline in overall investment account numbers, discounts on contractual prices with key customers and lower project revenues have adversely impacted revenue performance. Revenue performance in our Italian securities processing and funds management business, Kedrios, has remained flat compared to 2011.

On a like-for-like basis, profitability within the Financial Services sector declined 9.2%. This was driven by the decline in revenues on adjusted operating profit and the recognition of £1.2 million of provisions in respect of the integration of AR with our existing operations in Italy. The revenue impact has been marginally offset by the restructuring and other management costs saving initiatives implemented in 2011 under the Four Part Action Plan, and lower levels of depreciation and amortisation.

Overall, profitability for the sector was impacted by the £3.0 million (2011: £3.4 million) loss for the year generated by Kedrios (which included the £1.2 million of provisions noted above). Following the acquisition of, and the merger with AR, this business is expected to return a profit during 2013.

Technology

Financial Highlights

External adjusted revenue for the Technology sector increased 0.9% to £98.8 million (2011: £97.9 million), including the £1.6 million impact of the sale of the Cambridge Solutions SARL business in October 2011, and adverse foreign exchange impact of £0.4 million. On a like-for-like basis external revenue increased 2.9%. Adjusted operating profit increased 37.1% to £9.6 million (2011: £7.0 million), representing an adjusted operating profit margin of 9.7% (2011: 7.2%), including favourable foreign exchange impact of £0.3 million.

The sector has performed well following management actions taken in 2011 to support a more flexible sales strategy, targeting intermediaries and partnering arrangements, to clarify the sales offering and refocus the sales effort, and to rationalise the cost base and improve resource utilisation.

Like-for-like revenue growth in 2012 has been driven by growth in the existing customer base, including Gatwick Airport and the London Metal Exchange, a significant improvement in sales by our Data Integration business, primarily as a result of the focused sales effort and new Xuber sales, including revenue from Marsh, which was signed at the beginning of December 2012. The year-on-year impact of these benefits have been partially offset by a £3.5 million revenue reduction due to the decision to exit the IT reseller programme in our Infrastructure Managed Service business. This programme ceased in the first half of 2011.

On a like-for-like basis, adjusted operating profit grew 29.5%. The improvement in profitability and margin was driven by the contribution from the increased revenue and the effects of the extensive restructuring of the business in the second half of 2011 and further cost saving initiatives implemented in 2012. The cost savings achieved also enabled us to invest in sales and marketing, particularly in our software business to support the launch of the Xuber product in October 2012. These savings have also more than offset a £1.8 million onerous lease provision recognised in the year for an under-utilised data centre. The decision to exit the IT reseller programme had a negligible impact on profitability.

Procurement and Other BPO

Financial Highlights

External adjusted revenue for Procurement and Other BPO increased 14.0% to £209.0 million (2011: £183.3 million), including the £4.6 million impact of the sale of Xchanging Resourcing Services Limited business, and adverse foreign exchange movements of £1.4 million, principally related to the Indian Rupee. On a like-for-like basis external revenue increased 17.8%. Adjusted operating profit increased 11.1% to £8.0 million (2011: £7.2 million). This represents an adjusted operating profit margin of 3.8% (2011: 3.9%), including adverse foreign exchange movements of £0.4 million, and a £0.2 million operating loss (2011: £0.1 million operating profit) from the Xchanging Resourcing Services Limited business disposed of in January 2012. On a like-for-like basis adjusted operating profit increased 22.9%.

Revenue for the sector increased primarily due to higher contract labour volumes from BAE Systems, a key UK procurement customer. The 2011 results were negatively impacted by lower labour volumes from government defence spending cuts in the UK impacting the same customer. Revenues from new procurement contracts, principally L'Oréal in the European business and another significant contract win in North America, signed in the second half of 2011, have more than offset the impact of contracts terminated during 2011. In addition, the sector has benefited from growth in the provision of other BPO services, including finance and accounting services, from our processing base in India.

