Final Results

17th Mar 2009 07:38



17 March 2009

Friends Provident plc - Preliminary results for the year ended 31 December 2008 (unaudited)

Strong capital position; good progress on strategy

Financial highlights

Insurance Groups Directive (IGD) surplus remains strong, estimated at £0.85 billion at 31 December 2008 (31 December 2007: £1.3bn) and estimated at £0.8bn at the end of February 2009

Final dividend of 2.6p per share bringing full year dividend per share to 3.9p*

High quality of investments and focused strategy position business well to continue turnaround

IFRS net asset value per share excluding goodwill of 77p (2007: 96p) 

EEV underlying profit up to £420 million (2007: £16m) on our established market-consistent approach

IFRS underlying profit of £27 million (2007: £44m) before £217m  (2007: £90m) addition to corporate bond default reserves

Operating highlights

International contribution from new business of £111 million (2007: £110m) 

UK business restructured to align operations to corporate and individual customer segments

£25 million annualised cost savings at 31 December 2008, well on track to deliver £40 million of annualised savings in the UK by end of 2009

Trevor Matthews, chief executive officer, said:

"We are maintaining our capital strength, our prudent approach to accounting and our dividend policy, all of which position us well in the current conditions. 

"The company is reorganised, the leadership team is strengthened, and operational momentum is building. We have taken significant costs out of the business, sharpening our competitive edge in the key markets we identified at the start of 2008.

"2009 will be a tough year for economies worldwide, but we will continue to enhance our product range and build a business primed to broaden our distribution and grow market share both in the UK and abroad."

Financial Summary

	2008	2007
Cash
Life and pensions net cash operating (deficit)/surplus	£(12)m	£19m
Shareholder cash (outflow)/generation	£(155)m	£177m
Internal rate of return on new business**	12.9%	14.4%
Cash payback on new business**	11 years	9 years
IFRS
IFRS underlying profit excluding impact
of increase to corporate bond default reserves	£27m	£44m
Increase to corporate bond default reserves	£(217)m	£(90)m
IFRS underlying loss** before tax	£(190)m	£(46)m
IFRS loss before tax from continuing operations	£(871)m	£(113)m
Basic loss per share	(23.3)p	(5.0)p
IFRS net asset value per share excluding goodwill	77p	96p
EEV
Contribution from new business**	£139m	£206m
EEV underlying profit** before tax	£420m	£16m
Return on embedded value	7.9%	(4.3)%
Embedded value per share ***	128p	160p
Capital and dividend
Estimated IGD surplus capital resources**	£0.85bn	£1.3bn
Total shareholder return	(44.1)%	(21.5)%
Dividend per share*	3.9p	8.0p

* Final dividend of 2.6p expected to be paid by new holding company following group restructuring

** As defined within Appendix 1

*** Embedded value for 2007 is stated on a pro forma basis, including an uplift of the net asset value attributable to F&C to the market value of the stake

- Ends -

For further information please contact:

Journalists
Nick Boakes	Friends Provident plc	+44 (0) 845 641 7814
Peter Timberlake	Friends Provident plc	+44 (0) 845 641 7834
Vanessa Neill	Finsbury Limited	+44 (0) 20 7251 3801
Alex Simmons	Finsbury Limited	+44 (0) 20 7251 3801
Analysts
Chris Ford	Friends Provident plc	+44 (0) 845 641 7832

Ref: J031

Notes to Editors

1. An interview with Trevor Matthews, chief executive officer, will be available to view in video, audio and text formats at www.friendsprovident.com and www.cantos.com from 7.00am today.

2. An analyst presentation will take place at 9.30am today at JP Morgan Cazenove, 20 Moorgate, London, EC2R 6DA.

3. The analyst presentation will be webcast live from 9.30am and on demand from 2.00pm on the Friends Provident website: 

"http://www.friendsprovident.com/results" www.friendsprovident.com/results

4. The presentation slides will be available from 9.30am today on www.friendsprovident.com/presentations

5. For more information on Friends Provident including, photos, awards, fast facts, presentations, and media contacts please visit the media section at www.friendsprovident.com/media

6. Financial reporting dates 

	Financial Reporting Calendar:
	Friends Provident interim management statement plus quarter
	1 new business	28 April 2009
	Friends Provident plc Annual General Meeting	21 May 2009
	Friends Provident plc interim results	11 August 2009
	Friends Provident interim management statement plus quarter
	3 new business	27 October 2009

7. Certain statements contained in this announcement constitute 'forward-looking statements'. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements, from time to time, of Friends Provident plc, its subsidiaries and subsidiary undertakings or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, adverse changes to laws or regulations; risks in respect of taxation; unforeseen liabilities from product reviews; asset shortfalls against product liabilities; changes in the general economic environment; levels and trends in mortality, morbidity and persistency; restrictions on access to product distribution channels; increased competition; and the ability to attract and retain personnel. These forward-looking statements are made only as at the date of this announcement and, save where required in order to comply with the Listing Rules, there is no obligation on Friends Provident plc to update such forward-looking statements.

8. We received a large number of awards in 2008, showing continued recognition of the quality of our products and service:

FTAdviser.com - Online Service Awards 2008. Friends Provident received the 4 Star award for Life & Pensions Provider

Money Marketing Financial Services Awards 2008. Friends Provident came 3rd in the category of Company of the Year 

eBusiness

Investment Life & Pensions Moneyfacts 2008 Awards. Winner of Best Online Service

FTAdviser.com - Online Service Awards 2008. Friends Provident received the 5 Star award for Investment Providers and Packagers

Financial Technology Research Centre - e-Excellence Ratings 2008. Friends Provident received numerous Triple E ratings: Individual Pensions, Group SIPP, Life Protection, Critical Illness, Income Protection and Group Personal Pensions including Stakeholder for both new and existing business

Pensions

Incisive Media - Gold Standard Awards 2008. Friends Provident won the Group Pensions category 

European Pensions Awards 2008. Friends Provident was awarded Pension Provider of the Year

Protection

Online Finance Awards 2008. Friends Provident was awarded Best Online Protection Provider

Incisive Media - Gold Standard Awards 2008. Winner of Protection category

Health Insurance Awards 2008. Friends Provident was named Best Individual Income Protection Provider 

Investments

Investment Life & Pensions Moneyfacts 2008 Awards. Friends Provident won award for Best Ethical Investment Provider 

Overview

Market conditions in 2008 formed a challenging backdrop for the implementation of our new strategy, announced at the start of the year. The outcome of this strategy will be a more profitable cash-generating business with a strong foundation for growth, both in the UK and international markets. Our conservative investment strategy for shareholder assets and prudent accounting methodologies mean we remain well-capitalised.

We have significantly strengthened the operational management team in 2008. Trevor Matthews took up his appointment as chief executive officer at the end of July. In November we announced the appointment of Evelyn Bourke as chief financial officer, a position she will take up from 1 May 2009. Two experienced non-executive directors, David Rough and Robin Phipps, were also appointed to the Board during the year. Rodger Hughes, who was previously a long-standing partner of PricewaterhouseCoopers, will join the Board in March 2009. Lady Judge will retire from the Board on 21 May 2009, the date of Friends Provident's Annual general Meeting.

Strategy implementation

The operational structure of the UK business has been reorganised during the year to align our decision-making structures with the UK corporate and UK individual customer and distributor segments. This is a key change that allows greater flexibility and accountability. Many key UK corporate distributors reacted to corporate uncertainty early in 2008 by removing us from their panels of providers. We have addressed their concerns and we are now back on almost all of the panels that we target.

During the year we reviewed our ownership of a majority stake in F&C Asset Management plc, Lombard International (Lombard), the Luxembourg-based specialist life insurance business, and the financial adviser Pantheon Financial. The intention was to find the approach that offered the optimal value for Friends Provident shareholders. For both Lombard and Pantheon Financial the decision taken was to retain and develop the businesses within Friends Provident. We have taken steps to align both Lombard and Pantheon Financial management incentive schemes with the priorities of our new strategy. We are progressing towards distribution of our stake in F&C Asset Management to our shareholders. 

In January 2008 we set out a target for £40m run-rate of annual cost savings by the end of 2009. We remain confident of reaching this target and reported £25 million run-rate of savings as at 31 December 2008. 

Financial strength

We remain well capitalised with estimated surplus on the IGD basis at the year-end of £0.85 billion arising from capital resources of £1.80 billion less requirements of £0.95 billion, a coverage ratio of 1.9 times. The IGD surplus measure is conservative, excluding £0.6 billion of surplus assets held within long-term funds. The impact on IGD surplus of distributing our investment in F&C Asset Management plc to shareholders and after allowing for payment of dividend and interest in the first half of 2009 will be an increase of £0.1bn. 

We manage the FPLP With Profits Fund on the realistic basis, and on this basis the surplus within this fund continues to cover its risk capital margin without requiring additional shareholder support. 2008 saw significant adverse market movements in equities, bonds and commercial property which, as would be expected, reduced the regulatory surplus. It exceeded capital requirements by £0.3 billion at the year end. The equity backing ratio (which includes commercial property investments) of asset shares in this fund was reduced over the second half of 2008 to around 16% by the end of the year. Consequently, IGD surplus was not materially sensitive to movements in equity markets.

Our corporate debt portfolio remains highly-rated, with over 98% of £6.1 billion of corporate bonds (excluding unit-linked funds) at investment grade. Asset backed securities (excluding unit-linked funds) were £1.2 billion, of which 98% were at investment grade.

Allowing for investment market movements since the year-end, we estimate the IGD surplus to be £0.8 billion at the end of February and that this surplus would not be reduced by more than £0.1 billion if bond spreads were to widen by a further 100 basis points, or more than £0.2 billion for 150 basis points.

Outlook

2009 is expected to reflect a continuation of the trading environment of the second half of 2008, with new business in early 2009 below the 2008 comparatives. 

In the UK we are seeing increased traction with group pensions distributors and we are on almost all of the distributor panels for our targeted market segments. We expect this to continue to support new scheme wins. A further £17 million of APE over the next six months is expected from new schemes signed up in the first two months of 2009. The protection market remains subdued in line with the housing market. We are working hard to broaden our distribution, to allow greater utilisation of the strengths of our efficient platform.

In line with our policy, we have updated our persistency assumptions to reflect recent experience. We are closely monitoring policy lapses due to the potential impact of the ongoing recession.

We expect cost savings in the UK to contribute to improvement in new business profitability when the full run-rate is achieved from the end of 2009.

FPI's short term results will depend to some extent on the reaction of the diverse markets in which it operates to the ongoing global economic turmoil, although further product additions place us well within most markets. In the Middle East we have launched our Optus group savings product. We are aiming to provide further products in the German market. Both FPI and Lombard continue to have strong prospects for growth in the medium and longer term.

Financial performance

Cash

Life and pensions net cash operating flow was a deficit of £(12) million (2007: £19m surplus) as we reduced new business strain in line with the new strategy, but in-force surplus was also lower than last year

Shareholder cash outflow was £(155) million (2007: £177m inflow) as a result of increases to corporate bond default reserves (£(217)m outflow) 

Internal rate of return on new business was 12.9% (2007: 14.4%) and cash payback increased to 11 years (2007: 9 years) as a result of a number of factors described in the Business Review.

IFRS

IFRS underlying profit before increases to corporate bond default reserves was £27 million (2007: £44m), with the new business strain and in-force surplus both reducing, together with one-off charges of £(70) million, mainly for changes to expense assumptions.

The allowance for corporate bond defaults within statutory reserves increased by £217 million (2007: £90m) over the year, leading to a charge for this amount in the IFRS and cash results. The charge is after allowing for a £193 million release from changes to the liability reserving basis. Our reserving approach remains prudent, with an allowance for defaults of approximately £500 million on assets backing annuity liabilities of £2.7 billion.

IFRS loss before tax from continuing operations was £(871) million  (2007: £(113)m) and basic loss per share (23.3)p (2007: (5.0)p). These measures reflect a £(264) million charge for impairment of intangible assets related to F&C, £(154) million for losses attributable to minority interests in the F&C Commercial Property Trust and one-off costs of strategy implementation of £(78) million.

IFRS net asset value per share excluding goodwill was 77p (2007: 96p) and represents the equity attributable to ordinary shareholders only, less all goodwill.

EEV

Our embedded value results are calculated on the market-consistent basis that we have used since 2005. Our basis differs in some details from the CFO Forum Market Consistent Embedded Value Principles, notably in that we use the forward gilt curve rather than the swap curve to define risk-free rates. 

Contribution from new business was £139 million (2007: £206m) as UK business showed the anticipated fall in profitability due to more prudent assumptions and lower volumes.

EEV underlying profit before tax of £420 million (2007: £16m) improved significantly as there was no recurrence of significant charges for assumption changes that impacted the 2007 results. Operating assumption changes were £(22) million (2007: £(361)m).

Return on Embedded Value on an underlying basis was 7.9% (2007: (4.3)%) and not materially impacted by adverse operating assumption changes as in 2007.

Embedded value per share reduced to 128p (2007: 160p) reflecting a 15p decrease from reduced market value of the F&C stake, payment of dividends to Friends Provident shareholders and investment market movements.

Distribution of stake in F&C Asset Management

We are progressing toward distribution of our stake in F&C Asset Management to our shareholders by way of a return of capital. In order to achieve the return of capital, it is necessary to undertake a reorganisation that involves establishing a new holding company on top of the Group to effect the demerger and to create sufficient distributable reserves to enable future dividends to be paid by the Group. The approval of shareholders and the court will be required for this reorganisation and it is expected that shareholders will receive relevant documentation at the end of April 2009. It is anticipated that completion will take place at the end of June 2009.

Dividend

The Directors continue to believe that it is in the interests of shareholders to maintain the Group's existing dividend policy. While the Group has sufficient cash to support a final dividend of 2.6 pence per share for the year ended 31 December 2008, as a technical legal and accounting matter, the distributable profits shown in the individual company accounts for Friends Provident plc are insufficient to enable it to declare the final dividend, following the impairment of F&C in its accounts. Having considered these factors, the Directors believe that the establishment of a new holding company for the Group is the most suitable and effective way to provide greater flexibility in the capital structure of the Group, effect the demerger of F&C and provide sufficient distributable reserves to enable payment of a final dividend for 2008. The final 2008 dividend will be paid as soon as practicable after establishment of the new holding company. The directors will make a judgement on future dividend levels, taking into account future developments and the circumstances prevailing. 

Business Review

As expected, the change in strategy that we announced in January 2008 has had a significant impact on our UK trading results. In addition, the global economic downturn has provided a very tough operating environment both in the UK and internationally.

New business sales

	APE	APE	APE	PVNBP	PVNBP	PVNBP
	Change	2008	2007	Change	2008	2007
	%	£m	£m	%	£m	£m
UK Corporate	(20)%	£429m	£535m	(25)%	£1,989m	£2,662m
UK Individual	(44)%	£120m	£216m	(46)%	£954m	£1,780m
UK Total	(27)%	£549m	£751m	(34)%	£2,943m	£4,442m
FPI	13%	£210m	£186m	3%	£1,273m	£1,235m
Lombard	24%	£246m	£199m	24%	£2,463m	£1,985m
Intl Total	18%	£456m	£385m	16%	£3,736m	£3,220m
Total	(11)%	£1,005m	£1,136m	(13)%	£6,679m	£7,662m

Total new business APE was down 11%. UK sales were down 27% as we implemented our new strategy focusing on key lines of business. International new business was up 18% in Sterling terms and 3% on constant currency terms, reflecting strong performance from both FPI and Lombard as markets around the world were affected by global economic developments. 

Contribution from new business

		2007			2007
	2008	(Adjusted)*	2007	2008	(Adjusted)*	2007
	Contri-	Contri-	Contri-	PVNBP	PVNBP	PVNBP
	bution	bution	bution	margin	Margin	margin
UK Corporate	£14m	£30m	£38m	0.7%	1.1%	1.4%
UK Individual	£14m	£49m	£58m	1.5%	2.8%	3.3%
UK Total	£28m	£79m	£96m	0.9%	1.8%	2.2%
FPI	£44m	£39m	£39m	3.4%	3.2%	3.2%
Lombard	£67m	£71m	£71m	2.7%	3.6%	3.6%
Intl Total	£111m	£110m	£110m	3.0%	3.4%	3.4%
Total	£139m	£189m	£206m	2.1%	2.5%	2.7%

* As previously disclosed in the 2007 full year results, assumptions for maintenance expenses and corporate costs were revised in the embedded value basis at the end of 2007. This basis change had a material effect on UK contribution from new business, internal rate of return (IRR) and cash payback, with a less significant impact on International results. In accordance with our normal practice, we have not restated the 2007 figures. Commentary is given against the adjusted comparatives.

Contribution from new business before tax has reduced by £50 million to £139 million. Contributions from both of the UK businesses were significantly down due to lower sales volumes and margins. International contribution was similar to last year with an increase in FPI offsetting a reduction in Lombard.

The overall margin (defined as contribution from new business as a percentage of PVNBP) decreased from 2.5% to 2.1% with the UK margin falling from 1.8% to 0.9% and the International margin falling from 3.4% to 3.0%.

UK new business volumes reduced, affecting overall profitability:

New business sales were lower for those product areas from which we strategically withdrew: new group pensions schemes on an initial commission basis, and commission-paying individual pensions, savings and investments

There was a temporary hiatus on new scheme wins in group pensions due to uncertainty arising early in the year following speculation on a potential takeover; we have worked hard to regain positions on distributors' panels and are once again winning new schemes

We made strong progress towards our expense savings targets, however new business volumes, driven by these factors, have reduced more quickly than expenses. We will continue to control closely and reduce expenses in the UK in line with our target for £40 million run-rate savings by the end of 2009. 

FPI margins have improved slightly. However Lombard margins have reduced due to the mix of business sold, with a higher proportion of large cases where margins are typically lower, and higher acquisition expenses. 

Internal rate of return (IRR) and cash payback of new business

					2007
		2007		2008	(Adjusted)	2007
	2008	(Adjusted)	2007	Cash	Cash	Cash
	IRR	IRR	IRR	payback	payback	payback
UK Corporate	7.5%	7.9%	8.3%	24yrs	20yrs	18yrs
UK Individual	15.4%	17.2%	19.2%	12yrs	8yrs	7yrs
UK Total	9.9%	10.9%	11.7%	19yrs	14yrs	12yrs
FPI	15.3%	17.5%	17.8%	6yrs	6yrs	6yrs
Lombard	22.6%	29.8%	29.2%	5yrs	4yrs	4yrs
International Total	19.0%	23.2%	23.0%	6yrs	5yrs	4yrs
Total	12.9%	13.8%	14.4%	11yrs	10yrs	9yrs

The overall IRR has reduced from 13.8% to 12.9% with the UK IRR 1.0% per annum lower and the International IRR down by 4.2% per annum. The UK IRR has decreased due to the factors outlined above for the contribution from new business. The FPI IRR has fallen because we elected not to use financial reinsurance in 2008 and the proportion of regular premium business increased. The Lombard IRR has fallen because of business mix. The overall cash payback period has increased from 10 to 11 years, with the UK payback increasing from 14 to 19 years and the International payback increasing by 1 year, as a result of the factors described above. IRR and payback for both International businesses remain attractive.

Management expenses

The management expenses of the life and pensions businesses, which exclude both commission payments and non-recurring costs, are set out in the table below. 

	2008				2007
	UK	FPI	Lombard	Total	UK	FPI	Lombard	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Acquisition	123	25	36	184	141	23	27	191
Maintenance	108	18	16	142	73	15	12	100
Development	-	9	3	12	41	7	2	50
Other	14	-	3	17	6	-	4	10
Total Life & Pensions	245	52	58	355	261	45	45	351
Corporate				18				14
Total				373				365

At the end of 2007 we took the decision to report as development expenses only those costs that relate to wholly new products or markets. UK maintenance expenses therefore now reflect some costs that would previously have been reported as development costs. Expenses of the International businesses have increased in order to develop new products and support growth in both existing and new markets. £10 million of the Lombard increase is due to the weakening of Sterling against the Euro by 22% over the year. Other expenses include £6 million additional spend on the Wrap platform (costs incurred before the decision to close was taken, as well as costs of closure), £2 million relating to the strategic review programme and a number of smaller items.

In January 2008 we announced our target of £40 million of annualised savings by the end of 2009 compared to the 2007 operating cost base. The annualised savings for the UK business are calculated by annualising committed savings and deducting any increases, including inflation, to produce a net saving achieved. In addition we committed to reducing development costs by £20 million from the 2007 level.  Implementation costs for the full savings are expected to be above the £60 million indicated in January 2008 by £14 million. This is a result of the higher level of savings required to offset inflation of the UK cost base.

We have made significant progress towards these targets during 2008, with £25 million annualised operating savings achieved at 31 December 2008 (£22 million acquisition and £3 million maintenance) and a reduction of £15 million in development costs, for a one-off implementation cost of £32 million. Significant activities contributing to achieving the savings in 2008 included:

Reorganising our sales, marketing and customer services functions to reflect our specialist market focus - in aggregate, we reduced staff headcount by 10% over the year

Signing an agreement with IBM for provision of certain IT support functions, with initial annual savings of £6 million

Reducing development costs following closure of the Wrap platform development

Since the end of 2008 we have confirmed the closure of a site in Manchester and signed a further agreement with our longstanding partner Wipro for outsourcing of certain IT development functions. We remain confident of delivery against our cost target for the end of 2009.

UK Corporate

	Group	Group
	pensions	protection	Total
New business (APE)
2008	£422m	£7m	£429m
2007	£526m	£9m	£535m
New business (PVNBP)
2008	£1,964m	£25m	£1,989m
2007	£2,611m	£51m	£2,662m
Contribution
2008	£14m	-	£14m
2007 (adjusted)	£23m	£7m	£30m
2007	£32m	£6m	£38m
PVNBP margin
2008	0.7%	(0.7%)	0.7%
2007 (adjusted)	0.9%	13.1%	1.1%
2007	1.2%	13.1%	1.4%
IRR
2008	7.8%	1.3%	7.5%
2007 (adjusted)	8.4%	N/a	7.9%
2007	8.8%	N/a	8.3%
Cash payback
2008	23yrs	N/a	24yrs
2007 (adjusted)	20yrs	N/a	20yrs
2007	18yrs	N/a	18yrs

Group Pensions

Following the decision in January 2008 to withdraw from writing new group pension schemes on an unfunded commission basis, we gave three months' notice to distributors allowing the pipeline of unfunded commission schemes to flow through. Corporate uncertainty about a potential takeover of Friends Provident led fee-based distributors to adopt a 'wait and see' approach early in the year. We became re-established on provider panels in the fourth quarter, winning 26 schemes in the quarter. Due to the lead time from scheme wins to business coming on to the books, we expect around £20 million of new business sales APE related to these schemes to be reported in the first half of 2009.

	2008	2008
Group pensions new	Unfunded commission	Fee-based and funded
business (APE)	basis	commission basis
New schemes and single
premium transfers	£59m	£29m
Incremental business from
existing schemes	£187m	£148m
Totals	£246m	£177m

This table shows almost 80% of new business came from new members and increments under existing schemes. This proportion was unusually high, reflecting the reduced new scheme activity during 2008.

