1st Mar 2005 07:00
St. James's Place Capital PLC01 March 2005 PRESS RELEASE St. James's Place Capital Preliminary Announcement 1 March 2005 St. James's Place Capital plc today announces its annual results for the yearended 31 December 2004. The text of the announcement is attached: Enquiries: Mike Wilson, Chairman Tel: 020 7514 1907Andrew Croft, Group Finance Director Tel: 020 7514 1907 Nitya Bolam, Brunswick Tel: 020 7404 5959 Announcement of Annual Results for the year ended 31 December 2004 PRE-TAX PROFIT of £142.3 MILLION UP 37% St James's Place Capital plc (SJPC), the wealth management group, announces itsannual results for the year ended 31 December 2004. Achieved Profit highlights include: •Total Group profit before tax of £142.3 million up 37% (including £28.0 million from sale of LAHC) (2003: profit before tax of £103.9 million) •Group operating profit up 43% at £82.2 million (2003: £57.5 million) •New business profits of £38.0 million for the year (2003: £25.0 million) up 52% Other highlights include: •New business for the year up 19% (measured on an annual premium equivalent) •New business per Partner up 18% •New single premiums of £1.2 billion •Funds under management up 20% to £9.5 billion Proposed final dividend of 1.6p per share making a total dividend for the yearof 2.85p (2003: 2.75p) an increase of 3.6% for the full year. Mike Wilson, Chairman, commented: "We are delighted that the strong new business growth has translated into asubstantial 37% growth in pre-tax profit. The 20% increase in funds undermanagement to £9.5 billion is also particularly pleasing. We are confident that our long established model of having our own dedicateddistribution of experienced advisers, the St. James's Place Partnership, willgive us an even greater competitive advantage in the future world ofdepolarisation." SUPPORTING STATEMENT CHAIRMAN'S STATEMENT This is my first statement since assuming the role of Chairman on 1 September2004. This announcement also includes the Chief Executive's Statement and a Financial Commentary. Financial performance It is pleasing to report a strong performance in 2004, with the recovery in newbusiness first seen in September 2003 continuing throughout 2004. New businessfrom long-term savings and investment (measured on the industry basis of annualpremiums plus one tenth of single premiums) was up 19% over the year. The pre-tax profits for the full year on the Modified Statutory Solvency Basis('MSSB') were £38.8 million (2003: £10.1 million). Shareholders will recall thatthe MSSB result reflects the underlying current year cash flows of the business.Therefore, due to the long-term nature of life assurance business, we alsopresent our results on the Achieved Profit Basis which takes into account futureexpected cash flows from the in-force business. The Board remains of the viewthat this basis provides a more meaningful measure of the Company's performance. The pre-tax Achieved Profit result for the year at £142.3 million was up 37%over the 2003 pre-tax profit of £103.9 million, whilst the operating profit forthe year, was £82.2 million (2003: £57.5 million), an increase of 43%. Within both the MSSB and the Achieved Profit result for the year is the profitof £28 million from the disposal of our holding in LAHC announced on 1 July2004. The Financial Commentary provides further details on the results for the year and the disposal of LAHC. Final dividend & outlook Subject to the approval of shareholders at the Annual General Meeting, a finaldividend of 1.6 pence per share will be paid to shareholders on the register on11 March 2005, making a total of 2.85 pence for the full year, up from 2.75pence in 2003. The proposed dividend payment date is 18 May 2005. This 3.6%increase in the 2004 full year dividend reflects the Board's belief that theGroup is now in a position to be able to continue to grow dividends in thefuture. Partners and staff 2004 has been an exceptionally busy period for the Group and probably thebusiest year in our history. Despite the challenges, detailed in Mark Lund'sChief Executive's Statement, once again both members of the Partnership and ourstaff have continued to show their enthusiasm and commitment. On behalf of theDirectors and shareholders I would therefore like to thank all members of theSt. James's Place community for their contribution to our 19% growth in newbusiness last year. Foundation The St. James's Place Foundation, the Group's Charitable Trust, is an integralpart of the day to day life of the St. James's Place community. Over 85% of ourcommunity give to the Foundation on a monthly basis by Gift Aid and throughoutthe year there are many fund raising social events held. The money raised from Gift Aid, social events and sponsorship for individualchallenges is matched by the Group. Including this matching, a record £1.5million was raised for the Foundation in 2004. Succession and Board changes During the second half of 2004 we completed the final part of the previouslyannounced succession plan. On 1 September 2004 Mark Lund was appointed Chief Executive and I took over asfull time Chairman from Sir Mark Weinberg, who continues to be closely involvedwith the Group as an active President. In addition, on 1 September 2004 Andrew Croft, whose appointment as GroupFinance Director was announced in June 2003, joined the Board and Sarah Bateswas appointed as an independent non-executive director. I am delighted to announce an additional Board appointment with effect from theAnnual General Meeting on 12 May 2005. Subject to shareholder approval, SimonGulliford will