Adjusted operating profit increased primarily due to the profit contribution from the growth in the provision of other BPO services, the full year benefit of restructuring undertaken in 2011 under the Four Part Action Plan, and other cost saving initiatives implemented in 2012, primarily in the human resources business. However, adjusted operating profit margin was eroded by a number of factors. The incremental contract labour volume revenue in the year had a limited impact on profit, and was more than offset by two factors: investment in the US procurement business in the first half of 2012; and increased investment in sales and marketing in the UK, European and Australian procurement businesses.

The restructuring of the UK procurement business, for which a provision of £2.2 million was recognised at 31 December 2011, is progressing as planned to deliver an optimal lower cost operating model for the future. This restructuring has a completion date of the end of Q2 2013.

FINANCIAL REVIEW

Group financial performance summary

In the year ended 31 December 2012, the Group achieved improvement across all KPIs from continuing operations compared to the prior year.

The Group's adjusted KPIs are calculated after adding back a number of non-cash, acquisition-related items, exceptional items and movements in customer cash accounts held by FdB, as noted below, in order to present the underlying performance of the business.

All numbers presented, unless stated otherwise, are from continuing operations only.

Notes:

1 The 2011 comparator excludes £1.2 million of exceptional revenue items relating to contract settlements. There were no exceptional revenue items in 2012.

2 Adjusted operating profit excludes exceptional items (2012: £nil, 2011: £31.8 million), amortisation of intangible assets previously unrecognised by acquired entities (2012: £4.0 million, 2011: £4.8 million) and acquisition-related expenses (2012: £0.4 million, 2011: £nil).

3 Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) and dividends to non-controlling interests.

4 Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items (2012: £7.8 million, 2011: £14.9 million) acquisition-related expenses (2012: £0.2 million, 2011: £nil) and the movement in customer cash accounts held by FdB , less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

5 Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities, finance lease liabilities and loans from related parties.

6 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

7 Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate, divided by invested capital. Invested capital is calculated as the Group's net assets, less net cash.

8 Economic profit is adjusted operating profit less a tax charge at the Group's effective tax rate, less a charge for invested capital. The charge for invested capital is calculated as the Group's invested capital (as defined above) multiplied by the Group's weighted average cost of capital, being 10%.

Group performance

Adjusted revenue

Adjusted revenue from continuing operations for the year ended 31 December 2012 was £668.3 million (2011: £650.0 million). In 2011, there was also £1.2 million of exceptional revenue recognised in respect of contract settlements within the Financial Services sector.

Organic revenue was £666.2 million, an increase of 5.6% on a like-for-like basis. Organic revenue growth excludes adverse currency movements of £12.7 million, primarily related to the Euro, £1.9 million of revenue from AR, acquired in November 2012, and £0.1 million (2011: £6.2 million) relating to the impact of disposals in 2011 and 2012, which did not represent discontinued operations.

The increase in organic revenue was driven by higher UK, European and US procurement revenues, higher Insurance Services revenues and higher revenues in our Technology business. These were partially offset by lower revenues in the Financial Services sector.

Adjusted operating profit

Adjusted operating profit from continuing operations was £50.4 million (2011: £43.2 million). On a like-for-like basis, adjusted operating profit increased 19.8%. Organic growth excludes adverse currency movements of £1.6 million, primarily relating to the Euro and Indian Rupee, £0.3 million of profit contribution from AR, and £0.2 million (2011: £nil) relating to the impact of disposals in 2011 and 2012, which did not represent discontinued operations.

The organic increase in adjusted operating profit was primarily driven by the full year impact of cost saving initiatives across the Group, a reduction in depreciation and amortisation, and, to a smaller extent, an increase in higher margin revenues within the Insurance Services sector. These benefits have partially offset the investment in the US procurement business, and an investment in our sales and marketing capabilities.

Statutory operating profit from continuing operations increased to £46.0 million (2011: £6.6 million). Statutory operating profit includes the following:

·; amortisation of acquired intangibles of £4.0 million (2011: £4.8 million); and

·; acquisition-related expenses of £0.4 million (2011: £nil).