We increased total group pensions scheme members by 10% over the year from 682,000 to 750,000. Pension assets under management at the end of the year were £7.3 billion, with movements from the start of the year set out below. 

Pension assets under management	2008	2007
	£m	£m
Start of the year	7,595	5,488
Regular contributions	1,297	1,006
Transfers in and lump sum contributions	615	1,177
Transfers out and retirements	(446)	(474)
Investment return	(1,780)	398
End of the year	7,281	7,595

These figures include unit-linked group and individual pensions. The main driver of the reduction in assets was significant negative investment returns as equity and bond markets fell. Single premiums decreased due to the lower amount of new group pensions scheme wins and reduced new individual pensions business.

Contribution from new group pensions business has fallen from £23 million to £14 million and the PVNBP margin has reduced from 0.9% to 0.7%. The main reason for the decrease is the reduction of volumes ahead of actual expenses across the UK business. We have also reflected increased early retirement rates and paid-up rates in the persistency assumptions in light of 2008 experience.

The IRR on this business has fallen by 0.6% to 7.8% and the cash payback period has extended by 3 years to 23 years. This is mainly due to the same reasons as above.

Group protection

Group protection business accounts for a small proportion of the UK Corporate business. During the year some competitors adopted extremely aggressive pricing strategies, which we chose not to match. As a result, group protection new business reduced by 26%. However we increased group protection premiums in payment over the year to £28 million at the year-end (2007: £25m). Contribution from new business decreased from £7 million to £nil as a result of the lower volumes and a strengthening of persistency assumptions. As this business has previously been reported combined with individual protection business, comparative figures for IRR and payback are not available.

UK Individual

	Individual	Individual
	protection	pensions	Annuities	Investments	Total
New business (APE)
2008	£45m	£41m	£26m	£8m	£120m
2007	£59m	£79m	£27m	£51m	£216m
New business (PVNBP)
2008	£272m	£343m	£265m	£74m	£954m
2007	£362m	£644m	£273m	£501m	£1,780m
Contribution
2008	£9m	£8m	£(1)m	£(2)m	£14m
2007 (adjusted)	£18m	£18m	£12m	£1m	£49m
2007	£25m	£19m	£13m	£1m	£58m
PVNBP margin
2008	3.2%	2.4%	(0.3%)	(2.8%)	1.5%
2007 (adjusted)	5.2%	2.8%	4.4%	0.1%	2.8%
2007	6.7%	2.9%	5.0%	0.2%	3.3%
IRR
2008	8.6%	12.6%	N/a	2.7%	15.4%
2007 (adjusted)	14.6%	16.5%	N/a	7.6%	17.2%
2007	20.4%	16.7%	N/a	7.8%	19.2%
Cash payback
2008	13yrs	11yrs	N/a	N/a	12yrs
2007 (adjusted)	10yrs	8yrs	2yrs	29yrs	8yrs
2007	6yrs	8yrs	1yr	24yrs	7yrs

UK Individual total new business on the APE basis was 44% lower, mainly as a result of our withdrawal from less profitable segments of the market. This strategic change entailed focusing primarily on protection and annuity business.

Contribution from new business has decreased from £49 million to £14 million, IRR has decreased from 17.2% to 15.4% and cash payback has increased from 8 to 12 years. The main reasons are (as for UK Corporate) volumes reducing ahead of expenses and the factors impacting annuity margins discussed below.

Individual protection

Individual protection APE fell 24% to £45 million. Around £35 million is life and critical illness business, where sales are linked to transactions in the UK housing market. The remaining £10 million, which reduced by only 12% over the year, is income protection, a market where we are one of the leaders and which is less closely linked to house purchase transactions. 2008 market share for total individual protection business was 5.7%. We extensively restructured our sales force through the middle of the year, which led to reductions in market share in the second and third quarters. This process is now complete and we have gained share in the fourth quarter. Our critical illness product terms were perceived as not being as competitive as those of market leaders, which we have addressed through adding cover for a number of conditions early in 2009.

Contribution reduced from £18 million to £9 million, mainly driven by lower volumes. In addition, the expense basis change in respect of income protection claims and persistency assumption changes were also factors. IRR reduced from 14.6% to 8.6% and cash payback increased from 10 to 13 years for the same reasons.

Individual protection premiums in payment were level at £289 million (2007: £287m).

Individual pensions

Individual pensions APE reduced by 48% following the decision not to offer this business on unfunded commission terms. 2008 new business included £13.6 million APE received in respect of Department of Work and Pensions rebates, slightly down on the corresponding £14.0 million APE received in 2007. 

Contribution from new business reduced from £18 million to £8 million mainly due to lower volumes. IRR reduced from 16.5% to 12.6% and cash payback increased from 8 to 11 years because of the same factors.

Annuities

New annuity business was broadly maintained at 2007 levels, falling just 4% in 2008 to £26 million APE. We continue to focus primarily on providing annuities for our pensions customers as they reach retirement. New annuities APE written continued to be over 40% of the value of vesting pension funds in the year. Annuities in payment at year-end increased from £150 million to £166 million. 

The contribution from new business has reduced to a £1 million loss in 2008 compared to a £12 million profit in 2007. This is due to our reporting basis under EEV which makes no allowance for a return on the backing assets in excess of the risk-free rate (based on gilts); an assumption which is a key driver of the reported new business value.

Like our competitors, when pricing annuity business in 2008 we have typically passed on some of the return expected in excess of risk-free to policyholders in the form of higher annuity rates. With corporate bond spreads widening, this extra return has varied over the year. However, our EEV basis assumes that a risk-free rate is earned and hence a day one loss is recorded, but profits are expected to emerge over time. Our reporting methodology does not change the actual level of profits, merely the timing of when these profits are recognised.

To give an indication of how sensitive the new business value is to the choice of risk-free rate, assuming that 50 basis points of the spread available on a representative portfolio of bonds is due to illiquidity would increase the 2008 annuity contribution from new business by £13 million to £12 million. A 100 basis point illiquidity assumption would increase contribution from new business by £25 million to £24 million.

Investments

We adopted a tactical approach to the Investments market in our new strategy announced in January 2008. In addition, this market has been affected by the economic downturn and changes in capital gains tax rules. New business APE has consequently reduced from £51 million to £8 million.

Friends Provident International (FPI)

	2008	2007
New business (APE):
Asia	£103m	£100m
UK	£14m	£20m
Middle East	£42m	£22m
Europe (excluding UK)	£34m	£28m
Rest of the World	£17m	£16m
Total APE	£210m	£186m
New business (PVNPB)	£1,273m	£1,235m
Contribution from new business	£44m	£39m
VNB margin (PVNBP basis)	3.4%	3.2%
IRR	15.3%	17.8%
Cash payback	6 years	6 years
Assets under management	£4,526m	£4,722m

FPI delivered sales of £210 million, representing a 13% increase, helped in part by the fall in the value of Sterling. On a constant currency basis sales were up by 5% driven by a strong increase in the Middle East. Sales in Asia continue to represent about half of FPI's overall sales, with Hong Kong being the single largest market. The severe economic conditions prevailing led to a reduction in single premium investment business in the UK. Continued expansion in the German pensions market helped to lift overall sales in Europe to £34 million.

Contribution from new business has increased from £39 million to £44 million due to the growth in sales, strong cost management, and a small margin increase.

IRR reduced by 2.5% for two reasons. Financial reinsurance was utilised in 2007 but not in 2008; this reduced the IRR by 1.5%. Secondly, the mix of business changed with a higher proportion of regular premium business compared to single premium business. Cash payback remains unchanged.

Funds under management decreased during the year due to significant negative investment returns more than offsetting new money. 

Lombard

	2008	2007
New business (APE):
UK and Nordic	£58m	£28m
Northern Europe	£62m	£58m
Southern Europe	£94m	£98m
Rest of the World	£32m	£15m
Total APE	£246m	£199m
Of which, large cases (greater than €10m)	£106m	£79m
Total APE excluding large cases	£140m	£120m
New business (PVNBP)	£2,463m	£1,985m
Contribution from new business	£67m	£71m
VNB margin (PVNBP basis)	2.7%	3.6%
IRR	22.6%	29.2%
Cash payback	5 years	4 years
Assets under management	£12,425m	£10,060m

Lombard's new business in 2008 was £246 million, representing a 24% increase over 2007. The majority of Lombard sales are Euro-denominated and therefore benefited from the fall in the value of Sterling against the Euro. On a constant currency basis, sales increased by 2% in 2008. This was a strong result given investment market falls have led to a number of potential clients deferring estate planning decisions. Funds under management were down around 5% in Euro terms at €13.0 billion, reflecting investment market falls. Because of exchange rate movements, in Sterling terms funds under management increased by 24%.

UK sales increased sharply, resulting from a focus on niche opportunities and, in particular, UK resident non-domiciled clients. In Northern Europe, German sales slowed due to impending legislative changes that led to uncertainty over life assurance taxation. In Southern Europe constant currency sales fell by 22% with growth in France offset by significantly lower sales in Spain, where these was very strong growth in 2007. Sales in the rest of the world increased by 80% in constant currency terms, including a number of cases for Mexican clients.

Contribution from new business has reduced from £71 million to £67 million. The growth in sales has been more than offset by a reduction in PVNBP margin from 3.6% to 2.7%. Margin has decreased in part because of a change in product mix as the proportion of competitively priced large cases has increased. IRR has reduced by 6.6% to 22.6% and the cash payback period has increased marginally from 4 to 5 years.

IFA businesses

	2008	2007
	£m	£m
Sesame underlying profit	10	12
Pantheon Financial underlying profit	-	2

Sesame continued to trade profitably despite difficult conditions as the market for mortgage-related products became more challenging through the year. Sesame provides services to around 7,500 advisers across the UK, a figure that increased slightly over the course of the year.

Pantheon Financial will be retained within Friends Provident and will be managed to enhance value for Friends Provident shareholders. Pantheon broke even in 2008.

Asset Management

	2008	2007
	£m	£m
Net revenue	230	265
Operating expenses	(171)	(184)
Other	(3)	(3)
Asset Management underlying profit before tax	56	78
Operating margin	26.4%	30.9%

2008 was characterised by severe market declines, reducing client portfolio values and investor confidence. F&C has demonstrated that it is a robust business, with diversification by asset class, client type and geographic exposure resulting in resilient revenues. In September 2008 F&C completed the merger of its UK and Ireland property business with REIT Asset Management to create F&C REIT Asset Management, a standalone global property asset manager with £7.9 billion of assets under management in which F&C holds a 70% stake.

Assets under management were £98.6 billion at 31 December (2007: £103.6bn). There were £4.4 billion of insurance net outflows during the year, and a net £6.3 billion of other outflows. The average fee rate on new institutional business was 30% higher than fees earned on institutional outflows. £3.2 billion of new assets were acquired following the creation of F&C REIT Asset Management.

Net revenue reduced year-on-year although investment management fees were down by just 5% at £236 million (2007: £246m). The average fee margin, excluding performance fees, continued to increase, from 22.5% in 2007 to 22.9% in 2008.

Operating expenses were reduced as management acted to constrain spending in reaction to lower short-term revenues and longer term market uncertainties. This action has helped to support the operating margin, which declined to 26.4% (2007: 30.9%).

Financial Review

This review is structured in the following sections: Cash Generation, IFRS Profitability, Financial Strength, EEV Profitability and Embedded Value.

In the Financial Review published as part of the Interim management report and results for the half-year ended 30 June 2008, three businesses, F&C Asset Management plc (F&C), Lombard and Pantheon Financial (Pantheon), were identified as non-core and shown separately. Since that date it has been decided to retain and develop Lombard and Pantheon. We are progressing towards distribution of our stake in F&C to shareholders. For the purposes of this report, all three businesses are included in the review of the Group's financial results.

CASH GENERATION

Shareholder cash generation is the cash generated by the business during the year that is available to cover dividends and capital requirements. This is calculated on the regulatory basis and includes tax, investment movements and one-offs.

Summary of shareholder cash generation

	2008	2007
	£m	£m
New business strain	(303)	(321)
In-force surplus	243	272
Tax and other items	48	68
Life and Pensions net cash operating (outflow)/ surplus	(12)	19
Investment return and other items	(13)	13
Principal reserving changes and one-off items	(119)	71
Shareholder cash (outflow) / generation before corporate
bond default reserve movements	(144)	103
Increase in corporate bond default reserves	(217)	(90)
Mark to market movement of corporate debt	206	164
Shareholder cash (outflow) / generation	(155)	177

Shareholder cash generation was an outflow of £(155)m compared to £177m inflow in 2007. This result is mainly driven by principal reserving changes and one-off items, increased corporate bond default reserves in respect of assets backing our annuity liabilities, and the mark to market impact of our corporate debt.

Principal reserving changes and one-off items include a number of positive and negative one-off items totalling net £(119)m (2007: £71m). These include the final cash acceleration in respect of PS06/14 reserving changes, and charges for expense and persistency assumption changes and strategic review implementation costs.

The increase in corporate bond default reserves in respect of assets backing our annuity liabilities has impacted both IFRS profits and the shareholder cash result by a charge of £(217)m (2007: £(90)m). The effect of this on shareholder cash has been offset by the mark to market adjustment for our corporate debt of £206m (2007: £164m).

Life and Pensions net cash operating result

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
New business strain	(151)	(152)	(303)	(211)	(110)	(321)
In-force surplus	131	112	243	186	86	272
Tax and other items	39	9	48	61	7	68
Total	19	(31)	(12)	36	(17)	19

The Life and Pensions net cash operating result was £31m lower than 2007 at £(12)m. This decrease was driven by £29m lower in-force surplus and a £20m reduction in tax and other items, offset by £18m lower new business strain.

New business strain and in-force surplus

	2008			2007
	New			New
	business	In-force		business	In-force
	strain	surplus	Total	strain	surplus	Total
	£m	£m	£m	£m	£m	£m
Protection	(38)	25	(13)	(40)	44	4
Pensions	(106)	41	(65)	(145)	36	(109)
Annuities	1	(1)	-	10	5	15
Investments	(8)	2	(6)	(36)	14	(22)
With Profits Fund	-	64	64	-	87	87
UK Total	(151)	131	(20)	(211)	186	(25)
FPI	(103)	67	(36)	(69)	44	(25)
Lombard	(49)	45	(4)	(41)	42	1
Intl Total	(152)	112	(40)	(110)	86	(24)
Total	(303)	243	(60)	(321)	272	(49)

Cash new business strain mainly consists of acquisition expenses, commissions paid, and reserves established on a prudent basis in respect of the business written. The cash in-force surplus takes account of annual management charges received less maintenance expenses incurred. All figures are stated before tax and one-off items. Further detail is provided in Appendix 3.

Total cash new business strain is £303m compared to £321m last year. The UK strain has fallen by 28% as a result of the lower sales, commissions and acquisition management expenses, following implementation of the new strategy. International strain has increased by 38%, driven by higher sales and a change in mix of business. 

Total cash in-force surplus has decreased from £272m to £243m. UK surplus has reduced by £55m, mainly in respect of protection, investments and the With Profits Fund. There are two main reasons for the UK reduction. Firstly, the phased implementation of PS06/14 reserving changes over 2006 - 2008 has had the effect of accelerating surplus release, reducing future protection surplus. Secondly the 2007 expense basis change has the effect of recategorising costs previously included in new business strain. International in-force surplus has increased by 30% mainly from growth in funds under management and an increase in FPI regular premium business.

Protection

UK Protection sales are 24% down measured on the APE basis. New business strain has fallen by less than this due to a change of mix of income protection business between group and individual products, which have different reserving profiles. In-force surplus has fallen from £44m to £25m mainly due to implementing PS06/14 reserving basis changes in 2007 and 2008, which had the effect of accelerating surplus release. 

Pensions

Pensions sales decreased by 23%, which has caused a £39m reduction in new business strain. Commission fell by 42% from £72m to £42m as our new strategy started to take effect, with additional savings in management expenses. The in-force surplus has increased from £36m to £41m. Management charges received from existing business remained stable with charges generated from new premiums broadly offsetting reduced charges from falling investment markets. Legacy blocks of business produced additional surplus as prudent margins within the valuation basis are released as the business matures.

Annuities

Annuity sales decreased by 3%. Cash generation on sale was lower than 2007 reflecting the prudent reserving basis that prevents annuity liabilities being valued in line with current high yields on the matching assets. In the absence of future bond defaults, however we can expect future in-force surplus to be higher as these prudent reserves are released. The change in the annuity reserving basis is discussed in the corporate bond default reserves section below.

Investments

The adoption of a more selective approach to writing new investment business has resulted in an 85% fall in new business and consequently a lower new business strain. The lower in-force surplus is mainly due to falling investment markets, which have reduced annual management charges and increased non-unit reserves.

With Profits

The reduction in the surplus generated by the With Profits Fund from £87m to £64m reflects a combination of the run off in the book, the lower investment markets, and also the inclusion of some small positive one-off items in the 2007 result. Within this surplus the shareholders' one-ninth cost of bonus remains at £12m.

FPI

FPI sales have increased by 13% but the percentage increase in the new business strain is higher than this, mainly due to the business mix, in particular the German pension business with relatively high commission levels. In-force surplus has increased from £44m to £67m, largely due to the increased volume of regular premiums from the Premier product, which was sold in large volumes in 2007. 

  Lombard

Lombard sales increased by 24% and this drove the new business strain increase. The increased in-force surplus is from management charges earned on higher funds under management, notwithstanding falling investment markets.

Tax and other items

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Tax	29	(2)	27	49	6	55
Other net income	10	11	21	12	1	13
Total	39	9	48	61	7	68

The tax credit has been restricted in 2008 due to unrelieved losses because the regulatory basis does not allow a deferred tax asset to be created. UK other net income mainly represents income from IFA businesses as discussed in the Business Review section.

Investment return and other items

	2008	2007
	Total	Total
	£m	£m
Investment return and other	(29)	(10)
F&C dividend received	16	23
Total	(13)	13

Investment return and other includes corporate costs and currency movements. 2008 included £17m losses on exchange rate movements in respect of the Lombard net assets, which are denominated in euro. 2007 included the net compensation payment of £34m received in respect of the aborted merger with Resolution plc. 

Principal reserving changes and one-off items

	2008	2007
	£m	£m
Protection PS06/14 reserving changes	112	138
Expense assumption changes	(72)	(51)
Mortality and persistency changes	(25)	-
Strategic review costs	(84)	-
Reinsurance of annuity portfolio	-	56
Pension scheme contribution	(20)	-
Other	(36)	(16)
Tax	6	(56)
Total	(119)	71

During the year we implemented an internal reorganisation to gain further benefit from the PS06/14 reserving changes. This resulted in a further cash surplus acceleration of £112m and completes the implementation of the PS06/14 changes.

The expense assumption change of £72m results from strengthening expense reserves, in particular in respect of income protection claims. 

Mortality and persistency changes of £25m mainly reflect strengthening of the persistency basis for protection business.

Strategic review costs of £84m include £32m implementation costs incurred during the year, £10m advisor fees related to potential asset sales, and a reserve for future implementation costs of £42m. (The reserve is made for regulatory purposes and hence is included within shareholder cash resources but is not a provision for IFRS or EEV accounting). 

An additional £20m contribution to the Friends Provident Pension Scheme was made during the year.

Other includes a number of items including charges in respect of improved modelling and non-recurring project related costs. The 2007 other items included the write off of the Wrap development, which was previously included in the UK other income line.

Corporate bond default reserves

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Increase due to corporate
bond spread widening	(410)	-	(410)	(90)	-	(90)
Change in assumption for
the liquidity premium	193	-	193	-	-	-
Net increase in
corporate bond
default reserves	(217)	-	(217)	(90)	-	(90)

A charge of £217m is recognised in the shareholder cash result (and also in IFRS underlying profit) for the net increase in corporate bond default reserves in respect of annuity business. However, as the bonds backing the annuities are generally expected to be held to maturity, the charge will be released as profit and shareholder cashflow over time, to the extent that defaults do not arise. 

The charge arose from the widening of bond spreads above gilt yields from approximately 160 basis points at the end of 2007 to approximately 450 basis points at the end of 2008. Statutory reserving rules allow the recognition of a liquidity premium in the discount rate used to value the liabilities. At the start of the year we had a very prudent basis that took only 40 basis points of the spread above risk-free into account as a liquidity premium. At the end of the year we adjusted this assumption to include half of the spread above risk-free rates, up to a maximum of 250 basis points, as a liquidity premium. This remains a very prudent assumption; one of the most prudent assumptions in a range used by life assurers. This change reduced the gross charge of £410m by £193m.

After this basis change there is an allowance in liabilities for future corporate bond defaults on annuity business of approximately £0.5bn on an investment portfolio of around £2.7bn, which includes £0.6bn of government backed securities..

Mark to market movement of corporate debt

The 2008 credit to shareholder cash resources of £206m reflects the movement in the market value over the year of the STICS. In 2007, the market movement of £164m related to STICS and the convertible bond, which converted in December 2007.

Movement in Shareholder cash resources

		2008	2007
		£m	£m
Shareholder cash generation		(155)	177
Dividends paid in the year		(153)	(168)
Cash generation after dividends		(308)	9
Capital items:
Convertible bond		-	276
Financial reinsurance		(3)	12
Securitisation repayment		-	(22)
Acquisitions		(15)	(55)
Total movement		(326)	220

The dividends paid in 2008 included the 2007 final dividend, which was paid on the old dividend policy. 

Shareholder cash resources have decreased by £326m from £1,477m to £1,151m, as follows:

	2008	2007
	£m	£m
Shareholder invested net assets	1,181	1,449
Securitisation funding	71	71
Financial reinsurance funding	9	12
IFA subsidiaries - intangible assets	(48)	(55)
Regulatory reserves not included in Shareholder invested net assets	(62)	-
Shareholder cash resources	1,151	1,477

The regulatory reserves of £62m include an allowance for future strategic implementation costs of £42m.

IFRS PROFITABILITY

Our financial results are presented on two reporting bases: International Financial Reporting Standards (IFRS) as adopted by the EU and European Embedded Value (EEV). IFRS is the primary accounting basis. It includes the cash surplus earned during the period but differs from the EEV basis in that, with one exception, it does not recognise future cash flows in profit. The exception is that negative reserves on certain product lines are now permitted.

Summary of IFRS results

	2008	2007
	£m	£m
New business strain	(151)	(170)
In-force surplus	215	244
Investment return and other income	(13)	42
Principal reserving changes and one-off items	(70)	(135)
Asset Management	56	78
Corporate items	(10)	(15)
IFRS underlying profit before corporate
bond default reserve movements	27	44
Increase in corporate bond default reserves	(217)	(90)
IFRS underlying loss before tax	(190)	(46)
Non-underlying items	(681)	(67)
IFRS loss before tax from continuing
operations	(871)	(113)
IFRS underlying loss per share	(5.9)p	(1.4)p
IFRS basic loss per share	(23.3)p	(5.0)p
Dividend per share*	3.9p	8.0p
Dividend cover on an underlying basis	(1.5) times	(0.2) times
IFRS net assets excluding goodwill per share	£0.77	£0.96

* Including final dividend of 2.6p expected to be declared and paid by new holding company following group restructuring.