join the Board as an independent non-executive director. Simonhas a wealth of marketing experience, most recently as Group Marketing Directorof Barclays plc. Lord Weir and Anthony Loehnis will be resigning from the Board with effect fromthe AGM on 12 May 2005. Both William and Anthony have played an important rolein overseeing the development of the Company and I would like to thank them bothon behalf of the Board and shareholders for their immense contribution, supportand commitment over the years. We expect a number of other changes on the Board over the next year or so inorder to achieve full compliance with the new Combined Code. I would like to take this opportunity on behalf of the shareholders and the SJPcommunity both past and present, to thank Sir Mark Weinberg for his invaluablecontribution in building St. James's Place, in just 13 years, to a FTSE 250company and one of the United Kingdom's leading wealth management groups. We look forward to Mark's continued involvement with the Group as President andChairman of the Investment Committee, as well as playing a role in strategicplanning. Mike Wilson28 February 2005 CHIEF EXECUTIVE'S STATEMENT This is my first statement since assuming the role of Chief Executive on 1September 2004. St. James's Place is very much a growth company and we see exciting prospectsfor continued growth over the longer term, which we believe will deliversuperior shareholder returns. We focus all our efforts on the UK market placeand our aim is to be regarded by clients as the most professional and trustedadviser on wealth management. We have, and will continue to have, an exclusiverelationship with the St. James's Place Partnership for the distribution of theproducts and services available from St. James's Place. New business Our longer term goal is to grow new business by 15 - 20% per annum. It istherefore very pleasing to be able to report that in 2004 new business fromlong-term savings and investments grew by 19% (as measured on the industrymeasure of annual premiums, plus one tenth single premiums). There wasparticularly strong growth in the first two quarters of 2004 resulting in a 31%increase for the first half compared with the same period in 2003. As aconsequence the quarter by quarter comparisons will become easier as 2005progresses. All classes of business grew and we were particularly pleased to see new singlepremiums of £1.2 billion, which included a 32% increase in unit trust businessand a 40% increase in single premium pensions business. Gross fees from ourother wealth management services rose by 2% to £21.2 million (2003: £20.8million). The St. James's Place Partnership Whilst membership of the St. James's Place Partnership rose by only 1% duringthe year to 1,131 it is pleasing to note that individual Partner productivityincreased by 18% during 2004. We remain committed to attracting the highestquality advisers and to maintaining the highest standards by retaining onlythose Partners who are profitable to the Group. Many financial advisers have been awaiting the final depolarisation rules and,since these rules were only published in early December, have yet to makedecisions about where their own futures are best served. For the financialadvisers who can meet our quality standards we believe we are the right home forthem. We remain confident that St. James's Place will be one of the chiefbeneficiaries of depolarisation as experienced Independent Financial Advisersconsider their own options for the future. Investment management 2004 was a more stable year for the markets and the FTSE All-Share Index posteda gain over the year of 9.2%. Once again the overall performance of our fundshas been very pleasing and more than met our goal of generating consistent andsuperior investment results for our investors. The Investment Committee remains at the heart of our investment approach. Twonew members joined the Committee during 2004 - Sarah Bates, our recentlyappointed independent non-executive director and myself. We also engaged theservices of Keith Goulborn as property adviser, who is a specialist commercialproperty consultant and former manager of Unilever plc's UK operational andcorporate property portfolio. Delivering strong investment performance is the primary objective of theInvestment Committee and we are naturally very pleased when this isindependently recognised by the industry awards we continue to receive. Lipper/Citywire named Andrew Green, investment manager of our GAM Managed Funds and theRecovery Unit Trust, as investment manager of the year for 2004, and placed fiveof our ten external investment managers in their survey naming the top 100 fundmanagers. Standard & Poors once again recognised our investment performance withawards for two funds in 2004, the THSP Managed and the Far East Pension Funds.In addition, the Combined Actuarial Performance Services (CAPS) survey ranksthree of our five Managed Funds Pension Funds within the top 10 of all ManagedFunds surveyed over the 12-month period ending 31 December 2004. Overall, a verypleasing year for St. James's Place investment performance. In April 2004 we added a commercial property fund to our UK range of life andpension funds. This fund is managed by Insight Investment and the inflowsexceeded all expectations with £185 million under management as at 31 December2004. Also during the year we appointed the Californian based investment firm ReedConner & Birdwell to manage our range of North American funds. We are particularly pleased that funds under management at 31 December 2004 were£9.5 billion, up 20% since the start of the year. Regulation and compliance The year saw significant effort expended on the implementation of substantialregulatory change - the most substantial change many of us have experiencedduring our time in the industry. The key regulatory changes have been: • On 1 October 2004 mortgage regulation became effective.