In 2011, statutory operating profit also included net exceptional costs of £31.8 million related to restructuring costs of £18.4 million incurred in respect of the Four Part Action Plan, impairment of goodwill, intangibles and other assets of £14.6 million and contract settlement income of £1.2 million.

The table below sets out the reconciliation from statutory to adjusted operating profit for continuing operations.

Xchanging's share of adjusted operating profit for the year from continuing operations was £38.4 million (2011: £33.0 million).

Acquisition and acquisition-related expenses

On 7 November 2012, the Group acquired 98.7% of the share capital of AR, a provider of software packages and comprehensive IT solutions for the securities brokerage and asset management industry in Italy, with a customer base comprising more than 100 leading financial institutions. On 1 February 2013, AR has been merged with our pre-existing Italian business, Kedrios, and the joint company will operate under the name of Xchanging Italy S.p.A..

The Group recorded acquisition-related expenses of £0.7 million (2011: £nil), of which £0.4 million are recognised within administrative expenses and £0.3 million are recognised within finance costs, relating to this acquisition.

Margins

Adjusted operating profit margin for continuing operations improved 90 bps from 6.6% for the year ended 31 December 2011 to 7.5% for the year ended 31 December 2012. This was driven by an increase in margin in the Technology sector, and a reduction in Corporate costs as a result of the cost saving initiatives implemented in 2011. Margins in the Insurance Services, Financial Services and Procurement and Other BPO sectors declined in the year. Please refer to the Business Review for sector analyses.

Non-controlling interests

Non-controlling interest calculations for the Group's non-100% owned subsidiaries are dependent upon individual contractual terms. Some define adjustments in relation to certain items prior to calculating profit share based on the percentage share ownerships. These may include, for example, adjustments for differences between local and international accounting standards, and adjustments for any discounts or fees payable between parties.

In 2012, the adjusted profit after tax for total operations attributable to non-controlling interests was £6.3 million (2011: £4.8 million). The increase in the adjusted profit after tax for total operations attributable to non-controlling interests is due to the improved profit performance in the Enterprise Partnerships with the Lloyd's and London insurance market, and the reduction in the loss generated by Kedrios, partially offset by an increase in the reversal of profit under IFRS in the securities processing business and a reduction in the profit in the remaining Xchanging Solutions Limited (formerly Cambridge Solutions Limited) group.

The reversal of profit under IFRS in the securities processing business impacts non-controlling interest as contractually Xchanging is entitled to 100% of the profits, and cash flows, generated in this business under German GAAP, but the impact of IFRS adjustments is shared with the non-controlling interest. The significant differences between German GAAP and IFRS relate to the accounting treatment for defined benefit pension schemes and the capitalisation, and related amortisation, of internal costs.

Earnings per share (EPS)

When considering EPS, the Group uses Xchanging's share of adjusted profit from continuing operations to represent the performance of the business. Xchanging's share of adjusted profit for the year from continuing operations was £25.4 million (2011: £19.2 million).

On this basis, adjusted basic EPS for the period was 10.58 pence (2011: 8.01 pence). The improvement in adjusted basic EPS is driven by the improved profit performance in 100% owned subsidiaries. Xchanging's share of adjusted profit from continuing operations has also benefited from the non-controlling interest impact of the lower profit from our securities processing business under IFRS compared to German GAAP, as described above.

For a reconciliation of Xchanging's share of statutory profit after tax to Xchanging's share of adjusted profit after tax, as used to determine adjusted EPS, please refer to note 4 in the Notes to the consolidated financial information.

Disposals

On 28 October 2011, the Group disposed of its investment in Cambridge Solutions SARL, which was part of the Technology sector, for no gain or loss.

On 16 January 2012, Xchanging Resourcing Services Limited, a wholly owned subsidiary of the Group, sold its business of sourcing and placing contingent labour for £0.4 million. The assets sold included the contracts of the business, the employees and the databases required to carry out the business. A £0.4 million gain on sale was recognised in the year ended 31 December 2012.