IFRS underlying loss before tax has increased from £(46)m to £(190)m. This is mainly due to the increase in corporate bond default reserves of £(217)m compared with £(90)m in 2007. Principal reserving changes and one-off items were £(70)m arising mainly from expenses, mortality and persistency assumption changes.

The IFRS loss before tax from continuing operations has increased from £(113)m to £(871)m. In addition to the underlying result, the main charges contributing to the loss are: the impairment of Asset Management acquired intangibles and goodwill of £264m, the £154m loss attributable to minority interest shareholders in the F&C Commercial Property Trust and non-recurring items of £78m.

IFRS underlying earnings per share is (5.9)p (2007: (1.4)p) and IFRS basic loss per share is (23.3)p (2007: (5.0)p).

The total dividend for 2008 of 3.9p is in line with our dividend policy as stated in January 2008. The dividend cover on an underlying basis is (1.5) times, but this is significantly affected by the increase in corporate bond default reserves and the principal reserving changes and one-off items in underlying profit. Excluding these items the cover is 0.8 times.

Underlying loss by segment 

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
New business strain	(100)	(51)	(151)	(125)	(45)	(170)
In-force surplus	157	58	215	184	60	244
Investment return and
other income	(1)	(12)	(13)	29	13	42
Life and pensions
underlying profit before
corporate bond default
reserve movements,
principal reserving
changes and one-off items	56	(5)	51	88	28	116
Increase in corporate bond
default reserves	(217)	-	(217)	(90)	-	(90)
Principal reserving
changes and one-off
items	(72)	2	(70)	(128)	(7)	(135)
Life and pensions
underlying loss	(233)	(3)	(236)	(130)	21	(109)
Asset Management			56			78
Corporate items			(10)			(15)
IFRS underlying loss
before tax			(190)			(46)

The UK underlying loss of £(233)m (2007: £(130)m) was significantly impacted in both years by increases in corporate bond default reserves and principal reserving changes and one-off items. If these items are excluded, the profit of £56m is £32m lower than the 2007 profit of £88m, mainly because of lower in-force surplus and some negative items within other income.

The International underlying loss of £(3)m (2007: £21m profit) results primarily from one-off items within other income and a slightly higher new business strain in 2008.

Asset Management reflects lower F&C underlying profit in 2008, which is discussed in the Business Review section.

Profitability by product

	2008			2007
	New	In-	Profit/	New	In-	Profit/
	business	force	(loss)	business	force	(loss)
	£m	£m	£m	£m	£m	£m
Protection	(38)	29	(9)	(40)	45	5
Pensions	(58)	39	(19)	(75)	34	(41)
Annuities	1	(1)	-	10	2	12
Investments	(5)	26	21	(20)	16	(4)
With Profits Fund	-	64	64	-	87	87
UK Total	(100)	157	57	(125)	184	59
FPI	(23)	17	(6)	(19)	22	3
Lombard	(28)	41	13	(26)	38	12
International Total	(51)	58	7	(45)	60	15
Total	(151)	215	64	(170)	244	74

All figures are stated before tax and one-off items. More detailed analyses of new business strain and in-force surplus are provided below and in Appendix 3.

The IFRS new business strain is £151m compared to £170m last year. The UK IFRS strain has fallen by 20% as lower acquisition expenses and commissions were incurred on lower sales. International IFRS strain has increased by 13%, driven by higher sales. 

The IFRS in-force surplus has reduced from £244m to £215m. UK IFRS surplus has reduced by £27m mainly in respect of protection business where 2007 reserving changes have brought forward surplus that would have emerged in 2008, and the run-off of the With Profits Fund. International IFRS surplus is slightly lower than last year. 

New business strain

New business strain consists of three elements: 

the cash strain arising during the year; 

IFRS adjustments, reflecting the difference between regulatory and IFRS reserving bases; and

an allowance for the deferral of acquisition costs (DAC), to the extent it is allowed by IFRS.

		2008				2007
			IFRS	DAC			IFRS	DAC
		Cash	adjust-	move-	IFRS	Cash	adjust-	move-	IFRS
		Strain	ments	ment	strain	strain	ments	ment	strain
		£m	£m	£m	£m	£m	£m	£m	£m
Protection		(38)	-	-	(38)	(40)	-	-	(40)
Pensions		(106)	1	47	(58)	(145)	(4)	74	(75)
Annuities		1	-	-	1	10	-	-	10
Investments		(8)	(3)	6	(5)	(36)	(16)	32	(20)
UK Total		(151)	(2)	53	(100)	(211)	(20)	106	(125)
FPI		(103)	(103)	183	(23)	(69)	(103)	153	(19)
Lombard		(49)	(5)	26	(28)	(41)	(7)	22	(26)
Intl Total	(152)		(108)	209	(51)	(110)	(110)	175	(45)
Total		(303)	(110)	262	(151)	(321)	(130)	281	(170)

The cash strain is discussed in the Cash Generation section. 

The UK IFRS adjustments have reduced from £(20)m to £(2)m because of the lower UK investments and pensions sales. The International IFRS adjustments are similar to 2007 and are mainly actuarial funding adjustments for the FPI Premier product. Actuarial funding has the effect of reducing statutory reserves in the early years of an investment policy, but its impact is excluded from the IFRS results.

The UK DAC movement has decreased from £106m to £53m due to the reductions in pensions and investments new business volumes and lower commission. The International DAC movement has increased from £175m to £209m driven by sales volume increases and increased commission.

In-force surplus 

In-force surplus consists of three elements: 

the cash surplus arising during the year; 

the reversal of IFRS adjustments; and

the amortisation of DAC.

	2008				2007
		IFRS	DAC			IFRS	DAC
	Cash	adjust-	move-	IFRS	Cash	adjust-	move-	IFRS
	surplus	ments	ment	Surplus	surplus	ments	ment	surplus
	£m	£m	£m	£m	£m	£m	£m	£m
Protection	25	4	-	29	44	1	-	45
Pensions	41	17	(19)	39	36	14	(16)	34
Annuities	(1)	-	-	(1)	5	-	(3)	2
Investments	2	43	(19)	26	14	24	(22)	16
With Profit Fund	64	-	-	64	87	-	-	87
UK Total	131	64	(38)	157	186	39	(41)	184
FPI	67	(62)	12	17	44	10	(32)	22
Lombard	45	7	(11)	41	42	5	(9)	38
Intl Total	112	(55)	1	58	86	15	(41)	60
Total	243	9	(37)	215	272	54	(82)	244

The cash surplus is discussed in the Cash Generation section. 

The UK IFRS adjustments have increased from £39m to £64m, with most of the increase in respect of investment products. The non-unit reserves within the cash surplus have increased due to the fall in the investment markets, producing lower charges on this business. These reserves are reversed out in arriving at IFRS profits. 

The International IFRS adjustment has reduced from £15m to £(55)m, because the FPI adjustment includes £(63)m in respect of actuarial funding. This is mainly due to the enhanced unit allocations in respect of the second year premiums of Premier business, which was sold in large volumes in the second half of 2007.

The UK DAC movement of £(38)m is slightly down from last year's £(41)m. The International DAC movement has switched from £(41)m to a positive £1m. The FPI DAC has increased because it includes allowance for enhanced unit allocations for the second year Premier premiums. As mentioned above, Premier sales increased in the second half of 2007, with the resultant 2008 premiums causing the increase in the International DAC. 

Investment return and other income

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Longer-term return on
life and pensions
shareholder funds	48	-	48	69	2	71
IFA businesses	10	-	10	14	-	14
Other one-off items	(59)	(12)	(71)	(54)	11	(43)
Total	(1)	(12)	(13)	29	13	42

Longer-term investment return has reduced from £71m to £48m because of a 15% decrease in the weighted average value of UK life and pensions shareholder assets during the year from £1,219m for 2007 to £1,040m and because of a reduction in the proportion of assets held as equities following the sale of shareholder equities in the second half of 2007. The longer-term rates of investment return are unchanged and are assumed to be: equities 8.0%, gilts 5.0% and other fixed interest 5.5%.

The trading results of our IFA businesses are discussed in the Business Review section.

The UK other one-off items of £(59)m include a write down of the investment DAC because of lower assets under management, improved modelling, and non-recurring project costs. The 2007 UK items included a write off in respect of the cancelled Wrap development project and an injection into policyholder funds following a review of unit linked fund charges on first adoption of the ABI best practice guide. 

The International one-off items include various reserving refinements.

Corporate bond default reserves

The charge of £(217)m (2007: £(90)m) reflects the additional corporate bond default reserves set aside due to the significant widening of bond spreads above gilt yields. This is discussed in the Cash Generation section.

Principal reserving changes and one-off items

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Expense assumption
changes	(41)	2	(39)	(110)	(2)	(112)
PS06/14 reserving
changes	(7)	-	(7)	(29)	(5)	(34)
Reinsurance of annuity
portfolio	-	-	-	11		11
Mortality and persistency
changes	(24)	-	(24)	-	-	-
Total	(72)	2	(70)	(128)	(7)	(135)

The expense assumption charge of £39m mainly results from strengthening expense reserves, in particular in respect of income protection claims.

During the year we implemented an internal reorganisation to achieve further cashflow benefits from the PS06/14 reserving changes. These changes released £112m of regulatory surplus, which in IFRS reporting has been largely offset by the DAC.

Mortality and persistency changes of £24m mainly reflect strengthening of the persistency basis for protection business.

Asset Management and corporate items

	2008	2007
	£m	£m
Asset Management underlying profit	56	78
Expected return on net pension asset	4	8
Expected return on corporate net assets	4	(9)
Corporate costs	(18)	(14)
Total	46	63

Asset Management underlying profit is discussed in the Business Review section. The expected return on the net pension asset is lower because of the reduced equity exposure in the scheme. The expected return on corporate net assets has increased because interest charges are lower following the conversion of the convertible debt in December 2007. Corporate costs include £3m of one-off costs in connection with the strategic review.

Non-underlying items

	2008	2007
	£m	£m
Short-term fluctuations in investment return	(71)	(78)
Non-recurring items	(78)	38
Amortisation of acquired present value of in-force business	(26)	(26)
Amortisation of Life & Pensions acquired intangible assets	(14)	(11)
Amortisation of Asset Management acquired intangible assets	(49)	(42)
Impairment of Asset Management
acquired intangible assets and goodwill	(264)	-
Interest payable on STICS	52	52
Policyholder tax	(77)	23
Returns on Group controlled funds attributable to third parties	(154)	(23)
Total	(681)	(67)

Non-underlying items reflect the differences between IFRS underlying profit and IFRS profit before tax from continuing operations.

Short-term investment fluctuations represent the differences between actual and expected longer-term investment returns. The charge of £71m largely reflects the difference between expected and actual investment returns which were affected by widened corporate bond spreads on the value of fixed income securities not backing policyholder liabilities.

Non-recurring items include: strategic review implementation costs of £32m, strategic review advisor fees of £10m, Asset Management reorganisation costs of £15m and Asset Management unrealised exchange losses of £12m. The 2007 comparative included £34m net compensation received in respect of the aborted merger with Resolution plc.

We have recognised an impairment charge of £264m in respect of the Asset Management business. This includes an impairment charge of £48m in respect of the intangible assets related to F&C's asset management contracts. In addition, following our decision to distribute our stake in F&C, we assessed the carrying value of goodwill on the balance sheet in the light of F&C's market value at 31 December 2008. This had fallen significantly during the year and we have therefore recognised an impairment of £216m to goodwill, based on the market value of F&C at the end of 2008.

Within the calculation of the underlying IFRS result, STICS are accounted for as debt to reflect the economic reality. However, IFRS rules require that STICS should be accounted for as equity in calculating IFRS profit before tax and consequently STICS interest is added back and treated as an appropriation of profit.

Policyholder tax is excluded from the underlying result as it is not attributable to shareholders. The change compared to 2007 is due to unrealised losses following falls in investment markets.

Returns on Group controlled funds attributable to third parties mainly comprise the 49% minority interest in F&C Commercial Property Trust and reflect falls in underlying property values. The loss attributable to minority interests is excluded from the underlying result and is therefore added back to arrive at profit before tax.

FINANCIAL STRENGTH

Despite the uncertainty affecting the financial markets, our conservative investment strategy for shareholder assets, hedging of With Profits Fund assets and prudent accounting approach mean that our business remains financially strong. We continue to meet all our capital requirements. These include the group-wide Insurance Groups Directive capital requirements, the realistic solvency requirement for our with-profits business, the regulatory solvency basis for all life companies and our internal economic capital requirements. 

Insurance Groups Directive (IGD) surplus resources

	Estimated
	31 Dec 2008	31 Dec 2007
	£bn	£bn
Total Group resources for IGD calculation	1.80	3.5
Group resource requirement	(0.95)	(2.2)
IGD surplus	0.85	1.3
Resource requirement coverage	1.9 times	1.6 times

Our capital position is strong with an estimated IGD surplus of £0.85bn (2007: £1.3bn), reflecting capital resources of £1.8bn less requirements of £0.95bn. The IGD surplus measure is conservative, excluding £0.6bn of surplus assets held within the long-term funds.

The reduction in Group resources over 2008 has been primarily driven by investment market falls. However this has been largely offset by a reduction in the Group resource requirement, in particular the With Profit Insurance Capital Component (WPICC), in respect of the FPLP With Profits Fund.

We have maintained an active hedging strategy throughout 2008 and into 2009 to mitigate the impact of equity markets and interest rate movements on the capital position of our with-profits business.

The movement in IGD surplus since 2007 year-end can be analysed as follows:

	£bn
Surplus 31 December 2007	1.30
Payment of dividends and STICS interest	(0.20)
Net transfers to long-term funds	(0.10)
Other items	(0.15)
Estimated surplus 31 December 2008	0.85

Other items includes the impact of the F&C REIT acquisition of £80m, the acquisition of a 30% share in our Malaysian joint venture, AmLife for £33m, a one-off staff pension scheme contribution of £20m, and the investment return on shareholder assets.

IGD surplus sensitivities

Allowing for investment market movements since the year-end, we estimate the IGD surplus to be £0.8bn as at 28 February 2009. The IGD surplus has no material sensitivity to a 30% fall in equity markets from end of February levels, and would not be reduced by more than £0.1bn if bond spreads were to widen by a further 100 basis points, or more than £0.2 billion for 150 basis points. All life companies in the Group continue to cover their regulatory solvency requirements.

The impact on IGD surplus of distributing our investment in F&C Asset Management plc to shareholders and after allowing for payment of dividend and interest in the first half of 2009 will be an increase of £0.1bn. 

Economic capital

We continue to use economic capital to inform business decisions. We have developed a sophisticated capital model, which has helped with setting our financial risk appetite and our continued drive for capital efficiency. The model forms the basis for discussions with the FSA to agree the individual capital requirements for each company based on an assessment of its own risk profile.

EEV required capital is set at the higher of regulatory capital and requirements arising from internal capital management policies, which include economic risk capital objectives. In aggregate, EEV required capital is higher than regulatory requirements by approximately £400m (2007: £200m) with the increase being driven primarily by greater investment market volatility.

Life and pensions excess capital resources

	31 Dec	31 Dec
	2008	2007
	£bn	£bn
Total available capital resources	2.0	2.3
Regulatory capital requirement	(0.8)	(0.7)
Excess capital resources	1.2	1.6

Total available capital resources are calculated on a realistic basis for the FPLP With Profits Fund and on a regulatory basis for all other funds. The excess capital resources stand at £1.2bn, including the excess capital resources within the long-term funds. The bulk of the Group's capital is held outside the with-profits funds and, consequently, can be deployed around the Group with a relatively high degree of flexibility.

  FPLP With Profits Fund solvency

	31 Dec	31 Dec
	2008	2007
	£m	£m
Surplus assets	291	246
Risk capital margin (RCM)	291	246
Realistic surplus after RCM	-	-
With Profits Fund surplus	681	1,987
Long-term insurance capital requirement (LTICR)	(405)	(424)
Regulatory surplus after LTICR	276	1,563
Value of future internal transfers*	(276)	(337)
With Profit Insurance Capital Component (WPICC)	-	1,226

* The value of future internal transfers as at 31 December 2008 were £289m but restricted to £276m in the calculation of the WPICC.

We manage the FPLP with-profits business on a realistic balance sheet basis. For solvency monitoring, the assets and liabilities are calculated both on a realistic basis and on a regulatory basis. If the realistic balance sheet has a lower surplus than the regulatory balance sheet, an additional capital requirement, the WPICC, is applied to the regulatory balance sheet. 

For the realistic basis, policyholder liabilities (including options and guarantees) are valued using a market consistent stochastic model. The realistic balance sheet is resilient in the event of falls or rises in investment markets, in large measure due to the actions taken to hedge the exposure to guarantees and options.

On the realistic basis at 31 December 2008 there were surplus assets of £291m available to cover the risk capital margin of £291m (2007: £246m available to cover the risk capital margin of £246m). Our objective is to manage the fund so that, over time, the risk capital margin remains covered from assets within the With Profits Fund. In accordance with the Principles and Practices of Financial Management, in the event that surplus assets exceed the risk capital margin, this excess is used to reduce the charge for guarantees. Conversely if the surplus assets are less than the risk capital margin, the charge is increased.

On the regulatory basis, the surplus (prior to capital requirements) has fallen from £1,987m to £681m, reflecting the fact that asset values have fallen by more than regulatory liabilities. This partly reflects our prudent approach to allowing for default on corporate bonds within valuation interest rates, but also the relative insensitivity of the regulatory basis liabilities to changes in asset values. The capital requirement of £405m (2007: £424m) was covered from within the surplus. The regulatory and realistic bases are now much closer than in previous years, a typical result in a severe bear market. Allowing for the deduction of the value of future transfers out of the With Profits Fund, the WPICC at the end of 2008 was zero.

Free asset ratio

The free asset ratio is a common measure of financial strength. It is the ratio of assets less liabilities (including actuarial reserves but before the capital requirements), expressed as a percentage of actuarial reserves. The FPLP free asset ratio was 14.7% at the end of 2008 (2007: 22.3%) and available assets to meet capital requirements were £2.2bn (2007: £3.7bn). Available assets have decreased in 2008 as a result of falling asset values within the FPLP With Profits Fund.

FPLP financial strength ratings

Current ratings are:

Standard & Poor's: A- (strong) with a stable outlook

Fitch's rating: A (strong) with a negative outlook

Moody's rating: A3 (strong) with a stable outlook 

We target our financial strength ratings in the single A range and expect them to remain there for the foreseeable future. Standard & Poor's reaffirmed its A- stable rating on 25 February 2009.

The three rating agencies recognise the strength of our capital position as a positive rating factor. In recent years, capital strength, one of several factors considered by the agencies, has been one of the strongest components of our overall financial strength ratings.

Liquidity

Our liquidity remains strong. We have an undrawn £300m funding facility with a consortium of banks. This facility runs until April 2011 and provides considerable flexibility. We reviewed the facility with the participating banks and confirmed the facility at this level at the end of 2008. The reduction in the facility from £500m was by mutual agreement, having regard to the likely future liquidity requirements of the Group, after F&C has left the Group, and the associated costs of the facility.

Financial risk reduction

We actively manage financial risk and have taken a number of initiatives to reduce our exposures.

FPLP With Profits Fund

The overall aim remains to balance risk to shareholders with maximising returns to policyholders whilst ensuring guarantees are met as they fall due. As markets have fallen, we have actively managed the proportion of equities and property backing asset shares. At year-end 2008 the effective proportion of equities and property in the fund was 16% (31 December 2007: 52%), having reduced equity exposure well ahead of the worst of the market falls and the year-end close.

To ensure that we are fair to all customers we manage regular bonus rates to target an appropriate balance between the guaranteed portion and the total level of benefits. Market value reduction factors were reintroduced in October 2008 to ensure fairness between customers surrendering and those who remain invested in the fund. These actions are in line with the published Principles and Practices of Financial Management underlying the fund and our commitment to fair treatment of our customers.

Other life and pensions funds

Other risk mitigation activities include cashflow matching and other inflation and interest rate hedging.

Pension schemes 

Before the IFRIC14 ('The limit on a defined benefit asset, minimum funding requirements, and their interaction') restriction on the carrying value of the IAS19 surplus, the after tax surplus of the Friends Provident Pension Scheme was £82m (31 December 2007: surplus of £5m). The improvement in surplus mainly arose from widened corporate bond spreads, as the liabilities are discounted based on AA rated corporate bond yields, as required by the accounting standard.

The Scheme entered into an insurance contract with Norwich Union during the year under which Norwich Union took on approximately £350m of liabilities relating to all current pensioners, thereby further de-risking the Scheme from both an investment and longevity risk perspective. The arrangement also includes protection against the credit risk of Norwich Union. In addition, an extension has been agreed to place liabilities arising from the next five years' retirements with Norwich Union. The best estimate of the expected value of the next five years' retirements is £135m.

The Scheme further reduced its equity exposure to 16% by the end of the year from 40%, decreasing its sensitivity to equity shocks. Most of the reduction was in the first half of the year. The Scheme achieved an overall positive investment return during the year.

Following the triennial valuation of the FPPS in September 2008, the Scheme Trustees and Company are presently in discussions on the future funding arrangements.

Financial assets

The Group's financial assets, excluding cash and property, are summarised as follows as at 31 December 2008:

		With
	Unit	Profit	Non-	Share-	2008	2007
	linked	Funds*	profit	holder	Total	Total
	£bn	£bn	£bn	£bn	£bn	£bn
Shares, unit trusts & OEICs	23.5	2.6	0.1	-	26.2	31.2
Gilts	1.9	4.0	0.7	0.1	6.7	4.6
Corporate bonds & ABS	3.0	4.1	2.8	0.4	10.3	11.0
Derivatives	-	0.6	-	-	0.6	0.2
Deposits	0.5	-	-	-	0.5	0.6
Investment pools	-	-	-	-	-	0.1
Total	28.9	11.3	3.6	0.5	44.3	47.7

*With Profit Funds includes the non-profit assets within the FPLP With Profits Fund

Shares, unit trusts and OEICs comprise: unit trusts and OEICs £14.2bn, listed equity £10.6bn and unlisted equity £1.4bn. 

The equity exposure to the FPLP With Profits Fund is hedged with sold futures. The net exposure of the FPLP With Profits Fund to equity at 31 December 2008 was £0.6bn. The net exposure of the Fund to property was a further £0.6bn. 

Corporate bonds and ABS comprise: listed corporate bonds, £8.6bn, unlisted corporate bonds £0.2bn and Asset Backed Securities (ABS) £1.5bn. 

Corporate bonds

Listed corporate bonds of £8.6bn are analysed by fund and credit rating as follows:

		With
	Unit	Profit	Non-	Share-	2008
	linked	Funds	profit	holder	Total
	£m	£m	£m	£m	£m
AAA	124	936	194	65	1,319
AA	152	527	1,920	68	2,667
A	332	1,377	339	142	2,190
BBB	152	371	68	14	605
Sub-BBB or rating not available	1,705*	65	10	-	1,780
Total	2,465	3,276	2,531	289	8,561

* £1.5bn out of the £1.7bn corporate bonds in the unit linked 'Sub-BBB or rating not available' category represent Lombard investments where the ratings information is not retained. These are all unit-linked assets with no shareholder exposure.

