26th Jul 2005 07:03
St. James's Place Capital PLC26 July 2005 PRESS RELEASE 26 July 2005 INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2005 St. James's Place Capital plc ("SJPC"), the wealth management group, todayannounces its new business and financial results for the half year ended 30 June2005. The text of the announcement is attached: Enquiries: Mike Wilson, Chairman Tel: 020 7514 1985Andrew Croft, Group Finance Director Tel: 020 7514 1985 Nitya Bolam, Brunswick Tel: 020 7404 5959 PART 1 ST. JAMES'S PLACE GROUP INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2005 NEW BUSINESS UP 15% AND OPERATING PROFITS UP 14% St. James's Place Capital plc, the wealth management group, today announces itsnew business and financial results for the half year ended 30 June 2005. Key points include: •Pre-tax operating profit of £45.9 million (on an achieved profit basis)up 14% •Total pre-tax profit of £70.2 million (on an achieved profit basis) up 71% •New business pre-tax profits of £24.3 million up 20% •New business premiums of £103.8 million (on an APE basis) up 15% •Funds under management at £10.5 billion which over the twelve months are up 22% •Fees from wealth management services at £11.9 million up 27% •Net asset value per share 156.3p •Size of the Partnership 1,134 •Dividend increased by 4% to 1.3p per share (2004: 1.25p) Mike Wilson, Chairman, commented: "We are delighted with the strong first half performance which saw impressivegrowth in new business, fees from wealth management services, funds undermanagement and operating profit. "The second quarter saw our highest ever quarter for new business which was up 29%and funds under management exceeded £10 billion for the first time. "Particular highlights for the six months were increases of 26% in pensionsbusiness and 25% in unit trust sales. We are seeing a growing demand forpensions and our advice based business model means that we will be well placedto take advantage of this in the lead up to Pensions 'A' Day in April 2006." CONTENTS PART 1 NEW BUSINESS FIGURESPART 2 CHAIRMAN'S STATEMENT AND FINANCIAL COMMENTARYPART 3 ACHIEVED PROFIT RESULTSPART 4 INTERNATIONAL FINANCIAL REPORTING STANDARDS RESULTS ST. JAMES'S PLACE GROUP NEW BUSINESS FIGURES FOR THE SIX MONTHS TO 30 JUNE 2005 LONG-TERM SAVINGS Unaudited Unaudited 3 Months to 6 Months to 30 June 2005 30 June 2005NEW PREMIUMS 2005 2004 Change 2005 2004 Change £'m £'m % £'m £'m %New RegularPremiums Pensions* 12.1 6.9 75% 19.3 14.2 36% Protection 6.0 6.8 (12%) 11.6 12.6 (8%) 18.1 13.7 32% 30.9 26.8 15% New SinglePremiums Investment 210.1 155.0 36% 377.0 339.6 11% Pensions 90.7 84.8 7% 152.4 132.9 15% 300.8 239.8 25% 529.4 472.5 12% Unit TrustSales 114.1 86.6 32% 200.4 159.7 25%(includingPEPs and ISAs) Unaudited Unaudited 3 Months to 6 Months to 30 June 2005 30 June 2005NEW 2005 2004 Change 2005 2004 ChangeBUSINESS(RP + 1/10th £'m £'m % £'m £'m %SP) Investment 32.4 24.2 34% 57.7 50.1 15%Pensions 21.2 15.3 39% 34.5 27.3 26%Protection 6.0 6.8 (12%) 11.6 12.6 (8%) ------ ------ ------- ------- ------ ------- Total 59.6 46.3 29% 103.8 90.0 15% ------ ------ ------- ------- ------ ------- * see Note 3 to the New Business figures ST. JAMES'S PLACE GROUP WEALTH MANAGEMENT SERVICES KEY BUSINESS HIGHLIGHTS FOR THE SIX MONTHS TO 30 JUNE 2005 Unaudited Gross fees generated from additionalwealth management services £11.9m up 27% (2004: £9.4m) New Mortgage Advances £2,025.0m St. James's Place Bank £198.9mOther lenders £1,826.1m Portfolio Management Services New portfolios £22.8m Trust and Estate Planning Services Number of cases 401 St. James's Place Bank - in-force business *Number of facilities 64,309Number of accounts 24,065Credit balances £642.7mMortgages £1,256.5mAverage mortgage value £170.2kLoans and credit cards £22.5m *Number of facilities denotes the number of individual mortgages, personalloans, credit cards, current accounts and savings accounts, where one client mayhold a number of facilities. The average number of facilities per client is 2.7. ST. JAMES'S PLACE GROUP NEW BUSINESS FIGURES FOR THE SIX MONTHS TO 30 JUNE 2005 Notes 1. New business from long-term savings is calculated in accordance with the lifeassurance industry convention by adding together new regular premiums and one-tenthof single premiums and unit trust sales. 