• On 14 January 2005 general insurance products became regulated.• The regulations for depolarisation were announced on 1 December 2004requiring adoption by 1 June 2005.• Life companies were required to implement the FSA's new PrudentialSourcebook. The above, combined with our commitment to having the industry leadingcompliance standards, resulted in our employees and the St. James's PlacePartnership expending considerable cost and time on making these changes. Investment in IT systems We have previously announced a major IT infrastructure project through ourService Delivery Infrastructure programme (SDI). SDI will transform our newbusiness processing with a modern and efficient electronic system. The firstphase of the software has been delivered and is in the process of beingimplemented in our offices throughout the UK. The total cost of the projectcontinues to remain in line with our original £12 million estimate. During theyear we have incurred expenditure of £5.6 million, bringing the total cost todate to £9.0 million. The remaining £3 million of cost is expected to beincurred this year. Partners and employees Mike Wilson in his statement has already covered the magnificent job performedduring the year by the Partnership and our employees. I would just like to addmy thanks to the whole St. James's Place community, including our outsourceservice providers, for their efforts in 2004 - they are exceptionally committedand dedicated teams. 2005 developments Depolarisation has arrived and companies are required to adopt the new rules nolater than 1 June of this year. We have made the decision to depolarise during May, once our busy first quarterand the tax year-end is complete. However, as shareholders will be aware, St.James's Place is already well down the road to being depolarised and our panelsof providers for mortgages, protection and pensions already reflect thisapproach. We do not intend to make any significant changes to these panels butwe do intend to take advantage of the opportunity to fill any gaps whichdepolarisation allows us to do. Recently, we enhanced our offering by adding apanel of providers for Private Medical Insurance and Group Risk, and in May wewill increase the range of products we can offer to clients by adding PensionAnnuities, Immediate Needs Annuities, Group Pension Plans, Section 32 Plans andOffshore Funds. Our aim is to continue to manufacture around 80% of our newbusiness. The other significant development relates to the changes the Government will beimplementing in April 2006 in respect of Pensions Simplification. We welcomethis change and regard it as an important development which should give rise tosignificant new business opportunities as the demand from clients for trustedface to face advice grows in our target market place. With this very much inmind, we are continuing to devote significant effort to the development of ourpensions offering for the post Pensions A-Day market. Outlook We are in a period of unprecedented change and this is set to continue. 2005 hasalready seen the introduction of general insurance regulation; by the half-yearwe will enter the new depolarised regulatory regime and in April 2006 the newpensions rules come into force. We believe that these changes present us withopportunities to strengthen and grow our business. In addition to this regulatory and Government driven change, we feel that overthe longer term the social and economic backdrop is very much in our favour.People are living longer than ever before and as a consequence need to providefor a longer life expectancy and a longer retirement. Just as importantly, theresponsibility for pension provision is continuing to transfer from the Stateand companies to individuals. For many there is no longer certainty uponretirement. The task of determining how much to save and invest, where to makethose investments, how to monitor their performance and how to structure theretirement pot effectively, will be a challenge they will not wish to take onalone. Our proven adviser based approach to wealth management, built around experiencedmembers of the St. James's Place Partnership, who provide trusted face to faceadvice to clients, places us in a uniquely strong position to capitalise onthese opportunities. Mark Lund28 February 2005 FINANCIAL COMMENTARY The Financial Commentary is presented in two sections: a section providing acommentary on the results for the year and a second section covering othermatters of interest to shareholders and investors. Section 1:Commentary on the Results for the yearIn common with previous reports, we have presented our results on a ModifiedStatutory Solvency Basis (MSSB), which reflects the current year cash flow andan Achieved Profit basis, bringing into account the value of future cash flowson the in-force business. The Commentary covers the results on both bases. Modified Statutory Solvency Basis (MSSB) The table below shows the pre-taxprofit of the Group on this basis. Year Ended Year Ended 31 December 31 December 2004 2003 £' Million £' Million ------------ ------------ Life business 9.0 1.6Unit trust business 12.0 11.0Other (4.6) (2.5) ------------ ------------ 16.4 10.1IT systems development (5.6) (3.4) ------------ ------------ Operating profit 10.8 6.7 