Our corporate debt portfolio remains highly rated, with over 98% of £6.1 billion of corporate bonds (excluding unit-linked funds) at investment grade. 

The value of debt holdings in UK banks, including foreign-owned subsidiaries, was as follows:

	28 Feb 2009  £m	31 Dec 2008  £m
Tier 1	134	145
Upper tier 2	168	284
Lower tier 2	220	241
Other debt	82	93

Holdings within unit-linked funds are excluded from the above analysis because there is no shareholder exposure to asset price falls. More than 75% of the total debt holdings shown above are held within the With Profit Funds to back asset shares or non-profit liabilities. Other debt comprises senior bonds.

Asset Backed Securities (ABS)

Of the £1,473m total ABS, £1,320m is managed by F&C on behalf of the Group. The balance is represented by investments in ABS held by externally managed funds in which the shareholder has no exposure. The F&C managed ABS is analysed as follows:

	£m by ratings
Type of ABS	AAA	AA	A	BBB	BB	Sub B	Unrated	Total
Collateralised Debt
Obligations (CDO)	10	-	-	-	-	-	-	10
Collateralised Loan
Obligations (CLO)	3	-	-	-	-	-	7	10
Commercial Mortgage
Backed Securities
(CMBS)	188	87	39	39	-	-	-	353
Residential Mortgage
Backed Securities
(RMBS)	122	13	-	2	-	-	-	137
Monoline Wrapped	71	160	205	11	-	-	7	454
Other ABS	130	63	142	10	4	7	-	356
2008 Total	524	323	386	62	4	7	14	1,320
	40%	24%	29%	5%	0%	1%	1%	100%
2007 Total	1,083	191	251	58	6	22	-	1,611
	67%	12%	16%	4%	0%	1%	0%	100%

'Other ABS' in the tables above cover a variety of securities including credit card receivables, Structured Investment Vehicles, whole business securitisations, housing association and other asset backed securities. Approximately £150m of ABS has been re-categorised from Other ABS to CMBS during the year. The total exposure to US sub-prime mortgages is less than £5m.

Of the above ABS, the shareholder exposure amounts to £635m, including £358m of assets backing annuity liabilities. 

	£m by ratings
Exposure	AAA	AA	A	BBB	BB	Sub B	Unrated	Total
Shareholder
exposure - 2008	269	162	171	20	-	2	11	635
- 2007	544	85	113	17	1	10	-	770
With Profit Funds
exposure
- 2008	227	136	171	31	4	4	1	574
- 2007	457	71	110	27	5	8	-	678
Unit linked exposure
- 2008	28	25	44	11	-	1	2	111
- 2007	82	35	28	14	-	4	-	163
2008 Total	524	323	386	62	4	7	14	1,320
2007 Total	1,083	191	251	58	6	22	-	1,611

The above exposure analysis takes account of the profit sharing proportions of the funds.

The movement of ABS in the year is analysed in the following table.

	£m
Value at 1 January 2008 (excluding accrued interest)	1,611
Adjustment for accrued interest at 1 January 2008	23
Maturities and disposals	(107)
Impact of mark to market	(198)
Defaults	(9)
Value at 31 December 2008	1,320

ABS are valued using external pricing services. Almost all of the ABS portfolio is valued using active prices, generally from multiple pricing sources.

In addition to the Group's ABS exposure, the Friends Provident Pension Scheme has direct exposure to ABS of £51m and a further £165m via its investment in F&C Liability Driven Investment Pools. The ABS represent 32% of the investment pools and these are all AAA rated, as are the directly held ABS. 

Defaults

	2008
	£m
ABS:
Sedna Finance	9
Bonds:
Lambay Capital	7
Bradford & Bingley	12
Lehman Brothers	13
Washington Mutual	6
Total	47

Total bond and ABS defaults during the year were £47m representing a default rate of less than 0.5%. The shareholder exposure was £14m. 

EEV PROFITABILITY

European Embedded Value (EEV) is an alternative accounting basis to IFRS for life assurance companies. EEV profit reflects the future cashflows that are expected to arise from sales in the year and the effect of updating previous assumptions with actual experience.

In June 2008 the CFO Forum published its Market Consistent Embedded Value (MCEV) Principles that it is intended will replace the current EEV Principles from the end of 2009. The CFO Forum continues to debate the Principles and as yet there is no agreement, in particular on the appropriate risk-free rate to apply to certain classes of business in the current economic circumstances. We have chosen not to adopt the revised Principles for our 2008 reporting. We continue to use a market consistent approach and in particular use gilt returns to represent risk-free returns. Once the CFO Forum has confirmed the Principles, we will re-assess whether to adopt them and when. 

Summary of EEV results

	2008	2007
	£m	£m
Contribution from new business	139	206
In-force profit	215	167
Operating assumption changes	(22)	(361)
Other life and pensions items	42	9
Asset Management	56	78
Corporate items	(10)	(83)
EEV underlying profit before tax	420	16
Non-underlying items	(1,161)	(64)
EEV loss before tax	(741)	(48)
Return on embedded value	7.9%	(4.3)%
EEV underlying earnings / (loss) per share	13.1p	(4.5)p
EEV basic loss per share	(24.8)p	(2.7)p
Embedded value per share	£1.28	£1.60

EEV underlying profit has increased from £16m to £420m. The 2007 underlying profit included charges of £(361)m for life and pensions operating assumption changes, mainly in respect of persistency and expense basis changes, and a further £(68)m of operating assumption changes in respect of corporate costs. In 2008, the impact of a reduced contribution from new business has been offset by positive experience variances and lower development costs. 

The EEV loss before tax has increased from £(48)m to £(741)m. The main charges driving the increased loss are: investment return variances £611m, the effect of economic assumption changes £154m, the impairment of Asset Management acquired intangibles and goodwill £264m and non-recurring items £78m.

The return on embedded value, which is calculated on the underlying basis after tax, improved from (4.3)% to 7.9%. The UK return improved from (5.1)% to 5.2% and the International return improved from (0.8)% to 19.7%.

The EEV underlying earnings per share improved from (4.5)p to 13.1p whereas the EEV basic loss per share worsened from (2.7)p to (24.8)p.

Underlying profit by segment

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Contribution from new business	28	111	139	96	110	206
In-force profit	148	67	215	129	38	167
Operating assumption changes	(24)	2	(22)	(337)	(24)	(361)
Other life and pensions items	54	(12)	42	17	(8)	9
Life and pensions underlying profit	206	168	374	(95)	116	21
Asset Management and corporate items			46			(5)
EEV underlying profit before tax			420			16

The UK underlying profit has improved from £(95)m to £206m, mainly because of the reduction in operating assumption changes from £(337)m to £(24)m. The lower UK contribution from new business and a £(24)m operating assumption change have been offset by higher in-force profit and other life and pension items. 

The International underlying profit has improved from £116m to £168m, mainly due to a higher in-force profit due to the growth of the business and less significant operating assumption changes compared to 2007.

Asset Management and corporate items have improved from £(5)m to £46m. 2007 included a negative operating assumption change for corporate costs, offset by a lower F&C underlying profit in 2008.

Contribution from new business

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Contribution from new business	28	111	139	96	110	206

The UK contribution from new business decreased from £96m to £28m, and the International contribution has marginally increased from £110m to £111m. This is discussed in the Business Review section.

In-force profit

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Expected return on in-force	143	55	198	149	38	187
Experience variances	5	12	17	(20)	-	(20)
Total	148	67	215	129	38	167

The expected return of the UK in-force book has decreased from £149m to £143m reflecting a fall in the opening value of the in-force book. The International expected return has increased from £38m to £55m reflecting the growth in the in-force book.

UK experience variances include a number of items, both profits and charges. A persistency charge and one-off expenses not covered by the ongoing maintenance assumptions have been offset by a number of positive items.

International experience variances include a number of items. Modelling improvements in Lombard improved the result for the period, and there were offsetting experience variances in respect of Lombard expenses. 

Operating assumption changes

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Operating assumption changes	(24)	2	(22)	(337)	(24)	(361)

UK operating assumption changes include charges in respect of persistency assumptions changes on protection business of £23m, pensions (both persistency and paid-up-policy rates) of £17m and unitised bonds of £13m. These are partly offset by some positive changes, including £16m from revised expense assumptions.

In accordance with our policy, our assumptions are a reflection of our best estimate of the likely behaviours, outcomes, or circumstances in the future. The estimate is made, typically on an annual basis following experience investigations, based on the data available at the time.

We have not sought to anticipate in our 2008 results the potential effect of a continued recession on future profits from the in-force business. To give an indication of the sensitivity, the value of in-force business would reduce by approximately £80m if the persistency and morbidity experience were to deteriorate by approximately 25% over the average assumption for the next two years as a result of the economic downturn for life protection, income protection, unit-linked bonds, pensions (group and legacy) and International business.

Other life and pensions items

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Expected return on shareholder
net assets	46	-	46	63	1	64
Development costs	-	(12)	(12)	(41)	(9)	(50)
Other income	8	-	8	(5)	-	(5)
Total	54	(12)	42	17	(8)	9

The UK expected return fell from £63m to £46m because of a decrease in the weighted average value of life and pensions shareholder assets and because in August 2007 we largely eliminated the equity exposure within shareholder funds.

As we indicated last year, development costs now only include costs relating to developing wholly new products or entering wholly new markets.

UK other income includes Sesame £10m (2007: £12m) and Pantheon £nil (2007: £2m) which are discussed in the Business Review section. In addition there are £(3)m of further write-downs (2007: £(15)m) relating to the cancellation of the Wrap development in January 2008.

Asset Management and corporate items

	2008	2007
	£m	£m
Asset Management underlying profit	56	78
Expected return on net pension asset	4	8
Expected return on corporate net assets	4	(9)
Corporate costs	(18)	(14)
Operating assumption change for corporate costs	-	(68)
Total	46	(5)

Asset Management underlying profit is discussed in the Business Review section. The expected return on the net pension asset is lower because of the reduced equity exposure in the scheme. The expected return on corporate net assets has increased because interest charges are lower following the conversion of the convertible debt in December 2007. Corporate costs include £3m of one-off costs in connection with the strategic review.

Non-underlying items

	2008	2007
	£m	£m
Investment return variances	(611)	(45)
Effect of economic assumption changes	(154)	(12)
Non-recurring items	(78)	38
Impairment of Asset Management acquired
intangibles and goodwill	(264)	-
Amortisation of Asset Management acquired intangibles	(49)	(42)
Amortisation of Sesame/Pantheon acquired intangibles	(5)	(3)
Total	(1,161)	(64)

Investment return variances of £(611)m include the investment variances on life and pensions assets of £(888)m, offset by a £277m positive impact from the mark-to-market of corporate debt. The life and pensions investment variances comprise £(688)m of UK variances and £(200)m of International variances, and derive from equity market losses, widening corporate bond spreads and exchange rate movements.

The effect of economic assumption changes of £(154)m comprises £(199)m UK changes, mainly in respect of falling gilt yields impacting the reported value of the annuity business, offset by £45m of positive International changes.

Non-recurring items and the impairment of Asset Management acquired intangibles are discussed in the IFRS Profitability section.

EMBEDDED VALUE

The embedded value has reduced by 20% from £3,725m to £2,965m. It comprises:

	2008	2007
	£m	£m
Shareholders' invested net assets	1,181	1,449
Value of in-force life and pensions business	1,731	1,870
Market value of the listed asset management business	150	499
Provision for future corporate costs	(97)	(97)
Net pension scheme asset	-	4
Total embedded value	2,965	3,725

The embedded value per share is £1.28 (2007: £1.60).

There is much debate at present around the most appropriate discount rate to use to discount cashflows on business such as annuities. In current market conditions, with very wide spreads on corporate bonds it is likely that some of this spread represents liquidity risk rather than credit risk and therefore some companies have sought to modify the risk-free rate for their spread business in their EEV.

If we had increased the risk-free rate to 50 basis points above gilts, the value of our in-force annuity business would have been around £88m higher at the end of 2008 and the value of new business would have been £13m higher. If we had increased the risk-free rate to 100 basis points above gilts, the value of our in-force annuity business would have been around £148m higher and the value of new business would have been £25m higher.

Shareholders' invested net assets

Shareholders' invested net assets have decreased by £268m over the year and comprise:

	2008	2007
	£m	£m
Life and pensions shareholder funds	183	400
Life and pensions long-term funds	509	640
Total life and pensions net assets	692	1,040
Corporate net assets	489	409
Shareholders' invested net assets	1,181	1,449

Life and pensions shareholder funds have decreased reflecting transfers to long-term funds and investment losses. Life and pensions long-term funds have decreased reflecting the negative life surplus, partly offset by the transfer from shareholder funds.

Corporate net assets have increased mainly because of the £205m impact of marking to market the STICS, offset by the £153m dividend payment to shareholders.

Value of in-force life and pensions business 

The decline in the period is mainly due to a combination of the following factors: 

the impact of adverse investment markets on the value of future charges on unit-linked business and shareholder transfers on with-profits business; 

final implementation of PS06/14 reserving changes releasing a component of future protection business profits into net assets; 

a reduction in the value of in-force annuity business due to reduced risk-free rates and a change in the relationship between the statutory reserving interest rate and risk-free.

A partial offset is provided by the growth in the in-force International book.

Market value of the listed Asset Management business 

	2008	2007
Share price of F&C at year-end	£0.58	£1.92
Number of shares held	259m	253m
Percentage of shares held	52.5%	52.4%
Market value of holding in F&C	£150m	£499m

Provision for future costs

Regular on-going corporate costs of £12m (2007: £12m) are capitalised and deducted from the embedded value.

Net pension asset

The principal defined benefit scheme, Friends Provident Pension Scheme, has a surplus of £82m after tax on an IAS19 basis. The improvement in the position mainly arises from widened corporate bond spreads as the liabilities are discounted based on AA rated corporate bond yields as required by IAS19 Employee Benefits. IFRIC14 only allows a surplus to be recognised to the extent it can be recovered through refunds or reductions in contributions. Assuming a continuation of the current funding basis, it is unlikely, using the criteria set out in IFRIC14, that the surplus could be recovered. Therefore the surplus has been restricted to £nil value at 31 December 2008. The position will be reviewed in 2009, once a new funding plan has been agreed with the Trustee.

Consolidated income statement 

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Revenue
Gross earned premiums	2	949	994
Premiums ceded to reinsurers	2	(100)	(1,780)
Net earned premiums		849	(786)
Fee and commission income and income from
service activities		840	719
Investment return		(6,579)	2,573
Total revenue		(4,890)	2,506
Other income	2	-	49
Claims, benefits and expenses
Gross claims and benefits paid		1,733	1,582
Amounts receivable from reinsurers		(191)	(175)
Net claims and benefits paid		1,542	1,407
Change in insurance contracts liabilities		(1,017)	(1,983)
Change in investment contracts liabilities		(5,884)	1,617
Transfer to fund for future appropriations		(80)	42
Movement in net assets attributable
to unit holders		(271)	42
Movement in policyholder liabilities		(7,252)	(282)
Acquisition expenses		609	822
Administrative and other expenses		942	581
Finance costs		140	141
Total claims, benefits and expenses		(4,019)	2,669
Share of profit of associates and joint venture		-	1
Loss before tax from continuing
operations		(871)	(113)
Policyholder tax		77	(23)
Loss before shareholder tax from
continuing operations		(794)	(136)
Total tax credit		205	43
Policyholder tax		(77)	23
Shareholder tax		128	66
Loss for the year		(666)	(70)
Attributable to:
Equity holders of the parent: (i)
Ordinary shareholders		(541)	(108)
Other equity holders		52	52
		(489)	(56)
Minority interest		(177)	(14)
Loss for the year		(666)	(70)
		2008	2007
Earnings per share		pence	pence
Basic loss per share from continuing
operations	4	(23.3)	(5.0)
Diluted basic loss per share from
continuing operations	4	(23.3)	(5.1)

(i) All profit attributable to equity holders of the parent is from continuing operations. 

Consolidated underlying profit

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Loss before tax from continuing
operations (i)		(871)	(113)
Policyholder tax		77	(23)
Returns on Group-controlled funds
attributable to third parties		154	23
Loss before tax excluding profit
generated within policyholder funds		(640)	(113)
Non-recurring items	2	78	(38)
Amortisation of Asset Management
acquired intangible assets	5	49	42
Amortisation of acquired present value
of in-force business	5	26	26
Amortisation of Life & Pensions acquired
intangible assets	5	14	11
Impairment of goodwill	5	216	-
Impairment of Asset Management acquired
intangible assets	5	48	-
Interest payable on Step-up Tier one
Insurance Capital Securities (STICS)	3	(52)	(52)
Short-term fluctuations in investment return		71	78
Underlying loss before tax (i)		(190)	(46)
Tax on underlying loss		75	39
Minority interest in underlying loss		(21)	(24)
Underlying loss after tax
attributable to ordinary shareholders
of the parent		(136)	(31)
		2008	2007
Earnings per share		pence	pence
Underlying loss per share	4	(5.9)	(1.4)

(i) Included in loss before tax from continuing operations, and underlying loss before tax, are one-off items relating to basis changes and, in 2007, the adoption of FSA Policy Statement PS06/14 Prudential Changes for Insurers, which have increased the loss by £61m (2007: increased the loss by £146m).

IFRS underlying loss is based on longer-term investment return and excludes: (i) policyholder tax, (ii) returns attributable to minority interests in policyholder funds, (iii) non-recurring items, (iv) amortisation and impairment of acquired intangible assets and present value of acquired in-force business; and is stated after deducting interest payable on STICS. Management consider that underlying profit better reflects the performance of the Group and focus on this measure of profit in its internal monitoring of the Group's IFRS results.

Consolidated balance sheet 

At 31 December 2008

		2008	2007
	Notes	£m	£m
Assets
Intangible assets	5	1,358	1,456
Property and equipment		66	81
Investment properties		1,493	2,371
Investments in associates and joint venture		47	14
Deferred tax assets		15	55
Financial assets	6	44,372	47,710
Deferred acquisition costs		1,223	1,093
Reinsurance assets		1,964	2,015
Current tax assets		4	4
Insurance and other receivables		670	620
Cash and cash equivalents		5,183	4,782
Total assets		56,395	60,201
Liabilities
Insurance contracts		12,677	13,607
Fund for future appropriations		401	481
Financial liabilities
- Investment contracts		35,275	37,266
- Loans and borrowings		729	738
- Amounts due to reinsurers		1,792	1,611
Net asset value attributable to unit holders		668	909
Provisions		108	146
Deferred tax liabilities		108	329
Current tax liabilities		90	113
Insurance payables, other payables and
deferred income		1,003	677
Total liabilities		52,851	55,877
Equity attributable to equity holders
of the parent
Attributable to ordinary shareholders:
Share capital	8	234	234
Share premium	8	2,372	2,372
Other reserves	8	(242)	346
		2,364	2,952
Attributable to other equity holders	8	810	810
		3,174	3,762
Minority interest	8	370	562
Total equity	8	3,544	4,324
Total equity and liabilities		56,395	60,201

Consolidated statement of recognised income and expense

For the year ended 31 December 2008

	Equity
	holders of	Equity	Total
	the parent	holders of	equity
	(ordinary	the parent	holders of	Minority
	shares)	(STICS)	the parent	interest	Total
	£m	£m	£m	£m	£m
Actuarial loss on
defined benefit
schemes net of tax (i)	(20)	-	(20)	1	(19)
Foreign exchange
adjustments on
translation of overseas
subsidiaries	188	-	188	36	224
Revaluation of owner
occupied properties	(10)	-	(10)	-	(10)
Shadow accounting(ii)	(30)	-	(30)	-	(30)
Net income recognised
directly in equity	128	-	128	37	165
(Loss)/profit for the year	(541)	52	(489)	(177)	(666)
Total recognised
income and
expense for
the year	(413)	52	(361)	(140)	(501)

(i) The actuarial loss on defined benefit schemes includes an actuarial gain of £85m in respect of the Friends Provident Pension Scheme offset by the restriction of the surplus of £113m.

(ii) Shadow accounting includes £10m in respect of the revaluation of owner occupied properties and £(40)m in respect of foreign exchange adjustments on translation of overseas subsidiaries held by the With Profits Fund of FPLP.

For the year ended 31 December 2007

	Equity
	holders of	Equity	Total
	the parent	holders of	equity
	(ordinary	the parent	holders of	Minority
	shares)	(STICS)	the parent	interest	Total
	£m	£m	£m	£m	£m
Actuarial gains on
defined benefit
schemes net of tax	27	-	27	3	30
Foreign exchange
adjustments on
translation of overseas
subsidiaries	43	-	43	8	51
Net income recognised
directly in equity	70	-	70	11	81
(Loss)/profit for the year	(108)	52	(56)	(14)	(70)
Total recognised
income and
expense for
the year	(38)	52	14	(3)	11

Consolidated cash flow statement

For the year ended 31 December 2008

	2008	2007
	£m	£m
Operating activities
Loss for the year	(666)	(70)
Adjusted for:
Other income net of the related costs	-	(34)
Net realised and unrealised losses/(gains) on
assets at fair value	8,696	(780)
Finance costs	140	141
Amortisation and impairment of intangible assets	365	115
Depreciation of property and equipment	10	10
Movement in deferred acquisition costs	(88)	74
Total tax credit	(205)	(43)
Purchase of shares and other variable yield
securities	(25,080)	(15,229)
Sale of shares and other variable yield securities	24,512	14,122
Purchase of loans, debt securities and other fixed
income securities	(21,340)	(16,985)
Sale of loans, debt securities and other fixed
income securities	20,455	17,238
Purchase of investment properties	(13)	(167)
Sale of investment properties	283	107
Decrease in insurance contract liabilities	(932)	(155)
(Decrease)/Increase in investment
contract liabilities	(5,051)	3,642
Increase in fund for future appropriations	(80)	42
Decrease in provisions	(24)	(66)
Net decrease in receivables and payables	(469)	(267)
Pre-tax cash inflow from operating activities	513	1,695
Tax (paid)/received	(39)	27
Net cash inflow from operating activities	474	1,722
Investing activities
Acquisition of subsidiaries, net of cash acquired	132	(41)
Acquisition of associate	(33)	-
Reduction in participation in subsidiaries, net of
cash disposed	(1)	-
Other income net of the related costs	-	34
Additions to internally generated intangible assets	(7)	(26)
Purchase of property and equipment (net)	(3)	(11)
Net cash inflow/(outflow) from investing activities	88	(44)
Financing activities
Finance costs	(140)	(134)
STICS interest	(52)	(52)
Repayment of long term debt	(80)	(164)
Net movement in other borrowings, net of expenses	11	8
Dividends paid to equity holders of the parent	(153)	(168)
Dividends paid to minority interest	(39)	(42)
Net cash outflow from financing activities	(453)	(552)
Increase in cash and cash equivalents	109	1,126
Balance at beginning of year	4,782	3,581
Exchange adjustments on the
translation of foreign operations	292	75
Balance at end of year	5,183	4,782

  Notes to the consolidated accounts

1. Basis of preparation

The preliminary results for the year ended 31 December 2008, which were approved by the Board on 16 March 2009, are unaudited.