2. Sales of manufactured business on an APE basis for the six months were 83% ofthe total reported. Sales of stakeholder pensions by St. James's Place Partnership have beenincluded in the reported figures. These have been included under Pensions andamount to £9.1 million regular premiums (2004: £7.3 million) and £11.7 millionsingle premiums (2004: £9.3 million). This equates to £10.3 million new businesspremiums (2004: £8.2 million). Sales of protection business through a panel of providers have been included inthe reported figures under New Regular Premiums Protection. These amount to £7.1million of new regular premiums (2004: £7.4 million) for the six months to 30June 2005. This equates to £7.1 million new business premiums (2004: £7.4million). 3. The comparative figures for pensions regular premiums include £0.2 million ofinvestment regular premiums. PART 2 CHAIRMAN'S STATEMENTFinancial PerformanceI am delighted to report continued strong performance in the first half of 2005.New business from long-term savings and investment (measured on the industrybasis of annual premiums plus one tenth of single premiums) increased by 15%over the period. The financial statements have been restated to present the result and prior yearcomparatives in accordance with International Financial Reporting Standards("IFRS"). The pre-tax profits for the first half year on this basis were £13.1million (2004: £8.2 million). The Board considers, however, that the Achieved Profit Basis, which is shown assupplementary information, provides a more meaningful measure of the Group'sperformance. On the Achieved Profit Basis the pre-tax result for the period was up 71% to£70.2 million compared with £41.0 million for the same period of 2004. Theoperating profit, which is the best indication of the underlying performance ofthe business, increased by 14% to £45.9 million (2004: £40.3 million) over theperiod. The net asset value per share was 156.3 pence (31 December 2004: 145.8 pence),up 7%. The Financial Commentary in this announcement provides further details on theresult for the half year. DividendIn our 2004 annual results announcement the Board resolved to increase the fullyear dividend by 3.6% and in my statement at that time, I commented that theGroup was now in a position to be able to continue to grow dividends in thefuture. The Board has therefore resolved to increase the dividend in respect of the sixmonths to 30 June 2005 by 4% to 1.3 pence per share (2004: 1.25 pence pershare). The dividend will be paid on 19 September to those shareholders on theRegister at the close of business on 5 August. As with recent dividend payments,shareholders will be offered an alternative of a scrip dividend. New BusinessThe first half of 2005 has seen strong growth in new business over the sameperiod last year. Whilst new business was up 1% in the first quarter of 2005 compared with thefirst quarter of 2004, it grew by 29% in the second quarter. This was ourstrongest ever quarterly new business performance and gives us an increase of15% for the year. This performance is particularly pleasing as this growth was on top of a 31%increase in the first half of 2004. In our Report & Accounts for 2004 we stated that our aim is to continue tomanufacture around 80% of our new business and our manufactured businessaccounted for 83% of the total new business in the first half of 2005. A particular highlight for the six month period was the 26% increase in pensionsbusiness and we are beginning to see the pensions market awakening in the leadup to Pensions 'A' Day in April 2006. In addition unit trust and ISA businesswas up 25% in the six month period and total investment business was up 15%. Gross fees from wealth management services were up 27% to £11.9 million (2004:£9.4 million). The St. James's Place PartnershipThe membership of the St. James's Place Partnership at 30 June 2005 was 1,134,an increase of three since the start of the year. Whilst we are disappointed weremain committed to recruiting the highest quality advisers and to retainingonly those Partners who are profitable to the Group in the longer term. Although it is unlikely there will be any meaningful growth in Partnershipnumbers at the year end, we have introduced a number of initiatives focussing onrecruitment in the second half of the year. Every effort will be made, includingthe introduction of further initiatives if necessary, to achieve our statedobjectives of increasing Partner numbers by 5 - 10% per annum. Intermediaries continue to consider their options in the face of the slower thanoriginally expected development of multi-ties - however feedback and resultsfrom those