Return on invested capital and economic profit

The Group's return on invested capital has improved from 18.3% in 2011 to 28.0% in 2012, and economic profit has increased from £12.3 million to £22.3 million indicating an increased return in value delivered to shareholders. The improvements result from the rigorous cost management of the business, the exiting of loss making or low margin businesses, and the related growth in cash generation.

Adjusted revenue and adjusted operating profit movement: like-for-like analysis

The table below shows the adjusted revenue and adjusted operating profit movements by sector, excluding the impact of foreign exchange movements, acquisitions and disposals.

Analysis by sectors

Corporate

Corporate costs for the year totalled £15.3 million (2011: £19.9 million). Included within the 2011 costs was £1.8 million of expenditure on specific new business opportunities in the US. Following the finalisation of a significant procurement contract win in North America in August 2011, these costs were included as part of the ongoing cost base of the new US procurement business. A further £0.8 million of costs in 2011 related to employees previously considered part of the US BPO operations, but retained by Xchanging following the sale of the business to Sedgwick at the end of May 2011, and who transferred to form part of the Group's business development team. During the second half of 2011, these employees either exited the business, or were allocated to sectors (notably Insurance Services) and have formed part of the sector results for 2012.

Additionally, corporate costs in 2012 benefitted from the restructuring undertaken in 2011, which lead to the reduction in headcount and simpler, more streamlined processes, and the exit of the West London head office premises in July 2011, resulting in lower rental costs and lower depreciation charges for associated assets. Included in the 2012 result is a £0.4 million gain on the sale of the Xchanging Resourcing Services Limited business and a £0.1 million favourable foreign exchange movement.

Net finance cost

Adjusted net finance costs (pre-imputed interest on put options of £0.1 million (2011: £0.7 million), pre-acquisition-related finance costs of £0.3 million (2011: £nil), and pre-exceptional finance costs of £nil (2011: £4.3 million)) increased marginally from £4.1 million in 2011 to £4.2 million in 2012. Bank and other interest increased from £4.1 million in 2011 to £4.4 million in 2012 primarily due to £0.5 million of interest payable on the £6.0 million deferred consideration payment for the 2011 acquisition of the remaining 50% of Xchanging Broking Services Limited from Aon Limited, partially offset by a reduction in the interest payable on the revolving credit facility due to the reduction in the utilisation of this facility during the year. Amortisation of loan arrangement fees was £nil for the year compared to £0.3 million in 2011. All unamortised loan arrangement fees were written off at the time of the Group's debt refinancing in August 2011. The Group has also benefited in the year from the receipt of a £0.2 million dividend from its investment in a listed Italian software company.

Adjusted cash conversion

The Group delivered a strong performance in the year for adjusted cash conversion, improving significantly to 122.0% (2011: 112.0%). Adjusted cash conversion is calculated by adding back £7.8 million (2011: £14.9 million) of cash outflows in respect of exceptional restructuring provisions recognised in prior years, £0.2 million of acquisition-related expenses paid in the year and £9.1 million (2011: £1.2 million) increase in customer cash accounts held by FdB.

Cash flow

Operating cash flow from continuing operations was £62.6 million (2011: £35.9 million) driven by an improvement in cash generated from continuing operations and lower levels of capital expenditure. Cash generated from continuing operations increased by 40.3% to £85.7 million (2011: £61.1 million), due to the £19.2 million improvement in EBITDA, and a £13.9 million improvement in working capital management offsetting £6.2 million of adverse movements in pensions and provisions. £9.1 million of the working capital improvement relates to an increase in the customer cash accounts offered by FdB.

During 2012, £7.8 million (2011: £14.9 million) of cash was spent on restructuring costs as part of the rationalisation of the Group's overall cost base, all of which (2011: £4.9 million) was in respect of the utilisation of previous restructuring provisions. In the year, net provisions totalling £5.8 million (2011: £26.8 million) have been recognised primarily in respect of onerous lease contracts, dilapidations and additional restructuring. Two onerous lease contract provisions totalling £2.5 million have been recognised for an under-utilised data centre in our Technology business, and surplus office space in our Financial Services sector as result of the integration of AR with our existing operations in Italy. A £0.5 million dilapidations provision and £1.1 million of the restructuring provision relates to the transformation of the operating model in our Broker Services business to meet changing customer demands. The additional £0.5 million of restructuring provisions recognised in the year relates to redundancies in our Italian operations following the acquisition of AR.