LAHC 28.0 3.4 ------------ ------------ Total pre-tax profit 38.8 10.1 ============ ============ The life business pre-tax profit for the year was £9.0 million (2003: £1.6million). The result includes a pre-tax reserve of £4.0 million, within thelong-term business provision, against an adverse outcome of a VAT case awaitingjudgment from the European Court of Justice. Further details of this case andits possible implications can also be found in section 2 of this commentary. The profits for the unit trust business were £12.0 million pre-tax (2003: £11.0million). As previously commented in the 2004 Interim Statement, there has beena minor change in the expense recharging mechanism and the current year profitis after an additional expense allocation of £2.2 million. The other operations of the business incurred a loss for the year of £4.6million pre-tax (2003: loss of £2.5 million). In the Interim Report shareholderswere notified of forthcoming one-off costs in the second half of the year ofbetween £2 - 3 million, relating to our commitment to having leading compliancestandards. The actual costs were at the top end of the range and have beenincluded in this £4.6 million loss. In addition, in the second half of the year,we have provided an amount of £1.0 million in respect of the potential redressrequired on some 11,250 in-force endowment policies. As mentioned in the Chief Executive's Statement, the costs incurred on thestrategic IT systems development during the year were £5.6 million pre-tax(2003: £3.4 million pre-tax). Taking into account these factors the pre-tax operating profit was £10.8million, up from £6.7 million in 2003. Excluding the cost of the strategic ITsystems development, the pre-tax profits were £16.4 million (2003: £10.1million). As shareholders are aware we disposed of our holding in LAHC during the year andhave reported a profit on the disposal of £28 million which is as set out inNote 5 to this announcement. The resulting total pre-tax profits for the year were £38.8 million, comparedwith £10.1 million in 2003. The total net assets on the modified statutory solvency basis were £215.0million (2003: £179.6 million) resulting in a net asset per share of 48.9 pence(2003: 41.6 pence). Achieved Profit BasisThe table below summarises the pre-tax profit of the combined business. Year Ended Year Ended 31 December 31 December 2004 2003 £' Million £' Million ------------ ------------ Life business 62.9 44.0Unit trust business 29.5 19.4Other (4.6) (2.5) ------------ ------------ 87.8 60.9IT systems development (5.6) (3.4) ------------ ------------ Operating profit 82.2 57.5 Investment return 30.0 55.3Economic assumption changes 2.1 (1.1)Tax & solvency changes - (11.2) ------------ ------------ Profit from core business 114.3 100.5 LAHC 28.0 3.4 ------------ ------------ Total pre-tax profits 142.3 103.9 ============ ============ The life business operating profit for the year was £62.9 million (2003: £44million) and a full analysis of this result is shown in the Notes to thisannouncement. The significant improvement is predominantly the result of highernew business profit for the year, which at £23.7 million (2003: £13.5 million)was some 76% higher than in 2003. There was a negative experience variance of£2.8 million (2003: negative £6.9 million) principally arising from the £4.0million reserve in the long-term business provision previously noted. The operating profits of the unit trust business were up 52% at £29.5 million(2003: £19.4 million) with the increase resulting from higher new businessprofit of £14.3 million (2003: £11.5 million and a positive experience varianceof £5.9 million (2003: positive £2.2 million). The growth in the new businessprofit reflects both the higher new business volumes and the small change to theexpense recharging noted earlier. The positive experience variance reflects an improvement in the persistency of the business. A full analysis of the result isshown in the Notes to this announcement. As noted earlier in this statement, the other operations of the Group incurred aloss for the year of £4.6 million (2003: loss of £2.5 million) and the costs ofthe strategic IT systems development were £5.6 million (2003: £3.4 million). The resulting pre-tax operating profit for the year was £82.2 million (2003:£57.5 million) and the operating profit, excluding the IT systems developmentproject, was up 44% from £60.9 million to £87.8 million. During the year the average after tax increase in our fund prices was some 6%above the achieved profit assumption resulting in a positive investment varianceof £30 million (2003: £55.3 million). Taking into account the £28 million profit from the disposal of LAHC referred toearlier in this statement, plus a small profit arising from changes to theeconomic assumptions, the total pre-tax achieved profit for the year was £142.3million (2003: £103.9 million). The total net assets on an achieved profit basis at 31 December 2004 were £633.2million (2003: £527.3 million) resulting in a net asset per share of 144.1 pence(2003: 122.1 pence per share). Section 2:Other mattersNoted below are a number of issues about the Group that are of interest toshareholders. (i) ExpensesThis section provides a reminder to shareholders of categories and nature ofexpenditure incurred. Shareholders will recall that "commission, investment expenses and third partyadministration costs" are met from corresponding policy margins. Any variationin these costs flowing from changes in the volumes of new business or the levelof the stock markets does not directly impact the profitability