who have joined the Partnership convince us that St. James's Placeprovides the right home for financial advisers who can meet our qualitystandards. It is pleasing to note that following an 18% increase in individual Partnerproductivity for 2004, productivity per Partner increased by a further 16%during the first six months of this year compared with the same period lastyear. Investment ManagementI am delighted to announce that our funds under management have now passed the£10 billion level and stand at £10.5 billion at the end of June 2005. This is anincrease of 22% since June 2004. The FTSE 100 returned 14.5% in the year to 30 June 2005 and equity markets haverecovered since the 2003 lows, with the FTSE 100 now just off its levels of fiveyears ago. It is encouraging that, against this backdrop, an investment equally placed intoour five Pension Managed Funds over a five year period would be showing 1stquartile returns. In addition, five of our eleven unit trusts are ranked in the1st quartile over five years. St. James's Place continues to be recognised for the success of its InvestmentManagement Approach, with two Standard & Poor's awards for its pension funds -one being a 'runner-up' Group award and the other a 1st place award for the SJP/ THSP Managed Pension Fund. St. James's Place works exclusively with StamfordAssociates as an adviser to its Investment Committee and Stamfords won the'Multi-Manager' award in the Global Investor magazine's recent 'Awards forExcellence'. Investment in IT systemsDuring the first half of the year we have incurred expenditure of £1.8 millionon the continued development and implementation of our IT infrastructure project(internally called the Service Delivery Infrastructure "SDI" programme). The first phase of the project was successfully implemented in our offices atthe beginning of the year and is proving beneficial in terms of improvedmanagement information and access to records. The delivery and roll-out of phaseII software has been put back largely as a consequence of the significant amountof recent regulatory change in the industry. Therefore, we do not now expect tosee any savings in operational expenditure before 2006. The project costs arenow expected to be approximately £1.0 million higher than originally forecast,with expenditure in the second half of the year in the order of £2.2 million. Board ChangesThere have been a number of non-executive Board changes since my statement of 1March 2005. In that statement I announced the appointment of Simon Gulliford as an independent non-executive director, with effect from the Annual General Meeting on 12 May 2005. Simon's appointment was approved by the shareholders at the AGM. Shortly after the AGM we also announced the appointment of Mike Power as anindependent non-executive director. Mike is Professor of Accounting and Directorof the ESRC Centre for Analysis of Risk and Regulation at the London School ofEconomics and Political Science, where he has worked since 1987. He is a Fellowof the Institute of Chartered Accountants in England and Wales and an Associateof the UK Chartered Institute of Taxation. Anthony Loehnis and Lord Weir stepped down from the Board with effect from theAGM. We announced some further non-executive director changes yesterday. RogerWalsom has joined the Board as an independent non-executive director with effectfrom 22 July 2005. Roger recently retired following a long career as a Partnerof Ashurst, a leading City law firm, and his legal expertise will be especiallyvaluable in the light of the regulatory environment in which we operate. Inaddition, John Edwards joined the Board on 22 July 2005 as a representative ofHBOS plc, replacing Phil Hodkinson and Grenville Turner who resigned on thatdate. John is Chief Executive of the Insurance and Investment Division at HBOSplc. Charles Bailey will resign as a non-executive director with effect from 29September 2005. I would like to thank Phil, Grenville and Charles on behalf of the Board fortheir excellent contributions and support over the years. I am delighted that these changes will enable us to comply with the CombinedCode provision that at least half the Board comprises independent non-executivedirectors. Regulation and complianceAs previously commented the insurance industry has been going through anunprecedented period of change. During the first half of the year the full range of general insurance productshave become regulated and on 1 June the Group