Dividend payments to non-controlling interests were £7.6 million (2011: £7.7 million).

Equity free cash flow for the year was £50.3 million (2011: £21.3 million). No dividend was declared or paid in relation to 2011 (2011: no dividend was paid in respect of 2010).

Net expenditure on acquisitions in the year was £17.5 million (2011: £9.7 million). This comprises: the £10.4 million cash consideration paid in November 2012 on completion of the acquisition of AR less the £0.9 million of cash acquired with AR; the £6.0 million deferred consideration payment for the 2011 acquisition of the remaining 50% of Xchanging Broking Services Limited from Aon Limited; the £1.5 million final tranche of the deferred consideration for the 2010 acquisition of Data Integration Limited; a £0.7 million interim payment of the put option with Allianz Global Investors Kapitalanlagesellschaft mbH; the £0.2 million deferred consideration for the acquisition of Elumina Group Pty Limited in 2011; and the £0.4 million proceeds from the sale of the assets of Xchanging Resourcing Services Limited in January 2012.

Overall, the net cash position improved by £31.6 million compared with 2011. Net cash at the end of the period was £76.8 million (2011: £45.2 million).

Capital expenditure

Our net capital expenditure for continuing operations for the year was £15.5 million (2011: £17.5 million), representing 2.3% of revenue (2011: 2.7%) and 58.5% of depreciation and amortisation, excluding amortisation on assets previously unrecognised by an acquired entity (2011: 61.2%). In 2012, Xchanging invested in further developing our Technology sector insurance software product Xuber, Netsett, and completion of our new processing centre in Shimoga, India. Capital expenditure is closely managed to ensure that investment is directed in the right areas to deliver the best returns for shareholders.

Funding, distribution policy and dividends

Funding for sustaining investment and organic growth is met initially from operating cash flow. Our equity free cash flow and available debt finance determine the funding available for acquisitions and distributions.

The Board is recommending a final dividend of 1 pence per share in respect of the year ended 31 December 2012. The recommencement of the dividend is an indication of the Board's confidence in the underlying cash generation and growth outlook of the Group.

Treasury management

All of our treasury activity takes place within a formal control framework, under policies approved by the Board. We monitor compliance with these policies and guidelines through regular reporting of treasury activities.

The treasury function's primary responsibilities are to procure our capital resources and manage our liquidity, foreign exchange and interest rate risks on a Group-wide basis.

Borrowing facilities

Our principal sources of debt finance are a £75.0 million multi-currency revolving credit facility and a £20.0 million term loan provided by a syndicate of banks. Both facilities are committed and mature in August 2015. At 31 December 2012, £20.0 million (2011: £20.0 million) was drawn under the term loan and cash drawn under the revolving credit facility was £17.6 million (2011: £28.0 million). Bank guarantees of €20.0 million (£16.4 million) and USD2.7 million (£1.7 million) were also drawn against the revolving credit facility (2011: €20.0 million (£16.8 million) and USD2.7 million (£1.7 million)). Fixed term loan repayments of £3.3 million, payable every six months, will commence from January 2013.

The Group has a £10.0 million uncommitted overdraft facility linked to its UK notional cash pooling arrangement.

In addition to the above facilities, there is a working capital facility of INR 330.0 million (£3.7 million) provided to Xchanging Technology Services India Private Limited in India. No funds were drawn under this facility at the year end (2011: £2.9 million).

The Group also has non-fund based facilities for the provision of bank guarantees. At the year end date, £2.6 million of guarantees had been issued (2011: £2.6 million).

Headroom under committed and uncommitted credit facilities as at 31 December 2012

At 31 December 2012, the Group had £39.3 million (2011: £28.5 million) of headroom under its committed debt facilities.