The financial information set out in this preliminary announcement does not constitute statutory accounts for the years ended 31 December 2008 or 2007. The financial information for 2007 is derived from the statutory accounts for 2007 which have been delivered to the registrar of companies. The auditors have reported on the 2007 accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies in due course. 

2. Segmental information 

(a) Summary

Segment information is presented in respect of the Group's business and geographical segments. The primary reporting format, based on the Group's management and internal reporting structure, is business segments. 

Inter-segment pricing is determined on an arm's length basis. Segment results, assets, and liabilities, include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Segment capital expenditure includes purchases of property and equipment, investment properties and intangible assets.

Business segments (primary segment)

The Group comprises the following main business segments:

UK Life & Pensions (including corporate items and IFA Groups Sesame and Pantheon Financial)

International Life & Pensions 

Asset Management (including F&C's Managed Pension Fund business)

Geographical segments (secondary segment)

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. The Group has defined three geographical areas:

UK

Europe

Rest of the world

(b) Business segment information (primary segment information)

(i) Revenue and expenses

				Elimination
	UK Life	Intl		of inter-
	&	Life &	Asset	segment
	Pensions	Pensions	Management	amounts	Total
Year ended 31 December 2008	£m	£m	£m	£m	£m
Gross earned premiums on
insurance and investment
contracts	3,076	3,168	153	-	6,397
Investment contract
Premiums (i)	(2,145)	(3,150)	(153)	-	(5,448)
Gross earned premiums	931	18	-	-	949
Premiums ceded to reinsurers	(98)	(2)	-	-	(100)
Net earned premiums	833	16	-	-	849
Fee and commission income and
income from service activities	353	284	242	(39)	840
Investment return	(4,594)	(1,781)	(204)	-	(6,579)
Total revenue	(3,408)	(1,481)	38	(39)	(4,890)
Net claims and benefits paid	1,540	2	-	-	1,542
Movement in insurance and
investment contracts liabilities	(5,016)	(1,672)	(213)	-	(6,901)
Transfer to fund for future
appropriations	(80)	-	-	-	(80)
Movement in net assets
attributable to unit holders	(271)	-	-	-	(271)
Acquisition expenses	509	85	15	-	609
Administrative and other expenses	353	128	500	(39)	942
Finance costs	112	9	19	-	140
Total claims, benefits
and expenses	(2,853)	(1,448)	321	(39)	(4,019)
Share of profits of associates and
joint venture	-	-	-	-	-
Loss before tax from
continuing operations	(555)	(33)	(283)	-	(871)
Policyholder tax	78	-	(1)	-	77
Shareholder tax	119	(9)	18	ߛ	128
Segmental result after tax	(358)	(42)	(266)	-	(666)
Inter segment
revenue/(expense)	(39)	-	39	-	-

(i) Accounted for as deposits under IFRS

				Elimination
	UK Life	Intl		of inter-
	&	Life &	Asset	segment
	Pensions	Pensions	Management	amounts	Total
Year ended 31 December 2007	£m	£m	£m	£m	£m
Gross earned premiums on
insurance and investment
contracts	3,955	2,802	97	-	6,854
Investment contract
premiums (i)	(2,974)	(2,789)	(97)	-	(5,860)
Gross earned premiums	981	13	-	-	994
Premiums ceded to reinsurers	(1,779)	(1)	-	-	(1,780)
Net earned premiums	(798)	12	-	-	(786)
Fee and commission income and
income from service activities	311	180	276	(48)	719
Investment return	1,755	754	64	-	2,573
Total revenue	1,268	946	340	(48)	2,506
Other income (ii)	49	-	-	-	49
Net claims and benefits paid	1,406	1	-	-	1,407
Movement in insurance and
investment contracts liabilities	(1,156)	748	42	-	(366)
Transfer to fund for future
appropriations	42	-	-	-	42
Movement in net assets
attributable to unit holders	42	-	-	-	42
Acquisition expenses	732	77	13	-	822
Administrative and other expenses	270	117	242	(48)	581
Finance costs	119	4	18	-	141
Total claims, benefits
and expenses	1,455	947	315	(48)	2,669
Share of profits of associates and
joint venture	-	-	1	-	1
(Loss)/profit before tax from
continuing operations	(138)	(1)	26	-	(113)
Policyholder tax	(22)	-	(1)	-	(23)
Shareholder tax	69	3	(6)	-	66
Segmental result after tax	(91)	2	19	-	(70)
Inter segment
revenue/(expense)	(48)	-	48	-	-

(i) Accounted for as deposits under IFRS.

(ii) Compensation received (excluding related costs) resulting from the terminated merger with Resolution plc.

(ii) Underlying profit

	UK Life	Intl
	&	Life &	Asset
	Pensions	Pensions	Management	Total
Year ended 31 December 2008	£m	£m	£m	£m
Loss before tax from
continuing operations	(555)	(33)	(283)	(871)
Policyholder tax	78	-	(1)	77
Returns on Group-controlled funds
attributable to third parties	154	-	-	154
Loss before tax excluding
profit generated within
policyholder funds	(323)	(33)	(284)	(640)
Non-recurring items (i)	50	1	27	78
Amortisation of Asset Management
acquired intangible assets	-	-	49	49
Amortisation of acquired present
value of in-force business	9	17	-	26
Amortisation of Life & Pensions
acquired intangible assets	5	9	-	14
Impairment of goodwill	-	-	216	216
Impairment of Asset Management
acquired intangible assets	-	-	48	48
Interest payable on STICS	(52)	-	-	(52)
Short-term fluctuations in
investment return	68	3	-	71
Underlying (loss)/profit before tax	(243)	(3)	56	(190)
Tax on underlying loss				75
Minority interest in underlying loss				(21)
Underlying loss after
tax attributable to ordinary
shareholders of the parent				(136)
Earnings per share
Underlying loss per share
(pence)				(5.9)

(i) Non recurring items

Life & Pensions items include £42m (2007: £nil) of strategic review costs, £9m (2007: £nil) of other costs, £nil (2007: net credit of £34m) being compensation received (less related costs) relating to the terminated merger with Resolution plc, and £nil (2007: credit of £15m) in respect of the cost to shareholders of mortgage endowment complaints and historic business reviews.

Asset Management items include £15m (2007: £nil) in respect of reorganisation costs, £12m (2007: £nil) losses on forward currency contracts, £nil (2007: £7m) in respect of issuing shares to employees under the 2004 Reinvestment Plan and £nil (2007: £4m) in respect of provision for VAT repayable to investment trusts.

	UK Life	Intl
	&	Life &	Asset
	Pensions	Pensions	Management	Total
Year ended 31 December 2007	£m	£m	£m	£m
(Loss)/profit before tax from
continuing operations	(138)	(1)	26	(113)
Policyholder tax	(22)	-	(1)	(23)
Returns on Group-controlled funds
attributable to third parties	23	-	-	23
(Loss)/profit before tax
excluding profit generated
within policyholder funds	(137)	(1)	25	(113)
Non-recurring items (i)	(49)	-	11	(38)
Amortisation of Asset Management
acquired intangible assets	-	-	42	42
Amortisation of acquired present
value of in-force business	9	17	-	26
Amortisation of Life & Pensions
acquired intangible assets	3	8	-	11
Interest payable on STICS	(52)	-	-	(52)
Short-term fluctuations in
investment return	81	(3)	-	78
Underlying (loss)/profit before
tax	(145)	21	78	(46)
Tax on underlying loss				39
Minority interest in underlying loss				(24)
Underlying loss after tax
attributable to ordinary
shareholders of the parent				(31)
Earnings per share
Underlying loss per share
(pence)				(1.4)

(iii) Assets and liabilities

Year ended 31 December 2008				Elimination
	UK Life	Intl		of inter-
	&	Life &	Asset	segment
	Pensions	Pensions	Management	amounts	Total
	£m	£m	£m	£m	£m
Segment assets	36,618	18,288	1,502	(60)	56,348
Investment in
associates and
joint venture	15	32	-	-	47
Total assets	36,633	18,320	1,502	(60)	56,395
Total liabilities	33,954	17,631	1,326	(60)	52,851
Other segment
information:
Capital expenditure	17	6	2	-	25
Depreciation	6	1	3	-	10
Amortisation	19	29	50	-	98
Impairment (i)	18	3	264	-	285

Year ended 31 December 2007				Elimination
	UK Life	Intl		of inter-
	&	Life &	Asset	segment
	Pensions	Pensions	Management	amounts	Total
	£m	£m	£m	£m	£m
Segment assets	42,738	15,487	2,038	(76)	60,187
Investment in
associates and
joint venture	14	-	-	-	14
Total assets	42,752	15,487	2,038	(76)	60,201
Total liabilities	39,457	14,927	1,569	(76)	55,877
Other segment
information:
Capital expenditure	195	6	3	-	204
Depreciation	5	1	4	-	10
Amortisation	26	26	43	-	95
Impairment (i)	27	8	-	-	35

(i) Comprises impairment on Asset Management goodwill £216m (2007: £nil), Asset Management investment management contracts £48m (2007: £nil), internally generated intangible assets £3m (2007: £20m) and DAC £18m (2007: £15m)

(c) Geographical segmental information (secondary segment information)

			Rest of
			the
	UK	Europe	world	Total
Year ended 31 December 2008	£m	£m	£m	£m
Gross earned premiums	935	14	-	949
Fee and commission income and income
from service activities	467	194	179	840
Revenue from external customers	1,402	208	179	1,789
Investment return				(6,579)
Premiums ceded to reinsurers				(100)
Total revenue				(4,890)
Total assets	37,666	13,314	5,415	56,395
Capital expenditure	17	4	4	25

			Rest of
			the
	UK	Europe	world	Total
Year ended 31 December 2007	£m	£m	£m	£m
Gross earned premiums	981	13	-	994
Fee and commission income and income
from service activities	485	177	57	719
Revenue from external customers	1,466	190	57	1,713
Investment return				2,573
Premiums ceded to reinsurers				(1,780)
Total revenue				2,506
Total assets	44,351	10,983	4,867	60,201
Capital expenditure	196	7	1	204

3. Appropriations of profit

(a) Dividends paid on ordinary shares 

Dividends paid during the year and recognised in reserves

	2008	2007
	£m	£m
Final dividend in respect of 2007 and paid in May 2008 of 5.3p
per share (in respect of 2006 and paid in May 2007 of 5.2p
per share)	123	110
Interim dividend in respect of 2008 and paid in November 2008
of 1.3p per share (in respect of 2007 and paid in November
2007 of 2.7p per share)	30	58
Total dividends paid	153	168

As required by IAS10, dividends proposed after the balance sheet date are not accrued in these accounts.

(b) STICS interest

STICS interest paid during the year and recognised in reserves

	2008	2007
	£m	£m
Interest on 2003 STICS at 6.875%
Paid in May 2008 (May 2007)	10	10
Paid in November 2008 (November 2007)	11	11
Total 2003 STICS interest paid	21	21
Interest on 2005 STICS at 6.292%
Paid in June 2008 (June 2007)	31	31
Total 2005 STICS interest paid	31	31
Total STICS interest paid	52	52

4. Earnings per share

(a) Basic and underlying earnings per share from continuing operations

Earnings per share have been calculated based on the loss after tax and on the underlying loss after tax, attributable to ordinary shareholders of the parent. The directors consider that the underlying earnings per share figure gives a better indication of operating performance.

	2008	2008	2007	2007
	Earnings	Per share	Earnings	Per share
	£m	pence	£m	pence
Loss after tax attributable to ordinary
shareholders of the parent	(541)	(23.3)	(108)	(5.0)
Short-term fluctuations in investment
return	71	3.0	78	3.6
Non-recurring items	78	3.3	(38)	(1.8)
Amortisation and impairment of acquired
intangible assets	353	15.2	79	3.7
Minority interest on items excluded from
underlying loss	(44)	(1.9)	(15)	(0.7)
Tax credit on items excluded from
underlying loss	(53)	(2.2)	(27)	(1.2)
Underlying loss after tax
attributable to ordinary
shareholders of the parent	(136)	(5.9)	(31)	(1.4)

  (b) Diluted basic earnings per share from continuing operations

		2008			2007
		Weighted			Weighted
		average			average
		number			number
	2008	of ordinary	2008	2007	of ordinary	2007
	Earnings	shares	Per share	Earnings	shares	Per share
	£m	Millions	Pence	£m	millions	pence
Loss after tax attributable to
ordinary shareholders of
the parent	(541)	2,323	(23.3)	(108)	2,152	(5.0)
Dilution (c)	-	-	-	(1)	-	(0.1)
Diluted loss after tax
attributable to ordinary
shareholders of the parent	(541)	2,323	(23.3)	(109)	2,152	(5.1)

(c) Dilution

In 2007, options over 16,620,550 shares outstanding under F&C's option schemes as at 31 December 2007 had a dilutive impact on the Group's loss due to the potential decrease in the Group's share of F&C's earnings.

Share options outstanding under the Group's various option schemes as at 31 December 2008 were not dilutive in 2008 because their impact on EPS would be to reduce the loss per share.

5. Intangible assets

				Investment
		Acquired		management
	Goodwill	PVIF		contracts		Other		Total
	£m	£m		£m		£m		£m
Cost
At 1 January 2007	662	480		573		210		1,925
Acquisition through
business combinations	37	-		-		32		69
Other additions	11	-		-		26		37
Disposals	-	-		-		(13)		(13)
Adjustment to consideration	10	-		-		-		10
Foreign exchange adjustments	13	19		12		12		56
At 31 December 2007	733	499		585		267		2,084
Acquisition through
business combinations	29	-		71		-		100
Other additions	-	-		-		8		8
Disposals	(16)	-		-		(1)		(17)
Adjustment to consideration	(6)	-		-		-		(6)
Foreign exchange adjustments	52	76		40		40		208
At 31 December 2008	792	575		696		314		2,377
Amortisation and impairment
At 1 January 2007	-	140			289		91	520
Amortisation charge for year	-	26			42		27	95
Impairment charge	-	-			-		20	20
Disposals	-	-			-		(13)	(13)
Foreign exchange adjustments	-	3			-		3	6
At 31 December 2007	-	169			331		128	628
Amortisation charge for year	-	26			49		23	98
Impairment charge	216	-			48		3	267
Foreign exchange adjustments	-	15			1		10	26
At 31 December 2008	216	210			429		164	1,019
Carrying amounts
At 31 December 2007	733	330	254				139	1,456
At 31 December 2008	576	365	267				150	1,358

Goodwill is the only intangible asset which has an indefinite useful life. Acquired PVIF is amortised over the lifetime of the in-force policies. Investment management contracts are amortised over their estimated useful lives. Other intangible assets (mainly consisting of distribution channel relationships and software development) are amortised over their estimated useful lives.

The main increase in the cost of intangible assets in the year arises from (i) F&C's acquisition of REIT in September 2008 as set out in note 9 and (ii) exchange gains arising from intangible assets designated in Euros being converted into Sterling at the end of the year.

Goodwill is assessed for possible impairment in December of each year. Other intangible assets are reviewed for possible impairment at the end of each reporting period. All intangible assets are reviewed for impairment whenever there is an indication of possible impairment.

As a result of the impairment testing undertaken in December 2008, an impairment charge of £267m (2007: £20m) has been made. Asset Management investment management contracts have been impaired by £48m (2007: £nil), Asset Management goodwill has been impaired by £216m (2007: £nil) and other intangible assets have been impaired by £3m (2007: £20m). 

6. Financial assets

The Group's financial assets are summarised by measurement categories as follows:

	2008	2007
	£m	£m
Fair value through the income statement	44,275	47,695
Loans at amortised cost*	97	15
Total financial assets	44,372	47,710

* Includes £82m due from the Friends Provident Pension Scheme.

(a) Financial assets at fair value through the income statement

	With	Unit
	Profits	Linked	Non Linked		Share-	2008	2007
	(i)	(ii)	Annuities	Other	holder	Total	Total
	£m	£m	£m	£m	£m	£m	£m
Shares and other variable
yield securities (iii)	2,584	23,486	-	75	4	26,149	31,180
Debt securities and other
fixed-income securities
Government securities	4,059	1,950	355	282	100	6,746	4,647
Corporate bonds (including ABS)	4,077	3,005	2,187	613	421	10,303	11,012
Participation in investment pools	-	-	-	-	-	-	113
Derivative financial instruments	549	9	-	8	10	576	171
Deposits with credit institutions	-	494	-	7	-	501	572
	11,269	28,944	2,542	985	535	44,275	47,695

(i) Includes the consolidation of OEICs funds in which the Group holding is 50% or greater and financial assets of With-Profits held subsidiaries.

(ii) Includes the consolidation of OEICs funds in which the Group holding is 50% or greater

 

(iii) Includes holdings in unit trusts and OEICs

The majority of financial assets held are readily realisable, however, included in the carrying amounts above, £41,125m (2007: £43,972m) is expected to be realised more than 12 months after the balance sheet date in line with the expected settlement of policyholder liabilities.

The table above analyses the Group's financial assets by principal fund type. Investment risk in the With-Profits and Unit Linked funds is largely borne by policyholders. 

Asset Backed Securities (ABS) directly held by the UK Life and Pensions business comprise approximately 3.3% (2007: 3.4%) of Group investments, virtually all of which are at investment grade.

(b) Loans

	2008	2007
	£m	£m
Mortgage loans	4	3
Other loans	93	12
Total loans	97	15

The fair value of loans at both year ends is the same as their carrying value.

(c) Unit-linked net assets

The amounts included in the balance sheet in respect of net assets held within unit-linked funds are as follows:

	2008	2007
	£m	£m
Investment properties	575	995
Shares and other variable yield securities	23,085	25,474
Debt securities and other fixed-income securities	4,756	3,473
Derivative financial instruments	9	8
Deposits with credit institutions	494	517
Other receivables	262	120
Cash and cash equivalents	2,571	2,070
Total assets	31,752	32,657
Other payables	(200)	(181)
Total unit-linked net assets	31,552	32,476

The impact of consolidating OEICs in which the Group has a holding in excess of 50% has been excluded from the analysis of unit-linked net assets.

7. Capital

(a) Overview

The Group's Life & Pensions business manages its capital on both economic capital and regulatory bases.

The economic capital model helps in setting the Group's financial risk appetite and in actively managing financial risk. The economic capital model compares total available capital resources, calculated on a realistic basis, with the risk capital required to cover unexpected losses.

The Group complies with all regulatory capital requirements; these include the Insurance Groups Directive (IGD) and individual company regulatory requirements.

IGD looks at capital from a Group shareholder perspective and is a prudent measure in that surplus capital not immediately available to shareholders, such as surplus capital in the long-term funds, is excluded from the calculation.

The Life & Pensions capital statement, drawn up in accordance with FRS 27, illustrates the financial strength of the Life & Pensions business and is set out in section (b) below. Total available capital resources are calculated on a realistic basis for the FPLP With-Profits Fund and on a regulatory basis for all other funds. 

A reconciliation of IFRS Equity, Life & Pensions capital resources per the Capital Statement and Life and Pensions Capital on an IGD basis is set out below.

	2008			2007
		Capital			Capital
	Capital	require-		Capital	require-
	resources	ments	Surplus	resources	ments	Surplus
	£m	£m	£m	£m	£m	£m
IFRS Equity attributable
to equityholders of
the parent	3,174	-	3,174	3,762	-	3,762
Subordinated debt	14	-	14	4	-	4
Fund for future
appropriations	401	-	401	481	-	481
Entity resources
excluded from
Capital Statement (i)	(286)	-	(286)	(451)	-	(451)
Regulatory prudence -
Inadmissible assets
and valuation
differences (ii)	(1,306)	-	(1,306)	(1,548)	-	(1,548)
Life & Pensions Capital
Statement	1,997	771	1,226	2,248	690	1,558
FPLP With-Profits Fund
resources calculated
on a regulatory basis (iii)	390	114	276	1,741	1,404	337
Long-term fund surplus (iv)	(570)	-	(570)	(796)	-	(796)
Other	13	(10)	23	27	-	27
Life and Pensions Capital
on an IGD basis	1,830	875	955	3,220	2,094	1,126
Group IGD surplus (v)	Estimate £0.85bn					£1.30bn

(i) Corporate centre, Asset Management and IFA distribution businesses.

(ii) Largely goodwill, intangible assets and DAC less actuarial funding (for which credit cannot be taken on an IFRS basis).

(iii) FPLP With-Profits Fund resources are calculated on a realistic basis under IFRS and a regulatory basis under the IGD.

(iv) Long-term fund surplus capital over and above capital requirements is excluded from capital resources on an IGD basis.

(v) Group IGD surplus includes Corporate centre, Asset Management and IFA distribution businesses.

(b) Capital statement 

The capital statement in respect of the Group's Life & Pensions business is set out below. This statement shows an analysis of the available capital resources calculated on a realistic basis for the FPLP With-Profits Fund and calculated on a regulatory basis for all other funds. It also shows the regulatory capital requirements and, in total, the overall surplus capital over regulatory requirements. In addition the statement provides an analysis of policyholders' liabilities.

At 31 December 2008
	UK	UK		Overseas	Life &	Total
	with-	with-	UK non-	Life &	Pensions	Life &
	profits	profits	participating	Pensions	shareholders'	Pensions
	(FPLP)	(FPLA)	funds	funds	funds	business
	£m	£m	£m	£m	£m	£m
Shareholders' funds
Outside fund	-	-	-	-	661	661
Inside fund	-	-	940	94	-	1,034
	-	-	940	94	661	1,695
Other qualifying capital
Subordinated debt	-	-	-	14	-	14
Preference shares	-	-	-	-	300	300
FFA	334	67	-	-	-	401
	334	67	940	108	961	2,410
Regulatory adjustments
Assets	-	-	(357)	(642)	(13)	(1,012)
Liabilities	-	(3)	57	594	(6)	642
Shareholders' share of
future bonuses	(43)	-	-	-	-	(43)
Available capital
resources	291	64	640	60	942	1,997
Capital requirement
UK realistic basis	291	-	-	-	-	291
Other regulatory bases	-	16	412	52	-	480
	291	16	412	52	-	771
Overall surplus capital
over regulatory
requirements						1,226
Analysis of policyholders'
Liabilities
With-profits	9,541	181	-	-	-	9,722
Unit-linked	-	-	15,167	16,989	-	32,156
Non-participating	2,437	46	3,586	5	-	6,074
Total	11,978	227	18,753	16,994	-	47,952

At 31 December 2007
	UK	UK		Overseas	Life &	Total
	with-	with-	UK non-	Life &	Pensions	Life &
	profits	profits	participating	Pensions	shareholders'	Pensions
	(FPLP)	(FPLA)	funds	funds	funds	business
	£m	£m	£m	£m	£m	£m
Shareholders' funds
Outside fund	-	-	-	-	865	865
Inside fund	-	-	1,044	76	-	1,120
	-	-	1,044	76	865	1,985
Other qualifying capital
Subordinated debt	-	-	-	4	-	4
Preference shares	-	-	-	-	300	300
FFA	338	143	-	-	-	481
	338	143	1,044	80	1,165	2,770
Regulatory adjustments
Assets	2	-	(571)	(441)	(14)	(1,024)
Liabilities	-	(2)	189	409	-	596
Shareholders' share of
future bonuses	(94)	-	-	-	-	(94)
Available capital
resources	246	141	662	48	1,151	2,248
Capital requirement
UK realistic basis	246	-	-	-	-	246
Other regulatory bases	-	20	384	40	-	444
	246	20	384	40	-	690
Overall surplus capital
over regulatory
requirements						1,558
Analysis of policyholders'
liabilities
With-profits	11,568	197	-	-	-	11,765
Unit-linked	-	-	18,896	14,496	-	33,392
Non-participating	2,493	42	3,179	2	-	5,716
Total	14,061	239	22,075	14,498	-	50,873

(i) Summary

As can be seen from the above table, the total available capital resources of the Group's Life & Pensions business amounts to £1,997m (2007: £2,248m), its regulatory capital requirements amount to £771m (2007: £690m) resulting in a surplus of available capital resources over regulatory capital of £1,226m (2007: £1,558m).