of the Company. The "other new business related costs", such as sales force incentivisation varywith the level of sales - determined on our internal measure. As productionrises or falls these costs will move in the corresponding direction. "Establishment costs" are the running costs of the Group's infrastructure andare relatively fixed in nature in the short term. Consequently these costsremain broadly the same irrespective of new business volumes. The "contribution from third party product sales" reflects the net incomereceived from wealth management sales of £2.8 million (2003: £5.3 million),sales of stakeholder products of £2.1 million (2003: £1.5 million) and salesthrough the Protection Panel of £9.3 million (2003: £6.7 million). In previous commentaries we have provided a breakdown of the life companyexpenditure into the categories detailed above. A large number of shareholdershave requested the analysis be extended to cover the combined financial servicesactivities. The table below provides this information. Year Ended Year Ended 31 December 31 December 2004 2003Category £' Million £' Million ------------ ------------ Paid from policy marginsCommission 99.1 83.6Investment expenses 25.2 19.5Third party administration 20.5 18.9 ------------ ------------ 144.8 122.0 Direct expensesOther new business related costs 16.7 15.4Establishment costs 71.7 73.8Contribution from third party productsales (14.2) (13.5) ------------ ------------ 74.2 75.7 ------------ ------------ 219.0 197.7 ============ ============ We have undertaken a review of the capacity of our property portfolio,particularly since a growing number of recruits now have their own offices. As aresult of this review the Board took the decision in early 2005 to announce the closure of one office and the contraction of a number of other locations into less space,freeing up some 10% of our regional property capacity. If this unutilised space remainsunlet then it is likely we will need to establish a provision of some £1.8 million in the first half of 2005 to cover the expected future rental of this space. We expect future annualised savings from these moves to be in the region of £0.8 million. (ii) Tax positionAs highlighted in previous financial commentaries, the UK life company has notbeen receiving full tax relief for all of its expenses, as the tax relief isprincipally obtained by offset against tax deductions on the income and capitalgains arising in the unit linked funds. Hence if the unit linked funds do not realisesufficient capital gains, or if realised capital gains are sheltered by realised capitallosses carried forward, full tax relief is not obtained. At 31 December 2004 there are approximately £116.0 million of excess unrelievedexpenses which are being carried forward, which require fund tax deductions of some £23.2 million to obtain relief. In addition to the unrelieved surplus expenses,there is also a further £200 million of expenses, which under the life company taxregulations are deferred over a period of seven years and will fall into accountin future years. The fund tax deductions ultimately required to relieve these deferred expenses would be some £40 million. The cash crystallisation of these tax deductionsis dependentupon the level and timing of future net realised capital gains. For 2004 the fund tax deductions booked in the MSSB result are only £10.1 million(2003: £7.6 million), which is some £7.0 million lower than would ordinarily beexpected. On an Achieved Profit basis, the impact of the shortfall of fund deductions,measured as the difference between the expected tax deductions and the net presentvalue of deductions anticipated in future years is lower (approximately £3 - 4 million). At 31 December 2004, in aggregate the net realised and unrealised position ofthe funds was more or less neutral and the higher stock market levels haveprovided a greater degree of likelihood that fund deductions will be received inthe near future. Consequently, at the end of the year, an MSSB deferred tax asset of £7.3 million(2003: £ nil) has been recognised in relation to those expenses expected to be relievedagainst these fund deductions. The total value of modelled fund deductions on the Achieved Profit basis places a valueof £34.0 million on these expenses (2003: £22.6 million). (iii) European Court of Justice VAT CaseOn 12 January 2005 the Advocate General (AG) released his opinion in a EuropeanCourt of Justice case, the Arthur Andersen (C-472/03) case. If the Court followsthe AG's opinion, the VAT exemption for insurance related services may be removed,resulting in the addition of VAT to the administration charges incurred on insurancerelated outsourced contracts. SJPC is actively following this case and is reviewing the options available toreduce or mitigate any adverse decision from the Court. Both the MSSB andAchieved Profit result include a pre-tax cost of £4.0 million included in thelong-term business provision, being the increase in future policy maintenance costsarising from this decision. Shareholders should be aware that in the event of an adverse decision, inaddition to this impact on the existing business, there would also be anon-going impact on the Achieved Profit value of new business - in the currentyear this impact would, without any mitigating actions, have been between £1 - 2million pre-tax. We understand the European Court of Justice is scheduled to make its decision on3 March 2005. (iv) Operational Risks and Solvency RequirementsOperational RisksThe Financial Commentary in the 2003 Report and Accounts provided some detail onthe operational risks of the Group. Shareholders will recall from thisCommentary that St. James's Place Capital: • is a unit linked business and has no with-profit business• has never written business with onerous investment guarantees oroptions• has a conservative investment strategy for shareholder assets• has no defined benefit pension scheme liabilities• matches, wherever possible, its liabilities to appropriate assets tominimise exposure to fluctuating stock markets and interest rates.