We expect to be able to finance our current business plans through ongoing operations and our committed funding facilities.

Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its term loan and revolving credit facilities. As at 31 December 2012, the Group was compliant with all of its financial covenants:

·; the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.0 times. As at 31 December 2012, the ratio was 1.0 times.

·; the ratio of Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 31 December 2012, the ratio was 16.7 times; and

·; the ratio of net cash flow to UK cash pool debt service must not be less than 0.5 times. As at 31 December 2012, the ratio was 5.8 times.

Levels of borrowing and seasonality

Xchanging operates in a wide range of markets and locations and, as a result, the seasonality of our borrowing requirements is relatively low. Underlying cyclicality before capital expenditure is driven principally by collections of dividends and royalties from Enterprise Partnerships and scheduled repayments under the term loan facilities.

During 2012 the Group's average net cash balance, including the average cash balance in customer cash accounts held in FdB, was £62.6 million. The Group's average net cash balance, excluding the average cash balance in customer cash accounts held in FdB, was £47.1 million.

Cash balances

We invest surplus cash to maximise return, within liquidity and counterparty credit constraints that have been approved by the Board.

The majority of our wholly owned UK entities are included in a notional pooling arrangement to optimise liquidity management. We review the efficiency of our other cash balances on a monthly basis.

The aggregate cash balances in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the shareholders and, in the case of FdB, customer cash accounts. Although subject to timing variances, as a general statement we would expect the aggregate cash balance to remain relatively stable as a high proportion of Enterprise Partnerships' equity free cash flow is distributed to the shareholders.

Approximately £11.8 million of the cash balance in Enterprise Partnerships at the year end represented accrued but unpaid licence fees that are expected to be paid to the Group in 2013, and a further £10.8 million is expected to be paid to the Group in 2013 as dividends in respect of 2012 performance. A further £20.7 million represented cash placed in customer cash accounts offered by FdB for which an equal liability is recognised (2011: £11.6 million).The remaining cash balance in the Enterprise Partnerships represents dividends due to non-controlling interests and working capital.

Foreign currency translation exposure

We do not hedge foreign currency profit and loss translation exposures and our reported results may therefore be affected by currency fluctuations.

Foreign currency transaction exposures

We are subject to foreign exchange transaction exposure in our Indian operations, where revenues are generated in Sterling, US Dollars and Euros and the cost base is primarily in Indian Rupees. The principal transaction exposures arising during 2012 included net Sterling cash flows of approximately £18.0 million and net US Dollar cash flows of USD15.3 million. Under our foreign exchange risk management policy, exposures may be hedged with forward foreign exchange contracts when the underlying cash flows are deemed to be highly probable. Typically, we will look to hedge revenue to protect operating cash flow and to support the planning cycle. Foreign exchange contracts hedging revenue against the Indian Rupee amounting to £11.4 million, USD8.2 million and €3.3 million were outstanding at the year end (2011: £4.8 million and USD4.8 million).

Interest rate risk management

The Group reviews its interest rate exposure against acceptable risk profiles on a periodic basis and may enter into interest rate swap agreements in order to achieve an acceptable balance of fixed and floating rate interest exposure. At 31 December 2012 all drawn debt was subject to floating rate interest.

Retirement benefit obligations

The Group has three funded defined benefit schemes in the UK, all of which are closed to new members.

The cash contribution to the UK plans (Insurance Services and Technology sectors) includes £3.0 million per year in respect of recovery plans agreed with the trustees on two UK Plans, one in 2011 and the other in 2012. Recovery plans are agreed on completion of the triennial actuarial valuations and with valuations commencing for the two largest UK schemes in 2013, the current plans will therefore need to be reviewed with the trustees during 2014. It is expected that contributions in respect of the UK defined benefit schemes during 2013 will be £5.4 million (of which £2.0 million is expected to be funded from UK Enterprise Partnerships, and the remainder from a wholly owned subsidiary) and these figures include the anticipated level of deficit recovery payments.