Set out below are details of how the available capital resources have been calculated, the restrictions that are in existence over the available capital resources, the basis of calculating the regulatory capital requirements and an explanation for the change in the available capital.

(ii) Basis of calculating available capital resources in Life & Pensions business

The available capital of the two UK with-profits funds has been determined in accordance with FSA regulations and includes the FFA. The FFA represents the estimated surplus in the funds that has not been allocated and is available to meet regulatory and other solvency requirements of the funds. Adjustments have been made to restate all assets and liabilities onto the basis used to determine regulatory requirements.

The majority of the Group's life and pensions options and guarantees are within FPLP's With-Profits Fund. These are valued on a market-consistent stochastic basis. 

Options and guarantees outside FPLP's With-Profits Fund are not considered to be material to the Group's future cash flows. In addition they have largely been matched with suitable assets and there is no material risk to market or interest rate changes. Provisions have been established using deterministic scenarios based on prudent assumptions.

The With-Profits Fund in FPLP has available capital of £291m (2007: £246m) and has been calculated in accordance with the FSA's realistic capital regulations. In accordance with accounting rules, the realistic liabilities only represent amounts relating to policyholders and do not include the shareholders' share of future bonuses. However, the shareholders' share is treated as a deduction from capital that is available to meet regulatory requirements and shown as a separate adjustment in the capital statement.

The available capital in the closed with-profits fund in FPLA amounts to £64m (2007: £141m). This has been calculated in accordance with the FSA's regulatory capital requirements.

The available capital in the Group's UK non-participating businesses has been determined in accordance with FSA regulations and amounts to £640m (2007: £662m). Adjustments have been made to restate all assets and liabilities on to a regulatory basis. The regulatory adjustment to assets mainly consists of eliminating deferred acquisition costs. The regulatory adjustment to liabilities mainly represents the additional regulatory capital arising as a result of the securitisation of a defined book of pre-demutualisation business in December 2004 and including sterling reserves of investment policies.

The available capital in the Group's overseas businesses written by FPI, Lombard and the newly acquired associate undertaking (AmLife) has been determined in accordance with local requirements and amounts to £60m (2007: £48m). FPI is based in the Isle of Man, Lombard is based in Luxembourg and AmLife is based in Malaysia. The analysis of available capital is £14m FPI, £34m Lombard and £12m AmLife (2007: £18m FPI and £30m Lombard). Adjustments have been made to restate all assets and liabilities onto local regulatory bases.

The shareholders' funds supporting the Life and Pensions business, but held outside the Life & Pensions funds are shown separately in the capital statement. It is the Group's policy to ensure that each subsidiary is adequately capitalised to support its life businesses and to exceed regulatory capital requirements. The amount of shareholders' funds available is £942m (2007: £1,151m).

(iii) Restrictions on available capital resources in Life & Pensions business

The available capital is subject to certain restrictions as to its availability to meet capital requirements elsewhere in the Group. In particular, no transfers from long-term funds can take place without an up to date actuarial valuation. The main restrictions on capital are set out below.

UK With-Profits Fund in FPLP: the available surplus held in the FPLP With-Profits Fund can only be applied to meet the requirements of the fund itself or be distributed to with-profits policyholders and shareholders. Shareholders are entitled to an amount not exceeding one-ninth of the amount distributed to policyholders in the form of bonuses on conventional with-profits policies. Non-profit business written in the FPLP With-Profits Fund has been securitised and surpluses are initially used to repay £380m of floating rate loan notes issued by the Group. At the end of 2008 £123m of these loan notes are outstanding. Any subsequent surplus may be distributed 40% to FPLP's With-Profits Fund and 60% to shareholders. Arising from this arrangement, the FPLP Non-Profit fund has loaned £75m (2007: £72m) to FPLP's With-Profits Fund. The FPLP Non-Profit fund has also provided a contingent loan of £59m (2007: £61m) inclusive of accrued interest (with a facility for a further £41m) to the FPLP With-Profits Fund which is repayable out of future surpluses in the With-Profits Fund, subject to certain restrictions.

UK With-Profits Fund in FPLA: the available surplus held in the closed With-Profits Fund of FPLA can only be distributed to policyholders.

UK non-participating funds: for non-participating business, surplus can be distributed to shareholders subject to meeting the requirements of the business. 

Overseas life funds: the available surpluses in FPI and Lombard can be distributed to shareholders subject to meeting the requirements of the businesses.

Shareholders' funds: the capital is generally available to meet requirements anywhere in the Group. It remains the intention of management to ensure that there is adequate capital to exceed the regulatory requirements of the Group's life and pensions businesses, to meet any net new business strain and to support the Group's overall credit ratings. FPLP has guaranteed the £300m STICS issued in 2003 and the £500m STICS issued in 2005 by the parent company.

(iv) Basis of calculating capital requirements for Life & Pensions business

Each Life and Pensions company has to hold sufficient capital to meet its regulatory capital requirements.

For the FPLP With-Profits Fund, the capital requirement is the risk capital margin (RCM) which amounts to £291m (2007: £246m). This is calculated on a defined set of adverse scenarios prescribed by the FSA (the market risk scenarios tested are what would happen if property prices fall by 12.5%, equity prices fall by 20%, corporate bond prices fall by 8.43%, fixed interest yields rise 0.65% pa and persistency increases by 32.5%). The RCM is based on the asset mix at the year-end and takes into account hedging strategies and certain other actions management would take in the event of particular adverse market conditions.

Under the realistic capital methodology, the capital requirement is the higher of the 'twin peaks' test of the realistic peak and the regulatory peak. The With-Profits Insurance Capital Component (WPICC) which adjusts the regulatory peak surplus to the realistic peak surplus, is then reduced by the value of future transfers to shareholders, being £289m (2007: £337m).These are liabilities of the With Profits Fund in the realistic peak, but are not admissible assets of the FPLP Funds to which they are payable. The WPICC cannot be negative and as a result, in 2008, the regulatory excess capital is restricted to the regulatory peak surplus of £276m.

	Realistic			Regulatory
	2008	2007		2008	2007
	£m	£m		£m	£m
Available capital	291	246	Surplus	681	1,987
			Long term Insurance
Risk capital margin	(291)	(246)	Capital requirements	(405)	(424)
Realistic peak	-	-	Regulatory peak surplus	276	1,563
			With Profits Insurance
			Capital Component	-	(1,226)
			Regulatory excess
			Capital (i)	276	337

(i) Represented by value of future internal transfers. In 2008 the total of these was £289m but has been restricted to £276m as the WPICC cannot be negative.

The capital cover to meet the regulatory solvency requirement of FPLP's With-Profits Fund is provided from FPLP's Non-Profit Fund and shareholders' fund, to the extent it is not met from the With-Profits Fund itself.

For the FPLA closed With-Profits Fund, the capital requirement has been calculated on a regulatory basis in accordance with FSA regulations at £16m (2007: £20m).

For UK non-participating funds, the relevant capital requirement is the capital resources requirement determined in accordance with FSA regulations. This, in total, amounts to £412m (2007: £384m).

For overseas business, local regulatory capital requirements are determined and these amount to £52m (2007: £40m). This is analysed as £10m (2007: £10m) for FPI, £35m (2007: £30m) for Lombard and £7m (2007: n/a) for AmLife.

(v) Movement in available capital

At 31 December 2008 total available Life & Pensions capital resources had decreased by £251m to £1,997m, as shown below.

	UK	UK		Overseas	Life &	Total
	with-	with-	UK non-	Life &	Pensions	Life &
	profits	profits	participating	Pensions	shareholders'	Pensions
	(FPLP)	(FPLA)	funds	funds	funds	business
	£m	£m	£m	£m	£m	£m
At 1 January 2008	246	141	662	48	1,151	2,248
New business strain	-	-	(192)	(121)	-	(313)
Surplus in year (i)	45	(77)	114	106	23	211
Principal assumption
changes:
- Expense (ii)	-	-	(52)	2	-	(50)
- Persistency	-	-	(22)	-	-	(22)
Transfers	-	-	130	13	(135)	8
Dividend and STICS
interest	-	-	-	-	(97)	(97)
Acquisitions	-	-	-	12	-	12
At 31 December 2008	291	64	640	60	942	1,997

(i) All tax items are included within Surplus in year.

(ii) Included on a more prudent basis than IFRS where the total impact is a decrease of £39m.

	UK	UK		Overseas	Life &	Total
	with-	with-	UK non-	Life &	Pensions	Life &
	profits	profits	participating	Pensions	shareholders'	Pensions
	(FPLP)	(FPLA)	funds	funds	funds	business
	£m	£m	£m	£m	£m	£m
At 1 January 2007	220	142	724	44	1,344	2,474
New business strain	-	-	(221)	(85)	-	(306)
Surplus in year(i)	26	(1)	162	71	32	290
Principal assumption changes:
- PS 06/14	-	-	138	-	-	138
- Expense and lapse basis	-	-	(51)	-	-	(51)
Transfers	-	-	(90)	18	72	-
Dividend and STICS
interest	-	-	-	-	(297)	(297)
At 31 December 2007	246	141	662	48	1,151	2,248

(i) All tax items are included within Surplus in year.

8. Movement in capital and reserves

	Equity attributable to equity holders of the parent
	Share	Share	Other			Minority
	capital	Premium	reserves	STICS	Total	interest	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2008	234	2,372	346	810	3,762	562	4,324
Total recognised income
and expense for the year	-	-	(413)	52	(361)	(140)	(501)
Dividends on equity shares	-	-	(153)	-	(153)	(39)	(192)
Interest paid on STICS	-	-	-	(52)	(52)	-	(52)
Appropriations of profit	-	-	(153)	(52)	(205)	(39)	(244)
Share based payments	-	-	11	-	11	6	17
Change in participation
in subsidiary	-	-	-	-	-	34	34
Acquisition of
subsidiaries (note 9)	-	-	(35)	-	(35)	(26)	(61)
Disposal of subsidiaries	-	-	-	-	-	(27)	(27)
Other movements	-	-	2	-	2	-	2
At 31 December 2008	234	2,372	(242)	810	3,174	370	3,544
	Equity attributable to equity holders of the parent
	Share	Share	Other			Minority
	capital	premium	reserves	STICS	Total	interest	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2007	214	2,051	542	810	3,617	548	4,165
Total recognised income
and expense for the year	-	-	(38)	52	14	(3)	11
Dividends on equity shares	-	-	(168)	-	(168)	(42)	(210)
Interest paid on STICS	-	-	-	(52)	(52)	-	(52)
Appropriations of profit	-	-	(168)	(52)	(220)	(42)	(262)
Share based payments	-	5	10	-	15	6	21
Lombard earn-out	3	57	-	-	60	-	60
Change in participation
in subsidiary	-	-	-	-	-	1	1
Conversions of convertible
bonds	17	259	-	-	276	-	276
Acquisitions of subsidiaries	-	-	-	-	-	52	52
At 31 December 2007	234	2,372	346	810	3,762	562	4,324

  9. Business combinations 

Property business of F&C

F&C Asset Management plc ('F&C') acquired and gained control of the REIT property asset management group ('REIT Group') on 3 September 2008. As part of this transaction, F&C has relinquished 30% of its beneficial entitlement in F&C Property Asset Management plc ('F&C PAM') by transferring its interest into the newly created F&C REIT Asset Management LLP ('F&C REIT') Group property business, which is 30% minority owned. A loss of £4m (the Group's share:£2m) was recognised on this disposal.

F&C REIT ownership interests are initially split 70% ownership by F&C and 30% by the former owners of the REIT Group(collectively known as the 'REIT Parties'). 

70% of the REIT Group was acquired from the REIT Parties for an initial consideration of £25m cash and the issue of a £35m floating rate Loan Note and the transfer of 30% of F&C PAM. The Group's share of these sums is shown below.

The fair value of assets and liabilities acquired was as follows:

			Provisional fair
			value to the
			Group at
			acquisition, as
		Fair value	at 31 December
	Book value	adjustments	2008
	£m	£m	£m
Intangible assets - management
contracts	34	37	71
Net assets	1	-	1
Deferred tax liability	-	(20)	(20)
Estimated net assets acquired	35	17	52
Minority interest's share of
net assets			(33)
Goodwill attributable to Friends Provident			29
Total consideration attributable to
Friends Provident			48

Discharged by:

	£m
Initial consideration - cash	13
Initial consideration - loan notes	18
Fair value of consideration in respect of sacrifice of 30% of F&C PAM	15
Estimated expenses of acquisition	2
Total consideration	48

As noted above, F&C disposed of 30% of its property business via the relinquishment of 30% of its ownership of F&C PAM. The loss on disposal is quantified below:

	£m
Fair value of deemed consideration on disposal of 30% of F&C PAM	28
Share of net assets attributable to 30% of F&C PAM, being
transferred to minority interests	(14)
Goodwill on business transferred attributable to Friends Provident	(16)
Loss on disposal attributable to Friends Provident	(2)

Friends Provident's share of the net additional goodwill arising from these transactions is £13m.

The REIT Parties have the right to require F&C to acquire all or part of their membership interests in F&C REIT at a valuation determined by an independent valuer, subject to an overall cap on F&C's liability of £100 million. 

On Completion, this option is treated as a liability of £66m, being the fair value of 30% of F&C REIT and has been recognised with the initial charge being taken to equity.

10. Contingent liabilities 

In the normal course of its business, the Group is subject to matters of litigation or dispute. While there can be no assurances, at this time the Directors believe, based on the information currently available to them, that it is not probable that the ultimate outcome of any of these matters will have a material adverse effect on the financial condition of the Group.

As part of its asset management responsibilities, F&C performed collateralised stock lending activities as agent for a number of its clients. The unprecedented market turbulence, increased counterparty risk and counterparty failure rates encountered during the year resulted in F&C ceasing such activities. In certain cases, the cessation was exercised through invoking default clauses in the relevant contracts, realisation of collateral held and the repurchase of stocks originally on loan. However, the related termination calculations, setting out the realisations of collateral, the uses of the cash realised and net amounts due to or from principals under the relevant agreements have not yet been agreed for all clients. In particular, in certain instances the collateral held may not be readily realisable in the current market conditions. Whilst F&C acts in an agency capacity, it is possible that potential disputes may arise from the completion of these calculations. The calculations have yet to be completed and therefore it is not possible to estimate the potential liability, if any, of F&C in these circumstances.

11. Post Balance sheet events

The Group is in the process of demerging its 52% interest in the ordinary share capital of F&C and undertaking a restructuring which will establish a new holding company on top of the Group. The demerger will result in the F&C shares being distributed to shareholders on a pro-rata basis and will be structured as a return of capital. The restructuring will create additional distributable reserves to allow the demerger and for the Group to maintain its dividend policy. The demerger and restructuring are anticipated to be completed by the end of June 2009.

  Summary consolidated income statement on an EEV basis

For the year ended 31 December 2008

		2008	2007
	Notes	£m	£m
Life & Pensions
Contribution from new business	2(b), 3(a)	139	206
Contribution from existing business:
Expected return		198	187
Experience variances		17	(20)
Operating assumption changes		(22)	(361)
Development costs		(12)	(50)
Expected return on shareholders' net assets
within the Life & Pensions business		46	64
Other net income/(expense)		8	(5)
Life & Pensions underlying profit	2(a)	374	21
Asset Management underlying profit		56	78
Expected return on net pension liability		4	8
Expected return on corporate net assets		4	(9)
Corporate costs		(18)	(14)
Operating assumption changes for
corporate costs		-	(68)
Underlying profit before tax		420	16
Investment return variances		(611)	(45)
Effect of economic assumption changes	2(a)	(154)	(12)
Non-recurring items	4	(78)	38
Amortisation of non-covered business
acquired intangible assets		(54)	(45)
Impairment of Asset Management acquired
intangible assets	6	(264)	-
Loss before tax		(741)	(48)
Attributed tax		132	9
Loss after tax		(609)	(39)
Attributable to:
Ordinary shareholders of the parent		(577)	(59)
Minority interest		(32)	20
Loss after tax	8	(609)	(39)
		2008	2007
Earnings per share		pence	pence
Basic loss per share	5	(24.8)	(2.7)
Diluted basic loss per share	5	(24.8)	(2.8)
Underlying earnings/(loss) per share	5	13.1	(4.5)

EEV underlying profit is based on expected investment return and excludes: (i) amortisation and impairment of non-covered business acquired intangible assets (ii) effect of economic assumption changes (iii) non-recurring items; and is stated after deducting interest payable on STICS. Management consider that underlying profit better reflects the performance of the Group and focus on this measure of profit in its internal monitoring of the Group's EEV results.

  Consolidated statement of recognised income and expense on an EEV basis

For the year ended 31 December 2008

	2008	2007
	£m	£m
Actuarial (losses)/gains on defined benefit
plans net of tax (i)	(19)	30
Foreign exchange adjustments	137	42
Net income recognised directly in equity	118	72
Loss after tax	(609)	(39)
Total recognised income and expense for
the year	(491)	33
Attributable to:
Ordinary shareholders of the parent	(485)	2
Minority interest	(6)	31
Total recognised income and expense for
the year	(491)	33

(i) The actuarial loss on defined benefit schemes includes an actuarial gain of £85m in respect of the Friends Provident Pension Scheme offset by the restriction of the surplus of £113m.

Consolidated movement in ordinary shareholders' equity on an EEV basis

For the year ended 31 December 2008

	2008	2007
	£m	£m
Total recognised income and expense for the year
attributable to ordinary shareholders of the parent	(485)	2
Dividends on equity shares	(153)	(168)
Share based payments (impact on EEV reserves)	11	10
Acquisition of REIT	(34)	-
Acquisition of AmLife	(21)	-
Earn-out payments	-	2
Decrease in EEV reserves for the year	(682)	(154)
Share capital issued on conversion of convertible bonds	-	276
Share based payments
(impact on share capital and share premium)	-	5
Net movement in ordinary shareholders' equity	(682)	127
At 1 January	3,647	3,520
At 31 December	2,965	3,647

Consolidated balance sheet on an EEV basis 

At 31 December 2008

		2008	2007
	Notes	£m	£m
Assets
Value of in-force Life & Pensions business	10	1,731	1,870
Intangible assets	6	484	684
Property and equipment		66	81
Investment properties		1,493	2,371
Investment in associates and joint venture		26	14
Deferred tax assets		15	55
Financial assets		44,372	47,710
Deferred acquisition costs	7	12	12
Reinsurance assets		1,964	2,015
Current tax assets		4	4
Insurance and other receivables		722	672
Cash and cash equivalents		5,183	4,782
Total assets		56,072	60,270
Liabilities
Insurance contracts		12,677	13,607
Fund for future appropriations		385	464
Financial liabilities
- Investment contracts		34,695	36,823
- Loans and borrowings		1,189	1,479
- Amounts due to reinsurers		1,792	1,611
Net asset value attributable to unit holders		668	909
Provisions		205	243
Deferred tax liabilities		128	231
Current tax liabilities		90	113
Insurance payables, other payables and deferred income		908	571
Total liabilities		52,737	56,051
Equity attributable to:
Ordinary shareholders of the parent	2(d), 8	2,965	3,647
Minority interest		370	572
Total equity		3,335	4,219
Total equity and liabilities		56,072	60,270

Notes to the EEV results

1. Methodology

1.1 Basis of preparation

The EEV results presented in this document have been prepared in accordance with the European Insurers' Chief Financial Officers Forum's EEV Principles issued in May 2004 and the Additional Guidance issued in 2005. They provide supplementary information for the year ended 31 December 2008. As explained in the Financial Review, Friends Provident has not adopted the June 2008 CFO Forum MCEV Principles whilst some doubt remains over their final form. The market consistent approach we have used incorporates gilt returns to represent risk free rates.

The EEV basis of reporting is designed to recognise profit as it is earned over the term of the policy. The total profit recognised over the lifetime of the policy is the same as that recognised under the IFRS basis of reporting, but the timing 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 from future new business. This value comprises the sum of the shareholders' net worth, the provision for future corporate costs and the value of existing business. The shareholders' net worth is the net assets attributable to shareholders, and is represented by the sum of required capital and free surplus. The value of existing business is the present value of the projected stream of future distributable profits available to shareholders from the existing business at the valuation date, on a best estimate basis allowing for risk, adjusted for the cost of holding required capital.

A significant number of assumptions are made, including: the behaviour of customers (for example, persistency); mortality; the level of expenses required to maintain the book of business; tax and regulatory environment and the future economic environment. The assumptions are a reflection of our best estimate of the likely behaviours, outcomes, or circumstances in the future. The estimate is made, typically, on an annual basis following experience investigations based on the data available at the time both from our own book of business and externally sourced information. The aim is to set assumptions at a level that reflects recent or current experience.

The supplementary information should be read in conjunction with the Group's IFRS results. These contain information regarding the Group's financial statements prepared in accordance with IFRS issued by the International Accounting Standards Board and adopted for use in the EU. 

The results for covered business as reported under EEV principles are combined with the results for the remainder of the business reported in accordance with IFRS, except where EEV principles dictate otherwise. In particular the EEV principles have been applied to reflect Step-up Tier one Insurance Capital Securities (STICS) as debt rather than equity.

In addition, a pro forma embedded value is reported showing ordinary shareholders' funds on an EEV basis adjusted to include the F&C listed subsidiary 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 the net pension liability) on an IFRS basis and corporate debt valued at market value;

• corporate net assets;

• the net pension asset of FPPS on an IAS 19 basis;

• the provision for future corporate costs;

• the present value of future profits attributable to shareholders from existing

policies of the Life & Pensions business.

The shareholders' net worth includes the corporate debt of the Group. This debt is valued at market value, consistent with the EEV guidance.

EEV and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rate. The new business contribution and other income statement items have been translated using an average exchange rate for the relevant period. 

The EEV results were approved by the Board of Directors on 16 March 2009.

1.2 Covered business

The covered business incorporates the Life & Pensions business defined as long-term business by UK and overseas regulators. 