• has never sold 'flavour of the year' products such as high tech funds,precipice bonds and split-capital investment trusts. Solvency RequirementsThe required minimum solvency margin for the two life businesses is currentlyapproximately £30 million. All of the insurance companies are capitalised tosupport their planned business without the need for further capital resources. There are no formal intra-group arrangements in place to provide capital toparticular funds or business units. The FSA has recently issued Policy Statements 04/16 - Integrated PrudentialSourcebook for Insurers, which took effect from January 2005. This policystatement includes the framework for life companies to calculate their ownIndividual Capital Assessment (ICA). Typically this involves placing a realisticvalue on the assets and liabilities of the Company and making explicitallowances in the valuation for the actual business risks. We have completed thefirst ICA for the UK life company and we do not foresee an increase in thecapital required to support the business. In calculating the Achieved Profit result, the cost of maintaining this solvencycapital is deducted from the value placed on the in-force business - the totalamount deducted at 31 December 2004 was approximately £7.2 million post tax(2003: £8.1 million). (v) FRS27 and Related Memorandum of UnderstandingFRS 27 for Life Assurance was published in December 2004 with a view to fullcompliance for accounting periods ending on or after 23 December 2004. In viewof the tight timescales to implementation, the Accounting Standards Board (ASB)has agreed to certain modifications to the disclosure requirements for 2004. These modified requirements are set out in a Memorandum of Understanding (MOU)to which the ASB, Association of British Insurers and representatives of thelife insurance industry are signatories. Accordingly we have set out below thevarious disclosures required by the MOU. The life assurance business of the Group, which is transacted within thelong-term funds of approved insurance companies, is all non-profit business,comprising both unit linked and non-linked business. Life assurance assetsattributable to shareholders have been determined by deducting the regulatoryvalue of insurance and other liabilities from the value of assets. The capital available in respect of the life assurance business is summarised inthe table below. SJP (UK) SJPI Others/Consolidation Group Total Adjustment £' Million £' Million £' Million £' Million ----------- ----------- ------------ --------- Shareholders'funds outsidefund 7.0 0.0 48.3# 55.3 Shareholders'funds insidefund 70.0 40.2 49.5* 159.7 ---------- --------- ------------ --------- Totalshareholders'funds 77.0 40.2 97.8 215.0 Adjustments onregulatorybasis: Adjustment to (5.4) (11.9) - (17.3) assets Other (16.3) (4.5) - (20.8) adjustments -------- --------- ------------ --------- Total availablecapitalresources 55.3 23.8 97.8 176.9 ======== ========= ============ ========= # This represents the other net assets of the Group including capital allocated forother regulated businesses. * This adjustment represents the purchased value of in-force business within thelife funds.The sensitivity of the life assurance shareholders' funds to changes in marketconditions are set out in Note 12 to this announcement. Regulatory capital required and the capital management policies of the Group arenoted in Section (v) of this commentary. Restrictions apply to the transfer of assets from any long-term funds. At alltimes each long-term fund must maintain an excess of admissible assets overliabilities. Transfers of assets from the shareholders' funds are subject tonormal accounting rules relating to distributable reserves. Within each businessunit there are no restrictions on the use of capital. (vi) Developments in Achieved Profit ReportingOn 5 May 2004 a Forum of Chief Financial Officers drawn from the major Europeaninsurance companies launched the European Embedded Value Principles (the EEVprinciples) and agreed to adopt these principles in calculating embedded valuesincluded as supplementary financial reporting from the end of 2005. SJPC intend to adopt the EEV principles in 2005 and will provide details ofexpected impact on the financial numbers at the half year. (vii) International Financial Reporting StandardsAs shareholders will be aware, SJPC, like other listed companies, will bereporting our 2005 Financial Statements using International Financial ReportingStandards (IFRS). The introduction of IFRS will impact the MSSB results, which will be replacedwith figures prepared on the new basis. We will continue to publish AchievedProfit results as Supplementary Information. As highlighted in previous financial commentaries, the two main IFRS's thatimpact on the Group are IFRS2 - Share Based Payments and IFRS4 - InsuranceContracts. The major areas of impact on the Financial Statements are as follows: (i) IFRS 2 requires the fair value of share options to be expenses over thevesting period of the options. This is expected to reduce the futureprofitability of the