Around 60 UK employees are members of various BAE Systems defined benefit pension schemes; however, the contributions made by the Group to the BAE Systems schemes can only vary in respect of future service contributions and are therefore accounted for on a defined contribution basis. The Group has various indemnities in place with BAE Systems and therefore could only be exposed to deficits in the BAE Systems schemes in the event that BAE Systems were to become insolvent.

In Financial Services, the Group operates various unfunded defined benefit plans, the largest of which is supported by a Contractual Trust Arrangement (CTA). The CTA investment strategy adopted by the Group seeks to match asset movements to changes in the value of the liabilities. It is expected that contributions in respect of the Financial Services defined benefit schemes during 2013 will be £2.8 million (all of which is expected to be funded from Financial Services Enterprise Partnerships).

The Group works closely with the trustees of each of the pension plans to manage the risks associated with the provision of defined benefit pensions and reviews the investment strategy on all three UK schemes. The factors that most affect the value of the liabilities are interest rate and longevity, and the Group's sensitivity to these particular risks is shown in notes to the accounts.

As at 31 December 2012, the Group has net retirement benefit obligations of £62.1 million (2011: £42.4 million). The significant increase in the obligations is driven by an actuarial loss in the largest scheme in the Financial Services sector principally due to a reduction in the discount rate applied from 5.37% to 3.42%. The discount rate reduction is driven by the decrease in German bond yields.

Capital structure

The Group seeks to maintain a strong credit profile to aid its ability to partner in business and will plan so as not to exceed consolidated borrowings of 2.0 times Xchanging's share of consolidated profit before depreciation and amortisation. In order to achieve its desired capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders and adjust asset holdings to reduce or increase debt.

Regulatory capital

Xchanging operates in a number of regulatory regimes. The key businesses affected by regulatory requirements are XTB and FdB, which conduct securities processing and retail investment account administration in Germany. They both maintain full banking licences and are regulated under the German Federal Financial Supervisory Authority (BaFin). Sufficient regulatory capital must be held in these entities to cover the operating and credit risks of the business. The regulatory capital requirement is based on market, operating and credit risk factors applied to asset classes. The regulatory capital in the business is calculated as total equity less total intangible assets. There is no obligation to set cash aside to meet regulatory capital requirements but funding may be required from the holding company if the required regulatory capital is less than the calculated regulatory capital.

No additional regulatory capital was contributed to the German banking group during 2012.

Components of the Insurance Services business are regulated in the United Kingdom by the Financial Services Authority (FSA).

Weighted average cost of capital

The Group has calculated its weighted average cost of capital of as 10% (2011: 10%).

Taxation

The Group's effective tax rate on adjusted operating profit from continuing operations was 31.5% (2011: 36.3%).

The rate was higher in 2011 due to additional tax charges arising in that year from share schemes and other non-deductible items.

The cash tax rate on adjusted profit from continuing operations was 33.9% (2011: 34.5%).

The 2012 rates are higher than the UK statutory tax rate of 24.5% (2011: 26.5%). This is due to losses in Italy where no tax benefit has been recognised and various other non-deductible items. Additionally the effective tax rate has been adversely affected by the write-down of the closing UK deferred tax assets in accordance with the reduction in the UK corporate tax rate. The 2012 rates have also been affected by profits arising in overseas jurisdictions with higher tax rates.

The 2012 effective rate is lower than the 2012 cash tax rate, largely due to the recognition of deferred tax assets in the US.

David Bauernfeind

Chief Financial Officer

28 February 2013

Consolidated income statement

for the year ended 31 December 2012

1 Adjustments to adjusted in 2012 and 2011 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity, acquisition-related expenses and imputed interest on put options, along with the related tax impacting these items.

Consolidated statement of comprehensive income

for the year ended 31 December 2012

Items in the statement above are disclosed net of tax.

Consolidated cash flow statement

for the year ended 31 December 2012

Reconciliation of net cash flow to movement in net cash

for the year ended 31 December 2012

Movement in net cash

for the year ended 31 December 2012

Movement in net cash

for the year ended 31 December 2011

Consolidated balance sheet

as at 31 December 2012