The Asset Management business and IFA distribution businesses are excluded from the definition of covered business. For the purposes of segmentation the IFA distribution businesses are included within UK Life & Pensions. 

1.3 Allowance for risk

The allowance for risk in the shareholder cash flows is a key feature of the EEV Principles. The EEV guidance sets out three main areas available to allow for risk in an 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 risk in all three areas. 

1.4 Deriving risk discount rates

A market-consistent embedded value has been calculated for each product line by valuing the cash flows in line with the prices of similar cash flows traded on the open market. 

In principle, each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. For example, an equity cash flow is valued using an equity risk discount rate, and a bond cash flow is valued using a bond risk discount rate. If a higher return is assumed for equities, the equity cash flow is discounted at this higher rate. 

In practice, for liabilities where the payouts are either independent or move linearly with market movements, a method known as the 'certainty equivalent approach' has been applied whereby all assumed assets earn the risk-free rate and all cash flows are discounted using the risk-free rate. This gives the same result as applying the method in the previous paragraph. 

A market-consistent cost of financial options and guarantees and a market-consistent cost of holding required capital have also been calculated. The cost of financial options and guarantees includes additional allowance for non-market risk within FPLP's With-Profits Fund. An additional provision has been made for operational risks. These are described in more detail below. 

For presentational purposes, a set of risk discount rates has been derived for each product line, and for in-force and new business, by calculating the risk discount rate under a traditional embedded value approach that gives the same value as that from the market-consistent embedded value determined above. These derived risk discount rates are a function of the assumptions used (eg equity risk premium and corporate bond spreads). However, as the market-consistent approach is used, these assumptions do not impact the level of embedded value: a higher equity risk premium results in an exactly compensating higher risk discount rate. 

1.5 Financial options and guarantees

The material financial options and guarantees are those in the FPLP With-Profits Fund, in the form of the benefits guaranteed to policyholders and the guaranteed annuity rates associated with certain policies. 

The risk to shareholders is that the assets of the With-Profits Fund are insufficient to meet these guarantees. While shareholders are entitled to only a small share of profits in the With-Profits Fund (via one ninth of the cost of bonus), they can potentially be exposed to the full cost if fund assets are insufficient to meet policyholder guarantees. The time value cost of this asymmetry, known as the burnthrough cost, is modelled stochastically, as it will only occur in some adverse scenarios. The burnthrough time value cost is calculated as the difference between the average value of shareholder cash flows under a number of market-consistent scenarios, and the intrinsic shareholder value using risk-free assumptions included within the deterministic model. 

The burnthrough cost has been assessed using a stochastic model derived from the current Realistic Balance Sheet (RBS) model. This model has been calibrated to market conditions at the valuation date. Allowance has been made under the different scenarios for management actions, such as altered investment strategy, consistent with the RBS model. The burnthrough cost would be markedly higher without the hedging activities currently undertaken.

The burnthrough cost at 31 December 2008 of £72m (2007: £48m), is split between £30m (2007: £23m) market risk and £42m (2007: £25m) non-market risk. The non-market risks include lapses, annuitant longevity, and operational risk within the With-Profits Fund. The allowance for non-market risks is made by consideration of the impact of extreme scenarios from our economic capital model. 

Significant amounts of new with-profits business are no longer written and the guarantee levels offered are lower, hence there is no material impact of the burnthrough cost in the contribution to profits of new business.

1.6 Required capital and the cost of capital

Required capital is set at the greater of regulatory capital and requirements arising from internal capital management policies, which include economic risk capital objectives. The economic risk capital is determined from internal models, based on the Company's risk appetite.

In aggregate, required capital is higher than regulatory requirements by approximately £400m (2007: £200m). The increase is driven primarily by greater investment market volatility. Capital requirements under EEV amounted to £908m (2007: £668m). 

The EEV includes a deduction for the cost of holding the required capital. Frictional costs, being the tangible costs of holding capital, have been allowed for on a market-consistent basis. These consist of the total taxation and investment expenses incurred on locked-in shareholder capital and reflect the cost to an investor of holding an asset through investment in a life company, rather than investing in the asset directly. 

No adjustment has been made for any agency cost, this represents the potential markdown to value that investors will apply because they do not have direct control over their capital. Any adjustment would be subjective and different investors will have their own views of what adjustment, if any, should be made. 

1.7 Non-market risk

An investor can diversify away the uncertainty around the return on non-market risks, such as mortality and expenses. Hence in a shareholder valuation the allowance for non-market risk is made through the appropriate choice of best estimate experience assumptions and the impact of non-market risks on the level, and hence the cost, of capital. 

In choosing best estimate assumptions the allowance for non-market risk has been reviewed. However, best estimate assumptions may fail to represent the full impact on shareholder value where the impact of fluctuations in experience is asymmetric; that is where adverse experience has a higher impact on shareholder value than favourable experience. The areas identified as having such asymmetries are the burnthrough cost and operational risk.

The impact of variations in non-market risks to shareholders of meeting guarantees of the FPLP With-Profits fund have been taken into account in the burnthrough cost calculation. 

In addition, a provision of £86m (2007: £87m) has been set up for operational risks in the shareholders' funds. This provision has been calculated by comparing the mean impact of variations in operational risk, as modelled in the economic capital calculations, with the existing allowance for operational risk in specific accounting provisions and embedded value projection assumptions. 

This provision of £86m is equivalent to a 0.4% pa (2007: 0.4% pa) increase in the risk discount rate for UK Life & Pensions business and 0.8% pa (2007: 0.8% pa) for International Life & Pensions business. This impacts both embedded value and the contribution from new business.

1.8 Expenses

The EEV guidance requires companies to actively review expense assumptions, and include an allowance for holding company (corporate) costs and service company costs.

(a) Corporate costs

Corporate costs relate to those costs incurred at the corporate level that are not directly attributable to the Life & Pensions or the Asset Management businesses. 

Under EEV methodology, corporate costs are classified as either ongoing costs or development and one-off costs. For 2008, £12m (2007: £12m) of regular ongoing corporate costs were capitalised and deducted from the embedded value. 

 

 (b) Service costs

Service company costs are included in the EEV expense assumption calculations. Included within these are the fees charged by F&C for investment management services to the covered Life & Pensions business. 

Profits of IFA subsidiaries in respect of covered Life & Pensions business are not capitalised under the EEV methodology as those subsidiaries are separate cash generating units and run autonomously. Instead, these profits, which are immaterial, are brought into the consolidated income statement on an IFRS basis.

F&C service fee profits in respect of covered Life & Pensions business are not capitalised under the EEV methodology, as F&C is a separate business segment within the Group and the arrangement between F&C and the Life & Pensions business is on an arm's length basis. Instead, these profits, approximately £8m (2007: £11m), are brought into the consolidated income statement on an IFRS basis, and F&C is brought into the pro forma embedded value at market value. 

Productivity gains have been assumed within the EEV in respect of International business in anticipation of future business growth. The Lombard EEV has been reduced by £15m (2007: £15m) for a projected expense overrun for the period to 2013.

(c) Development costs

Development costs include costs related to developing wholly new products or entering wholly new markets.

1.9 New business

New business within the covered business includes:

• premiums from the sale of new contracts;

• payments on recurring single premium contracts, including Department for 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; and

• new entrants in the group pensions business. 

The EEV new business definition is consistent with the quarterly New Business disclosure.

2. Segmental analysis 

(a) Life & Pensions EEV Profit 

Year ended 31 December 2008

		2008			2007
	Notes	UK	Intl	Total	UK	Intl	Total
		£m	£m	£m	£m	£m	£m
Contribution from	2(b),
new business	3(a)	28	111	139	96	110	206
Contribution from existing
business:
Expected return		143	55	198	149	38	187
Experience variances (i)		5	12	17	(20)	-	(20)
Operating assumption
changes (i)		(24)	2	(22)	(337)	(24)	(361)
Development costs		-	(12)	(12)	(41)	(9)	(50)
Expected return on  shareholders'
net assets
within the Life &
Pensions business		46	-	46	63	1	64
Other net
income/(expense)		8	-	8	(5)	-	(5)
Life & Pensions EEV
underlying profit/(loss)
before tax		206	168	374	(95)	116	21
Investment return
variances	3(e)	(688)	(200)	(888)	(205)	(6)	(211)
Effect of economic
assumption
changes		(199)	45	(154)	(21)	9	(12)
Non-recurring items	4	(31)	(1)	(32)	15	-	15
Other underlying
items		(5)	-	(5)	(3)	-	(3)
Life & Pensions EEV
profit/(loss)
before tax		(717)	12	(705)	(309)	119	(190)
Attributed tax	3(f)	173	3	176	129	(124)	5
Life & Pensions EEV
profit/(loss) after tax		(544)	15	(529)	(180)	(5)	(185)

(i) The UK experience variances and operating assumption changes mainly comprise the adverse impact of persistency assumption changes of £52m. The remaining variances include £15m persistency impact as a result of the economic downturn in the second half of 2008 offset by positive tax asset adjustments of £40m and a burnthrough cost variance of £8m.

 

(b) New business margin

Year ended 31 December 2008

	2008			2007
	UK	Intl	Total	UK	Intl	Total
	£m	£m	£m	£m	£m	£m
Contribution from new
Business	28	111	139	96	110	206
Present Value of New
Business Premiums
(PVNBP)	2,943	3,736	6,679	4,442	3,220	7,662
Margin - PVNBP	1.0%	3.0%	2.1%	2.2%	3.4%	2.7%

PVNBP equals new single premiums plus the expected present value of new regular premium business.

(c) Pro forma embedded value

At 31 December 2008

	2008	2007
	£m	£m
Ordinary shareholders' equity on an EEV basis	2,965	3,647
Adjustment to the value of the listed Asset
Management business to market value	-	78
Pro forma embedded value	2,965	3,725
Pro forma embedded value per share	£1.28	£1.60

(d) Summary consolidated balance sheet on an EEV basis 

	2008			2007
	Segmental	Intra-group		Segmental	Intra-group
	analysis	debt (iv)	Total	analysis	debt (iv)	Total
	£m	£m	£m	£m	£m	£m
Life & Pensions - long-term funds	509	-	509	640	-	640
Life & Pensions - shareholders' funds	183	840	1,023	400	850	1,250
Life & Pensions net assets	692	840	1,532	1,040	850	1,890
Corporate net assets	489	(840)	(351)	409	(850)	(441)
Shareholders' invested
net assets (i)	1,181	-	1,181	1,449	-	1,449
Attributable net asset value of the
Asset Management business
net of minority interest (ii)	150	-	150	421	-	421
Net pension asset of Friends
Provident Pension Scheme (iii)	-	-	-	4	-	4
Shareholders' net worth	1,331	-	1,331	1,874	-	1,874
Provision for future corporate
costs			(97)			(97)
Value of in-force Life & Pensions
business			1,731			1,870
Ordinary shareholders' net assets
on an EEV basis			2,965			3,647
Called-up share capital			234			234
Share premium account			2,372			2,372
EEV reserves			359			1,041
Ordinary shareholders' equity
on an EEV basis			2,965			3,647

At 31 December 2008

  (i) Within shareholders' invested net assets is £30m (2007: £36m) of goodwill and £24m (2007: £29m) of other acquired intangible assets in relation to the purchase of the Group's two IFA distribution businesses, Sesame and Pantheon Financial.

(ii) The attributable net assets of the Asset Management business have reduced as a results of impairment (see note 6)

(iii) As explained in the IFRS section, the surplus in the Friends Provident Pension Scheme has been restricted to £nil value at 31 December 2008.

(iv) Intra-group long-term debt is analysed as follows:

	Debt		Interest payable
	2008	2007	2008	2007
	£m	£m	£m	£m
Due from FPLP to Friends Provident plc	795	795	46	46
Due from Sesame to Friends Provident
Distribution Holdings Ltd	45	55	-	-
	840	850	46	46

(e) Life & Pensions net assets segmental information by business segment 

	2008				2007
	UK	Intl	Total		UK	Intl	Total
	£m	£m	£m		£m	£m	£m
Life & Pensions net
assets	704	(12)	692		1,049	(9)	1,040
Value of in-force Life &
Pensions business	975	756	1,731		1,260	610	1,870
	1,679	744	2,423		2,309	601	2,910

3. Life & Pensions EEV profit

(a) Contribution from new business

The contribution from new business is calculated using economic assumptions at the beginning of the period and operating assumptions from the end of the period. For annuity business, as the contribution is sensitive to the interest rate at outset, the appropriate rate for each month's new business is used. The table below gives the contribution before cost of capital and share based payments.

	2008	2007
	£m	£m
Contribution from new business before cost of capital
and share based payments	148	218
Cost of share based payments	(6)	(3)
Cost of capital	(3)	(9)
Contribution from new business	139	206

The contribution from new business using end-of-period economic assumptions was £154m (2007: £189m) and is quoted after cost of required capital and share incentives. 

The contribution is £15m higher on end-of-period economic assumptions owing to the large relative movements in risk free rate and expense inflation assumptions.

(b) Profit from existing business - Life & Pensions

Profit from existing Life & Pensions business comprises the expected return on the value of in-force business at the start of the period plus the impact of any changes in the assumptions regarding future operating experience, changes in the reserving basis (other than economic assumption changes) and profits and losses caused by differences between the actual experience for the period and the assumptions used to calculate the embedded value at the end of the period.

The expected return on the value of in-force business is the difference between the expected return on the assets backing the liabilities and the expected return on the market-consistent value of the liabilities. Effectively, this approach is similar to applying an unwind in the risk discount rate to the value of the in-force business at the beginning of the year. However, the risk discount rate to be used is a rate appropriate over the period of return only, which is not necessarily equal to the overall in-force risk discount rate averaged across all future durations above.

(c) Development costs - Life & Pensions

Development costs include costs related to developing wholly new products or entering wholly new markets. 

(d) Expected return on shareholders' net assets

The expected return on shareholders' net assets held within the Life & Pensions business comprises the return on the shareholders' net assets held by the life assurance companies within that business using the 2007 investment return assumptions detailed in note 13(a).

The expected return on corporate net assets is the expected investment return on assets held by Friends Provident plc and its non-life subsidiaries. It excludes the expected return on the net pension liability and the result of the F&C business, which are shown separately in the summary consolidated income statement.

(e) Investment return variance

The split of the investment return variance in the Life & Pensions EEV profit is shown in the table below:

	2008	2007
	£m	£m
In respect of net assets at the start of year	(58)	(38)
In respect of covered business	(592)	(105)
Investment return variances after tax	(650)	(143)
Investment return variances before tax	(888)	(211)

The investment return variance of £58m (2007: £38m) after tax relates to shareholder net assets. The investment return variance in respect of covered business comprises £186m (2007: £59m) after tax, relating to assets backing policyholder liabilities, and £406m (2007: £46m) after tax, relating to the value of the in-force business.

(f) Attributed tax charge

EEV Life & Pensions profits except for the expected return and investments variance on shareholders' net assets are calculated net of tax and then grossed up at the effective rate of shareholder tax. The full standard rate of UK corporation tax has been used to gross up after tax profits on UK business and appropriate tax rates have been used for the International business. EEV deferred tax is provided on the mark-to-market revaluation of debt held within covered business.

	2008	2007
	£m	£m
Contribution from new business	40	61
Profit from existing business	55	(56)
Development costs	(3)	(16)
Expected return on shareholders' net assets within the
Life & Pensions business	17	21
Other net expenses	2	2
Tax rate change (operating)	-	88
Tax charge on underlying profit	111	100
Other non-recurring and non-underlying items	(11)	3
Investment return variances	(238)	(67)
Effect of economic assumption changes	(43)	(2)
UK tax rate change	-	(22)
Tax credit on non-underlying loss	(292)	(88)
Prior year tax adjustments	10	(17)
International tax rate change	(5)	-
Attributed tax credit	(176)	(5)

4. Non-recurring items

	2008	2007
	£m	£m
Strategic review costs	(10)	-
Other	(9)	-
Terminated merger income (less related costs)	-	34
Corporate non-recurring item	(19)	34
Strategic review costs	(32)	-
Provision for past sales	-	15
Life & Pensions non-recurring items	(32)	15
Reorganisation costs	(15)	-
Losses on forward currency contracts	(12)	-
Reinvestment Plan costs	-	(7)
Investment Trust VAT costs	-	(4)
Asset Management non-recurring items	(27)	(11)
Total non-recurring items	(78)	38

  5. Earnings per share

Earnings per share have been calculated based on EEV underlying profit after tax and profit after tax attributable to ordinary shareholders of the parent. The directors consider the underlying earnings per share figure gives a better indication of operating performance.

Basic and underlying earnings per share

	2008		2007
	Earnings	Per share	Earnings	Per share
	£m	pence	£m	pence
Loss after tax attributable
to ordinary shareholders
of the parent	(577)	(24.8)	(59)	(2.7)
Investment return variances	611	26.3	45	2.1
Effect of economic assumption changes	154	6.6	12	0.5
Amortisation and impairment of
non-covered business acquired
intangible assets	54	2.3	45	2.1
Impairment of Asset Management
acquired intangible assets	264	11.4	-	-
Non-recurring items	78	3.4	(38)	(1.8)
Tax credit on items excluded from
underlying loss	(226)	(9.7)	(96)	(4.5)
Minority interest on items excluded
from underlying loss	(53)	(2.4)	(5)	(0.2)
Underlying profit/(loss) after tax
attributable to ordinary
shareholders of the parent	305	13.1	(96)	(4.5)

	2008	2007
	millions	millions
Weighted average number of ordinary shares	2,323	2,152

Diluted basic earnings per share 

		2008			2007
		Weighted			Weighted
		average			average
		number of	2008		number of	2007
	2008	ordinary	Per	2007	ordinary	Per
	Earnings	shares	share	Earnings	shares	share
	£m	millions	pence	£m	millions	pence
Loss after tax
attributable to
ordinary shareholders
of the parent	(577)	2,323	(24.8)	(59)	2,152	(2.7)
Dilution	-	-	-	(1)	-	(0.1)
Diluted loss after
tax attributable to
ordinary shareholders
of the parent	(577)	2,323	(24.8)	(60)	2,152	(2.8)

6. Intangible assets on an EEV basis 

		Investment
		management
	Goodwill	contracts	Other	Total
Carrying amounts	£m	£m	£m	£m
At 31 December 2008	171	267	46	484
At 31 December 2007	380	254	50	684

As a result of impairment testing undertaken in December 2008, an impairment charge of £216m (2007: £nil) has been made in respect of Asset Management goodwill and £48m (2007: £nil) in respect of Asset Management investment management contracts. 

(a) Goodwill

Goodwill is the only intangible asset which has an indefinite useful life and has been allocated as follows: 

	2008	2007
	£m	£m
Asset Management	141	344
Pantheon Financial	22	28
Sesame	8	8
Total goodwill	171	380

(b) Investment management contracts

These relate solely to Asset Management. 

(c) Other intangible assets 

Other intangible assets are amortised over their anticipated useful lives and mainly include distribution channel relationships and software development.

The analysis of the net book value for each segment is as follows:

	2008	2007
	£m	£m
UK Life & Pensions	31	38
International Life & Pensions	14	11
Asset Management	1	1
Total other intangible assets	46	50

7. Deferred acquisition costs

Deferred acquisition costs of £12m (2007:£12m) relate to Asset Management business.

8. Reconciliation of movement in pro forma embedded value

			Total
	UK	Intl	Life &
	Life &	Life &	Pensions		Total
	Pensions	Pensions	EEV	Other	EEV
	£m	£m	£m	£m	£m
Pro forma embedded value at
31 December 2007	2,309	601	2,910	815	3,725
Contribution from new business	28	111	139	-	139
Contribution from existing business
- Expected return	143	55	198	-	198
- Experience variances	5	12	17	-	17
- Operating assumption changes	(24)	2	(22)	-	(22)
Development costs	-	(12)	(12)	-	(12)
Expected return on shareholders' net assets	46	-	46	-	46
Other net income	8	-	8	-	8
Other underlying items	-	-	-	46	46
Underlying EEV profit before tax	206	168	374	46	420
Investment return variances	(688)	(200)	(888)	277	(611)
Effect of economic assumption changes	(199)	45	(154)	-	(154)
Non-recurring items	(31)	(1)	(32)	(46)	(78)
Other non-underlying items	(5)	-	(5)	(313)	(318)
EEV (loss)/profit before tax	(717)	12	(705)	(36)	(741)
Attributed tax	173	3	176	(44)	132
EEV (loss)/profit after tax	(544)	15	(529)	(80)	(609)
Net movement recognised directly in the
statement of recognised income and
expense	-	86	86	35	121
Minority interest	-	-	-	6	6
Dividends on ordinary shares	(50)	(1)	(51)	(102)	(153)
Share based payments	-	-	-	11	11
Acquisition of subsidiaries & associate	-	12	12	(67)	(55)
Adjustment to the value of the listed Asset
Management business to market value	-	-	-	(78)	(78)
Allocation of OLAB surplus
to International L&P (i)	(26)	26	-	-	-
Other movements	(10)	5	(5)	2	(3)
Total movement in EEV	(630)	143	(487)	(273)	(760)
Pro forma embedded value at 31
December 2008	1,679	744	2,423	542	2,965

Pro forma EEV comprises the EEV of the entire Group, incorporating the Group's share of F&C at market value of £149m (2007: £497m).

'Other' consists predominantly of Asset Management business and corporate items.

9. Reconciliation of net worth and value of in-force business for Life & Pensions

					Total
				Value of	Life &
	Free	Required	Total net	in-force	Pensions
	surplus	capital	worth	business	EEV
	£m	£m	£m	£m	£m
Shareholders' capital and reserves
At 31 December 2007	372	668	1,040	1,870	2,910
Contribution from new business	(224)	31	(193)	292	99
Expected return	13	18	31	138	169
Experience variances, operating
assumption changes, development
costs, other expenses
and non-recurring items	(283)	204	(79)	74	(5)
Expected profit - transfer to net worth	267	(12)	255	(255)	-
Life & Pensions underlying
profit after tax	(227)	241	14	249	263
Investment return variances
and economic
assumption changes	(259)	(9)	(268)	(493)	(761)
Other non operating variances	(26)	-	(26)	-	(26)
Prior year tax adjustments	(10)	-	(10)	-	(10)
Tax rate assumption changes	-	-	-	5	5
Life & Pensions EEV profit after
Tax	(522)	232	(290)	(239)	(529)
Acquisitions	12	-	12	-	12
Foreign exchange adjustments	(27)	8	(19)	100	81
Transfer of assets	-	-	-	-	-
Dividend to parent company	(51)	-	(51)	-	(51)
Shareholders' capital and reserves
At 31 December 2008	(216)	908	692	1,731	2,423

All items in the table above are shown net of tax. £890m of regulatory capital is also available, raised through the STICS, securitisation and financial reinsurance, that is not included within the EEV shareholder capital above.