Group by £1.5 million per annum, however there will belittle change to the opening net asset position at 1st January 2005. (ii) IFRS 4 requires the pure protection contracts sold by the Group to continueto be accounted for under the UK Generally Accepted Accounting Practice existingat the end of 2004. (iii) IFRS 4 requires the investment contracts sold by the Group (e.g. lifebonds, pensions and unit trust business) to be accounted for under IAS 39Financial Instruments and IAS 18 Revenue. IAS 18 Revenue requires the initialcharge arising on new business to be spread over the term of the contract,rather than being reported as income at point of sale. Similarly, theincremental costs of acquiring the business (e.g. commission) are also requiredto be spread over the deemed term of the contract. This spreading of income andcosts will give rise to a Deferred Acquisition Cost (DAC) Asset and a DeferredIncome Reserve (DIR) in the Balance Sheet. For our contracts the initial charge is generally greater than the cost ofacquiring the business, and hence the DIR will be greater than the DAC.Consequently, there is a net deferral of income, although the underlying cashflows remain unaffected. Premiums received on investment contracts will be accounted for as depositsunder IFRS and only the margin arising will be reported in the income statementrather than the total single premium. (iv) Where the Group's life funds invest in the Group's unit trusts, it may benecessary to consolidate these holdings. (v) There will be some significant presentational changes to both the revenuestatements and balance sheet. (vi) There is a significant outstanding industry wide issue to be resolved in respect ofthe valuation of unit linked assets and unit linked liabilities and we areawaiting the final conclusion in respect of this issue. Taking into account the impact of the above changes and subject to theresolution of outstanding industry wide issues, we believe there will be nosignificant difference in reported statutory profits, but Group net assetsmay be reduced by up to £10 million. Shareholders should be aware that this financial impact is unaudited andtherefore subject to change, particularly as there remains a degree ofuncertainty on some key standards and interpretation. Andrew Croft28 February 2005 ACCOUNTS ON A MODIFIED STATUTORY SOLVENCY BASIS CONSOLIDATED PROFIT AND LOSS ACCOUNT LONG-TERM BUSINESS TECHNICAL ACCOUNT Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Notes £' Million £' Million Earned premiums, net of reinsuranceGross premiums written 4 1,134.8 990.2Outwards reinsurance premiums 4 (27.2) (27.9) --------- --------- 1,107.6 962.3Investment income 452.5 74.3Unrealised gains on investments 360.0 1,014.0Other technical income 1.4 0.1 --------- --------- 1,921.5 2,050.7 --------- --------- Claims incurred, net of reinsuranceClaims paid - Gross amount (498.9) (360.5) - Reinsurers' share 23.3 21.0 --------- --------- (475.6) (339.5)Change in the provision for claims - Gross amount 0.5 (4.6) - Reinsurers' share (1.6) (1.4) --------- --------- (1.1) (6.0) --------- --------- (476.7) (345.5) --------- ---------Changes in other technical provisions, netof reinsuranceLong-term business provision - Gross amount 8.6 (8.0) - Reinsurers' share (6.9) 20.2 --------- --------- 1.7 12.2 Technical provisions for linkedliabilities (1,260.4) (1,538.2) Net operating expenses (160.6) (155.5)Investment expenses and charges (21.0) (16.1)Other technical charges (2.1) (2.5)Tax attributable to the long-termbusiness 8.0 (3.4) --------- --------- (1,911.1) (2,049.0) --------- --------- Balance on the long-term businesstechnical account 10.4 1.7 ========= ========= CONSOLIDATED PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Notes £' Million £' Million Balance on the long-term business technicalaccount 10.4 1.7Tax credit attributable to balance onlong-term business technical account (1.4) (0.1) --------- ---------Shareholders' profit from long-term business 9.0 1.6Investment incomeIncome from associated undertaking - 3.4Income from other investments 3.3 3.9 Investment expenses and charges (1.2) (2.1) Other incomeIncome from unit trust operations 12.0 11.0Other income 4.0 3.5 Other charges (16.3) (11.2) --------- --------- Operating profit 10.8 10.1Profit on sale of investment - LAHC 5 28.0 - --------- --------- Profit on ordinary activities before tax 4 38.8 10.1Tax on profit on ordinary activities 4 (2.0) (3.5) --------- ---------Profit on ordinary activities after tax,being profit for the financial year 36.8 6.6Dividends 6 (12.3) (11.8) --------- ---------Retained profit/(loss) for the financialyear 24.5 (5.2) ========= ========= Pence PenceDividend per share 6 2.85 2.75Basic earnings per share 7 8.5 1.5Diluted earnings per share 7 8.2 1.5Basic and diluted adjusted earnings pershare 7 2.0 1.5 In arriving at operating profit, unless otherwise stated, all amounts are inrespect of continuing operations, in both the current and previous year. The profit on sale of the investment in LAHC is classified as a discontinuedoperation. In accordance with the amendment to FRS3 no note of historical cost profits hasbeen prepared as the Group's only material gains and losses on assets relate tothe holding and disposal of investments. The Group has no other recognised gains and losses during the current andprevious year and therefore a separate statement of total recognised gains andlosses has not been presented. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- £' Million £' Million Opening shareholders' funds 179.6 186.0 Profit for the financial period 36.8 6.6Dividends (12.3) (11.8) --------- ---------Retained profit /(loss) for the period 24.5 (5.2)P&L reserve credit in respect of share optioncharges 0.5 0.8Consideration paid for own shares (1.4) (2.5)Issue of share capital 11.8 0.5 --------- --------- Net increase /(decrease) to shareholders' funds 35.4 (6.4) --------- --------- Closing shareholders' funds 215.0 179.6 ========= ========= CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 2003 ---------- ----------Assets Notes £' Million £' Million InvestmentsLand andbuildings 1.4 1.3Other financial investments --------- --------- Shares and other variable yield 8 - 31.6 securities Debt securities and other fixed income 57.6 52.8 securities Deposits with credit institutions 71.8 69.7 ---------- --------- 129.4 154.1 ----------- ---------- 130.8 155.4 Acquired value of long-termbusiness in-force 49.5 51.6 Assets held to cover linkedliabilities 7,456.2 6,195.8 Reinsurers' share of technical provisionsLong-term business provision 66.1 73.3Claims outstanding 4.2 5.8 ---------- ---------- 70.3 79.1DebtorsDebtors arising out of direct insuranceoperations - due from policyholders 8.5 4.5Other debtors 55.9 52.5 ---------- ---------- 64.4 57.0Other assetsTangible assets 5.7 5.8Cash at bank and in hand 88.0 48.4 ---------- ---------- 93.7 54.2Prepayments and accrued incomeDeferred acquisition costs 44.5 53.5Other prepayments and accrued income 4.2 5.1 ---------- ---------- 48.7 58.6 ---------- ----------Total assets 7,913.6 6,651.7 ========== ========== CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 2003 --------- ---------Liabilities Notes £' Million £' Million Capital and reservesCalled up share capital 9 65.9 64.8Share premium account 11 15.9 5.1Shares to be issued 11 0.1 0.2Other reserves 11 2.2 2.2Profit and loss account 11 141.6 117.4 --------- --------- 225.7 189.7Own shares reserve 11 (10.7) (10.1) --------- ---------Equity shareholders' funds 215.0 179.6 Technical provisionsLong-term business provisions 12 104.3 112.9Claims outstanding 19.9 20.4 --------- --------- 124.2 133.3 Technical provisions for linked liabilities 7,456.2 6,195.8 Provisions for other risks and charges 13 22.4 16.1 CreditorsCreditors arising out of direct insurance 11.2 9.4operationsAmounts owed to credit institutions 14 22.4 53.6Amounts due to reinsurers 12 11.3 11.6Other creditors including taxation and social 16.5 15.2securityProposed dividends 6 7.0 6.4 --------- --------- 68.4 96.2 Accruals and deferred income 27.4 30.7 --------- ---------Total liabilities 7,913.6 6,651.7 ========= ========= CONSOLIDATED CASH FLOW STATEMENT (EXCLUDING POLICYHOLDER FUNDS) Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Notes £' Million £' Million Shareholders' net cash outflow to long-term - -businessOther operating cash flows attributable toshareholders 19.8 13.9 --------- --------- Net cash inflow from operating activities 15 19.8 13.9 InterestInterest received 3.2 3.7Interest paid (1.2) (2.1) --------- --------- 2.0 1.6 TaxationCorporation tax paid (5.2) (3.5) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (3.1) (1.7)Sale of fixed assets 0.4 0.4Consideration paid for own shares (1.4) (2.5) --------- --------- (4.1) (3.8)Acquisitions and disposalsNet disposal proceeds from sale ofinvestment in LAHC 64.4 - Equity dividends paid (3.8) (11.8) --------- --------- Net cash inflow/(outflow) before financing 73.1 (3.6) Financing(Repayment)/draw down of loan (31.2) 8.6Issue of ordinary share capital 3.7 0.5 --------- --------- (27.5) 9.1 --------- ---------Net cash inflow in the year 45.6 5.5 ========= ========= Net cash inflow was applied as follows: Increase in cash holdings 48.6 7.2Net portfolio investmentsWithdrawals from credit institutions (3.0) (1.7) --------- ---------Net investment of cash flows 45.6 5.5 ========= ========= Notes to the Announcement 1. BASIS OF PREPARATION The consolidated financial statements of the Company and its wholly owned lifeinsurance and non insurance subsidiary undertakings, have been prepared inaccordance with the provisions of section 255A of, and the special provisionsrelating to insurance groups of Schedule 9A to, the Companies Act 1985. The financial statements are prepared in accordance with applicable accountingstandards, which have been applied consistently and in accordance with theAssociation of British Insurers' Statement of Recommended Practice on Accountingfor Insurance Business ("ABI SORP") dated November 2003. 2. PROFIT RECOGNITION RELATING TO THE VALUE OF LONG-TERM BUSINESS IN-FORCEProfits emerging on long-term assurance business in-force are determined inaccordance with the Modified Statutory Solvency Basis of reporting, which isconsistent with the ABI SORP. Under this method, the statutory result arising in the period is required to beadjusted under Schedule 9A of the Companies Act 1985 for certain items,including the deferral of acquisition costs and movements in certain reserves,which are recognised in the long-term business technical account. Long-term business provision and technical provisionsThe long-term business provision is calculated on actuarial principles. Thecalculation is in accordance with statutory reporting for solvency and uses thegross premium method. The provisions held for linked liabilities are the unit liabilities togetherwith certain non-unit provisions. Whilst the directors consider that the gross long-term business provision andthe related reinsurance recovery is fairly stated on the basis of currentexperience and economic conditions, the ultimate liability will vary as a resultRelated Shares:
St James's Place