10. Value of in-force Life & Pensions business on an EEV basis 

At 31 December 2008	2008	2007
	£m	£m
Value of in-force allowing for market risk (excluding
time value of options and guarantees)	1,950	2,057
Time value cost of options and guarantees
(including the impact of non-market risks)	(72)	(48)
Cost of required capital, plus excess economic capital requirements	(61)	(52)
Provision for operational risks	(86)	(87)
Value of in-force Life & Pensions business	1,731	1,870

11. Equity attributable to equity holders of the parent

Ordinary shareholders' equity on an EEV basis reconciles to equity attributable to equity holders of the parent on an IFRS basis as follows:

	2008	2007
	£m	£m
Ordinary shareholders' equity on an EEV basis	2,965	3,647
Less items only included on an EEV basis:
Value of in-force Life & Pensions business	(1,731)	(1,870)
Provision for future corporate costs	97	97
Adjustment of long term debt to market value	(254)	(59)
Add items only included on an IFRS basis:
Goodwill on covered business	404	353
Other intangible assets	74	69
Acquired PVIF	265	249
STICS treated as equity	810	810
Deferred acquisition costs	1,211	1,081
Deferred front end fees	(115)	(102)
IFRS reserving and other IFRS adjustments	(552)	(513)
Equity attributable to equity holders of the parent
on an IFRS basis	3,174	3,762

12. Maturity profile in years of Value of In-force (VIF) by proposition 

As at 31 December 2008

	Total	1-5	6-10	11-15	16-20	21-25	26-30	31-35	36-40	41+
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
UK
With-Profits Fund	113	7	57	31	13	4	1	-	-	-
Protection	156	66	42	26	15	6	1	-	-	-
Investments	111	57	31	14	6	2	1	-	-	-
Pensions	450	130	124	92	57	29	13	4	1	-
Annuities	(17)	(54)	4	13	10	3	3	2	1	1
UK other	162	129	33	-	-	-	-	-	-	-
UK total	975	335	291	176	101	44	19	6	2	1
		34%	30%	18%	10%	5%	2%	1%	0%	0%
International
FPI	306	173	70	39	18	6	-	-	-	-
Lombard	450	189	96	63	40	25	16	10	6	5
International total	756	362	166	102	58	31	16	10	6	5
		48%	22%	13%	8%	4%	2%	1%	1%	1%
Total VIF	1,731	697	457	278	159	75	35	16	8	6
		41%	27%	16%	9%	4%	2%	1%	0%	0%

 13. EEV assumptions 

(a) Principal economic assumptions - deterministic 

Economic assumptions are actively reviewed and are based on the market yields on risk-free assets at the valuation date. 

	2008	2007
UK and International (excluding Lombard):	%	%
Risk-free rate (i)	3.7	4.6
Investment returns before tax:
Fixed interest	3.6-7.7	4.6-5.9
Equities	6.7	7.6
Properties	5.7	6.6
Future expense inflation:
UK business	3.7	4.5
International business	3.7	4.5
UK and OLAB corporation tax rate	28	30/28
Isle of Man corporation tax rate (ii)	28	30/28

(i) For UK and FPI business the risk-free rate is set with reference to the gilt yield curve at the valuation date. For annuity business a term-dependent rate allowing for the shape of the yield curve is used as this can significantly impact value. For other business, a rate based on the annualised 15-year gilt yield is used.

 

(ii) Isle of Man corporation tax rate is 0%. It has been assumed that all distributable profits will be repatriated as dividends and hence a full UK rate has been applied.

	2008	2007
Lombard:	%	%
Risk-free rate	4.2	4.7
Investment returns before tax:
Fixed interest	4.2-5.2	4.7-5.7
Equities	7.2	7.7
Cash	2.5	4.1
Future expense inflation	3.2	4.1
Tax rate	28.6	29.6

The key exchange rates used in respect of Lombard business were a closing exchange rate of 1 Euro = £0.959 (2007: 1 Euro = £0.734) and an average exchange rate over the year of 1 Euro = £0.772 (2007: 1 Euro = £0.678).

Margins are added to the risk-free rates to obtain investment return assumptions for equity and property. For corporate fixed interest securities the investment return assumptions are derived from an AA-bond yield spread, limited to the actual return on the underlying assets. As a market-consistent approach has been followed, these investment return assumptions affect only the derived risk discount rates and not the embedded value result.

Maintenance expenses for UK and International business (excluding Lombard) are assumed to increase in the future at a rate of 1% per annum in excess of the assumed long-term rate of retail price inflation. This is derived from the difference between the risk-free rate of return and the average of the FTSE Actuaries over five-year index-linked gilt yield at 5% and 0% inflation. Lombard maintenance expenses are assumed to increase in line with a weighted average of retail price inflation and average earnings increases.

For Lombard the risk-free rate is the average of the 10-15 year and the over 15 year yields using the EuroMTS indices. The investment return assumption is the weighted average (based on an assumed asset mix) of returns on fixed interest securities, equities and cash. 

Derived risk discount rates by product type

Average derived risk discount rates are shown below for the embedded value and the contribution from new business. The average derived risk discount rate for the in-force has increased over 2008, owing mainly to widening corporate bond spreads. 

Annuities have been excluded from the 2008 table as the increased allowance for liquidity premium in the statutory valuation has resulted in a negative value of in-force business under MCEV and hence a meaningless derived risk discount rate. The 2007 table has been restated excluding annuity business for comparison purposes.

A more detailed split of the derived risk discount rates is given in the following table.

Derived risk discount rates for new business have been based on end-of-period economic assumptions.

31 December 2008	UK with-	Other	Average	International
	profits business	UK	UK	Sterling	Euro
Embedded value	%	%	%	%	%
Risk-free rate	3.7	3.7	3.7	3.7	4.2
Market risks (non-options)	4.7	3.0	3.2	1.0	1.7
Options - market risks	8.0	-	0.9	-	-
Options - non-market risks	11.2	-	1.2	-	-
Other non-market risks	0.4	0.4	0.4	0.8	0.8
Risk discount rate	28.0	7.1	9.4	5.5	6.7

31 December 2007	UK with-	Other	Average	International
	profits business	UK	UK	Sterling	Euro
Embedded Value	%	%	%	%	%
Risk-free rate	4.6	4.6	4.6	4.6	4.7
Market risks (non-options)	3.1	2.2	2.3	1.2	2.1
Options - market risks	2.4	-	0.3	-	-
Options - non-market risks	2.7	-	0.3	-	-
Other non-market risks	0.4	0.4	0.4	0.8	0.8
Risk discount rate	13.2	7.2	7.9	6.6	7.6

With-profits business is subject to more investment risk than the remaining business, and so has higher non-option market risk. The with-profits options elements, have increased significantly as the burnthrough cost has increased and is a much higher proportion of a declining value of in-force following adverse investment returns over 2008.

31 December 2008	International
	UK	Sterling	Euro
Contribution from new business	%	%	%
Risk-free rate	3.7	3.7	4.2
Market risks	3.8	0.5	1.2
Non-market risks	0.4	0.8	0.8
Risk discount rate	7.9	5.0	6.2

31 December 2007	International
	UK	Sterling	Euro
Contribution from new business	%	%	%
Risk-free rate	4.6	4.6	4.1
Market risks	2.8	0.7	2.6
Non-market risks	0.4	0.8	0.8
Risk discount rate	7.8	6.1	7.5

(b) Principal economic assumptions - stochastic

The cost of options and guarantees is determined using The Smith Model Plus economic scenario generator. The model is calibrated to market conditions at the valuation date and correlations between the asset classes are derived from historic data, consistent with the model used for the Realistic Balance Sheet.

Risk-free rates are calibrated to the gilt yield curve. Equity volatility is calibrated to market implied volatility and is a reasonable fit to the implied volatility of FTSE 100 put options held by the FPLP With-Profits Fund. Property holdings are modelled assuming an initial volatility of 15% and a 6.1% pa running yield. 

Sample implied volatilities by asset class

31 December 2008	Term (years)
	5	15	25	35
	%	%	%	%
15-year risk free zero coupon bonds	9.2	4.8	4.5	5.3
Equity	30.6	32.6	34.3	36.0
Property	15.4	18.0	20.2	22.2

Sample Correlations by asset class

31 December 2008	6 Yr Rolling	Equity	Property
	Bond Return	Total	Total
	Index	Return	Return
6 Year Rolling Bond Return Index	1.00	-0.15	-0.15
Equity Total Return	-0.15	1.00	0.68
Property Total Return	-0.15	0.68	1.00

 

(c) Other assumptions

Other assumptions (for example mortality, morbidity, persistency and expenses) are a reflection of our best estimate of the likely behaviours, outcomes or circumstances in the future. Typically the estimates are made on an annual basis following experience investigations based on the date available at the time both from our own book of business and externally sourced information. 

The aim is to set assumptions at a level that reflects recent experience, unless there are reliable indicators that suggest their adoption would result in a significant variance compared to these assumptions in the future. In some instances, there may be little or no direct experience to use in setting assumptions and the future outcome is therefore uncertain.

In terms of future improvements in annuitant mortality, these have been assumed to be in accordance with the 'medium cohort' projections (with certain amendments) published in the CMI in 2002. The amendments are to use 75% of these projections for females and to introduce a minimum annual rate of improvement in future mortality - for males this is assumed to be 1% pa and for females 0.75% pa. 

14. Sensitivities

Life and Pensions

The table below shows the sensitivity of the embedded value and the contribution from new business to changes in assumptions at year end 2008, split by UK and International. The sensitivities shown reflect movements in Life and Pensions EEV and corporate net assets only.

For each sensitivity other future experience assumptions remain unchanged, except where changes in economic conditions directly affect them. The assumptions underlying the statutory reserving calculations remain unchanged in all sensitivities.

Sensitivities shown in a single direction have broadly symmetrical impacts.

2008 Sensitivities		Change in embedded			Change in new business
		Value			contribution
		(net of tax)			(gross of tax)
		UK	Int	Total	UK	Int	Total
	Notes	£m	£m	£m	£m	£m	£m
Base EEV/VNB		1,679	744	2,423	28	111	139
Market risk
1% increase in equity and property
expected returns	(i)	n/a	n/a	n/a	n/a	n/a	n/a
1% increase in risk-free rates, with
corresponding change in fixed
- interest asset values		(107)	(16)	(123)	(3)	(3)	(6)
1% decrease in risk-free rates, with
corresponding change in fixed-
interest asset values		103	14	117	3	3	6
10% reduction in market values of
equity and property assets
(for embedded value)	(ii)	(56)	(34)	(90)	n/a	n/a	n/a
10% adverse movement in
sterling/overseas exchange rate	(iii)	(15)	(54)	(69)	n/a	n/a	n/a
100 basis points increase in corporate
bond spreads		(113)	(5)	(118)	n/a	n/a	n/a
Insurance and other risk
5% reduction in annuitant mortality:
Before reinsurance		(46)	-	(46)	(2)	-	(2)
After reinsurance		(29)	-	(29)	(2)	-	(2)
5% reduction in mortality and
morbidity (excluding annuities):
Before reinsurance		49	4	53	9	1	10
After reinsurance		14	4	18	2	1	3
1% increase in risk discount rates	(iv)	(105)	(49)	(154)	(18)	(17)	(35)
Reduction in capital requirement to
regulatory minimum (for EEV)	(v)	-	-	16	n/a	n/a	n/a
50% increase in capital requirements
(for new business contribution)		n/a	n/a	n/a	(2)	(1)	(3)
10% decrease
in maintenance expenses		52	16	68	6	5	11
10% proportionate
decrease in lapse rates		15	39	54	8	10	18
10% proportionate
decrease in paid-up rates		14	3	17	7	2	9

(i) As a market-consistent approach is used, equity and property expected returns only affect the derived risk discount rates and not the embedded value or contribution to profits from new business.

(ii) The movement in embedded value from a reduction in market values comprises a £4m (2007: £3m) fall in the value of shareholders' invested net assets and a £86m (2007: £124m) reduction in the value of in-force Life and Pensions business. 

(iii) Currency risk is expressed in terms of total overseas exposure; the principal currencies the Group is exposed to are the Euro and US Dollar.

(iv) Although not directly relevant under a market-consistent valuation where the risk discount rate is a derived disclosure only, this shows the impact of a change in the average derived risk discount rate, to enable adjustments to be made to reflect differing views of risk.

(v) Required capital is set at the greater of regulatory capital and requirements arising from internal capital management policies. In aggregate the required capital is higher than the regulatory requirement by £400m (2007: £200m). This sensitivity shows the impact on embedded value of using the lower regulatory capital requirements.

Appendix 1: Definitions

Annual Premium Equivalent (APE) represents annualised new regular premiums plus 10% of single premiums.

Cash payback on new business is the time at which the value of the expected cash flows, after tax, is sufficient to have recouped the capital invested to support the writing of the business. The cash flows are discounted at the appropriate risk-discount rate, and calculated on the same assumptions and expense basis as those used for the contribution from new business.

Contribution from new business is calculated using economic assumptions at the beginning of the period, and is quoted after the cost of required capital, share based payments and including an apportionment of fixed acquisition expenses across products.

EEV underlying profit is based on expected investment return and excludes: (i) amortisation and impairment of non-covered business acquired intangible assets, (ii) effect of economic assumption changes, (iii) non-recurring items; and is stated after deducting interest payable on STICS.

IFRS underlying profit is based on longer-term investment return and excludes: (i) policyholder tax, (ii) returns attributable to minority interests in policyholder funds, (iii) non-recurring items, (iv) amortisation and impairment of acquired intangible assets and present value of acquired in-force business; and is stated after deducting interest payable on STICS.

IGD Surplus Capital resources is the Group's capital resources in excess of its capital resource requirements from a group shareholder perspective, calculated in accordance with INSPRU 6.1. It is a prudent measure in that surplus capital not immediately available to shareholders, such as surplus capital in the long-term funds, is excluded from the calculation.

Internal Rate of Return on new business (IRR) is equivalent to the discount rate at which the present value of the after tax cashflows expected to be earned over the lifetime of the business written is equal to the capital invested to support the writing of the business. With the exception of investment return, all assumptions and expenses are consistent with those used for calculating the contribution from new business. IRR assumes best estimate investment returns after an allowance for default risk, whereas contribution from new business assumes (market consistent) risk-free rates. IRR also takes into account the funding and release of regulatory capital requirements.

Margins are defined as the pre-tax contribution from new business generated by each product type, divided by the new business volume for that product. 

Present Value of New Business Premiums (PVNBP) represents new single premiums plus the expected present value of new business regular premiums.

Pro forma embedded value is the shareholders' equity on an EEV basis, adjusted to bring the value of the holding in the F&C Asset Management plc to market value.

Shareholder cash resources (SCR) are a measure of the tangible assets available to the Life & Pensions business and attributable to shareholders. The movement in SCR therefore provides a view of the sustainability of the business model. SCR are based on shareholders' invested net assets included within the embedded value, but adjusted to include securitisation and financial reinsurance balances, and to exclude intangible assets and mark-to-market adjustments to marketable long-term debt.

  

Appendix 2: Cash related balance sheet disclosures

The table below provides an analysis of shareholder cash resources, IGD excess resources over capital requirements and realisable assets.

Shareholder cash resources are based on shareholder invested net assets on the

EEV basis adjusted to include cash resources generated from securitisation and

financial reinsurance less the carrying value of non-covered business acquired

intangible assets.

IGD is provisional and is analysed below after the deduction of group

capital resource requirements from resources within long-term funds. The format

provided is intended to demonstrate the relationship between the three cash

related balance sheet disclosures and therefore differs from the presentation in

the annual IGD return.

Realisable assets represent the assets and liabilities held by Friends Provident plc

and FPLP shareholders' funds (these being the funds where strategic resources

are held). Assets and liabilities that we intend to hold for the long term, primarily

loans, are excluded from realisable assets. An analysis of the movement in

realisable assets is provided below.

	2008			2007
	Share-			Share-
	holder			holder
	cash	IGD	Realisable	cash	IGD	Realisable
	resources	surplus	assets	resources	surplus	assets
	£m	£m	£m	£m	£m	£m
Life & Pensions
long-term funds	509	25	-	640	12	-
Life & Pensions
Shareholder funds
Regulatory debt	(795)	-	-	(795)	-	-
Other debt	14	14	-	14	14	-
Other net assets:
FPLP realisable assets	636	636	636	843	843	843
Other	328	261	-	338	231	-
IFA subsidiaries
- intangible assets	(48)	(48)	-	(55)	(55)	-
Less: accrued transfers
from long-term funds	-	-	(12)	-	-	(211)
	135	863	624	345	1,033	632
Corporate net assets
Other debt	-	-	-	-	-	-
Mark to market on
long-term debt	254	-	-	48	-	-
Other net assets:
Friends Provident plc
realisable assets	77	77	77	212	212	212
Other	158	60	-	149	129	-
	489	137	77	409	341	212
Asset Management, net
of capital resource
Requirement	-	(175)	-	-	(81)	-
Securitisation, regulatory
provisions and
financial reinsurance	18	-	-	83	-	-
Total	1,151	850	701	1,477	1,305	844

 

Movement in realisable assets

	2008	2007
	£m	£m
Net transfers from long-term funds	212	308
Dividends received	14	21
Other operating cashflow	(51)	(54)
Merger termination (net of costs)	-	34
Loans	18	5
Dividends paid	(153)	(168)
Capital outflows:
Loans and capital into life subsidiaries	(172)	(42)
Investment in IFA subsidiaries	(8)	(117)
Lombard earnout settlement	-	(26)
Other	(3)	(29)
Movement in realisable assets	(143)	(68)
Realisable assets as at 1 January	844	912
Realisable assets as at 31 December	701	844

Appendix 3: IFRS ongoing profit before one-off items

(a) UK Life & Pensions IFRS ongoing profit before one-off items

Year ended 31 December 2008

				Savings &	With	UK
				Invest-	Profits	Life &
	Protection	Pensions	Annuities	ments	Fund	Pensions
	£m	£m	£m	£m	£m	£m
New business strain
Commission	(69)	(42)	-	(4)	-	(115)
Acquisition expenses	(52)	(58)	(7)	(5)	-	(122)
Other revenue and
reserve movements	83	(6)	8	1	-	86
	(38)	(106)	1	(8)	-	(151)
In-force surplus
Annual management
charges	-	71	-	23	42	136
Maintenance expenses	(17)	(20)	(1)	(9)	(32)	(79)
Investment management fees	-	(4)	-	(2)	(9)	(15)
Other revenue and
reserve movements	42	(6)	-	(10)	63	89
	25	41	(1)	2	64	131
Net cash generated	(13)	(65)	-	(6)	64	(20)
Deferred acquisition
costs
Deferred in period	-	47	-	6	-	53
Amortised in period	-	(19)	-	(19)	-	(38)
	-	28	-	(13)	-	15
Deferred income reserve
Deferred in period	-	-	-	-	-	-
Amortised in period	-	1	-	(1)	-	-
	-	1	-	(1)	-	-
Other IFRS adjustments
New business	-	1	-	(3)	-	(2)
In-force	4	16	-	44	-	64
	4	17	-	41	-	62
IFRS ongoing profit/(loss)
before one offs
IFRS new business strain	(38)	(58)	1	(5)	-	(100)
IFRS in-force surplus	29	39	(1)	26	64	157
	(9)	(19)	-	21	64	57

Year ended 31 December 2007

				Savings &	With	UK
				Invest -	Profits	Life &
	Protection	Pensions	Annuities	ments	Fund	Pensions
	£m	£m	£m	£m	£m	£m
New business strain
Commission	(92)	(72)	-	(31)	-	(195)
Acquisition expenses	(72)	(80)	(7)	(14)	-	(173)
Other revenue and
reserve movements	124	7	17	9	-	157
	(40)	(145)	10	(36)	-	(211)
In-force surplus
Annual management
charges	-	63	-	25	51	139
Maintenance expenses	(14)	(17)	-	(4)	(19)	(54)
Other revenue and
reserve movements	58	(10)	5	(7)	55	101
	44	36	5	14	87	186
Net cash generated	4	(109)	15	(22)	87	(25)
Deferred acquisition
costs
Deferred in period	-	74	-	32	-	106
Amortised in period	-	(16)	(3)	(22)	-	(41)
	-	58	(3)	10	-	65
Other IFRS adjustments
New business	-	(4)	-	(16)	-	(20)
In-force	1	14	-	24	-	39
	1	10	-	8	-	19
IFRS ongoing profit/(loss)
before one offs
IFRS new business strain	(40)	(75)	10	(20)	-	(125)
IFRS in-force surplus	45	34	2	16	87	184
	5	(41)	12	(4)	87	59

(b) Total Life & Pensions IFRS ongoing profit before one-off items

Year ended 31 December 2008

			Intl	UK	Total
			Life &	Life &	Life &
	FPI	Lombard	Pensions	Pensions	Pensions
	£m	£m	£m	£m	£m
New business strain
Commission	(165)	(22)	(187)	(115)	(302)
Acquisition expenses	(25)	(33)	(58)	(122)	(180)
Other revenue and
reserve movements	87	6	93	86	179
	(103)	(49)	(152)	(151)	(303)
In-force surplus
Annual management charges	27	69	96	136	232
Maintenance expenses	(18)	(17)	(35)	(79)	(114)
Investment management fees	(2)	-	(2)	(15)	(17)
Other revenue
and reserve movements	60	(7)	53	89	142
	67	45	112	131	243
Net cash generated	(36)	(4)	(40)	(20)	(60)
Deferred acquisition costs
Deferred in period	183	26	209	53	262
Amortised in period	12	(11)	1	(38)	(37)
	195	15	210	15	225
Deferred income reserve
Deferred in period	(101)	(6)	(107)	-	(107)
Amortised in period	(48)	8	(40)	-	(40)
	(149)	2	(147)	-	(147)
Other IFRS adjustments
New business	(2)	1	(1)	(2)	(3)
In-force	(14)	(1)	(15)	64	49
	(16)	-	(16)	62	46
IFRS ongoing profit/(loss)
before one offs
IFRS new business strain	(23)	(28)	(51)	(100)	(151)
IFRS in-force surplus	17	41	58	157	215
	(6)	13	7	57	64

Year ended 31 December 2007

			Intl	UK	Total
			Life &	Life &	Life &
	FPI	Lombard	Pensions	Pensions	Pensions
	£m	£m	£m	£m	£m
New business strain
Commission	(134)	(24)	(158)	(195)	(353)
Acquisition expenses	(20)	(34)	(54)	(173)	(227)
Other revenue
and reserve movements	85	17	102	157	259
	(69)	(41)	(110)	(211)	(321)
In-force surplus
Annual management charges	26	56	82	139	221
Maintenance expenses	(14)	(17)	(31)	(54)	(85)
Other revenue
and reserve movements	32	3	35	101	136
	44	42	86	186	272
Net cash generated	(25)	1	(24)	(25)	(49)
Deferred acquisition costs
Deferred in period	153	22	175	106	281
Amortised in period	(32)	(9)	(41)	(41)	(82)
	121	13	134	65	199
Other IFRS adjustments
New business	(103)	(7)	(110)	(20)	(130)
In-force	10	5	15	39	54
	(93)	(2)	(95)	19	(76)
IFRS ongoing profit
before one offs
IFRS new business strain	(19)	(26)	(45)	(125)	(170)
IFRS in-force surplus	22	38	60	184	244
	3	12	15	59	74

ENDFR SFASIWSUSEFD

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