implemented the changes arisingfrom depolarisation. We are hopeful that we are through the bulk of the regulatory changes and arenow focussing our efforts on the preparation for Pensions 'A' Day in April 2006.We regard these changes as having a positive impact on the higher income market,as the demand from individuals grows - this will therefore benefit St. James'sPlace. We are well advanced in our preparation for the forthcoming changes and willshortly be launching a Pensions Audit service for our clients and prospectiveclients to enable them to maximise the opportunities. Partners and staffOn behalf of the Directors and shareholders I would like to thank all members ofthe Partnership and staff for their continued enthusiasm, commitment andcontribution towards the substantial growth achieved during the first sixmonths. OutlookThe Board believes the economic and social backdrop, together with theforthcoming Pensions 'A' Day changes provides continuing growth opportunitiesfor the Group. We are more convinced than ever that our own dedicated distribution, the St.James's Place Partnership, gives us a real competitive edge for the future andwill enable us to meet our longer term goal to grow new business by 15 - 20% perannum. FINANCIAL COMMENTARY The financial commentary is as usual presented in two sections: a sectionproviding a commentary on the results for the period and a second sectioncovering other matters of interest to shareholders and investors. Section 1:Commentary on the Results We have presented our results on the new International Financial ReportingStandards and an Achieved Profit basis which brings into account the value offuture cash flows on the in-force business. The commentary covers the results on both bases: International Financial Reporting Standards ("IFRS") In common with all listed companies we are required to present our 2005 results,including this interim statement, in accordance with International FinancialReporting Standards. The comparative numbers have been restated onto the IFRS basis and we haveissued a separate press release on the restatement which can be found on ourwebsite at www.sjpc.co.uk. The full IFRS accounts are shown later in this announcement. The table belowshows the pre-tax profit of the Group on this basis. 6 Months 6 Months 12 Months Ended Ended Ended 30 June 2005 30 June 2004 31 December 2004 £' Million £' Million £' Million Life business 12.2 7.8 11.6Unit trust business 5.9 4.8 11.8Other (3.2) (1.4) (6.8) --------- --------- ---------- 14.9 11.2 16.6 IT systems development (1.8) (3.0) (5.6)LAHC - - 28.0 --------- --------- ----------Profit before tax 13.1 8.2 39.0 ========= ========= ========== Life businessThe profit from the life business at £12.2 million (2004: £7.8 million) hasincreased by 56% over the prior period reflecting the stronger new business,higher funds under management and the continued emergence of cash flows fromprior years' business. Unit trust businessThe growth in new business and higher funds under management have seen unittrust profits increase by 23% from £4.8 million in 2004 to £5.9 million for thesix months to 30 June 2005. Other"Other" shows the earnings from the core business other than the Group's lifeand unit trust business. During the six months there was a loss of £3.2 million(2004: loss of £1.4 million). Included in the current year loss is the £1.8million cost of a provision, highlighted in the full year 2004 financialcommentary, to cover the expected future rental of an unutilised office. In addition "Other" includes a £1.7 million cost of expensing share options inaccordance with IFRS 2. The prior year figure has been restated to reflect thecorresponding cost in the first half of 2004 of £0.1 million. As previously covered in the Chairman's Statement, we have expensed £1.8 million(2004: £3.0 million) on the continued development of our strategic ITdevelopment. The total net assets of the Group on an IFRS basis at 30 June 2005 were £229.5million (31 December 2004: £222.2 million) resulting in a net asset per share of51.8 pence (31 December 2004: 50.6 pence). Achieved Profit Basis The table below summarises the pre-tax profit of the combined business: 6 Months 6 Months 12 Months Ended Ended Ended 30 June 2005 30 June 2004 31 December 2004 £' Million £' Million £' Million Life business 37.8 32.2 62.9Unit trust business 13.1 12.5 29.5Other* (3.2) (1.4) (6.8) ---------- --------- ---------- 47.7 43.3 85.6IT systems development (1.8) (3.0) (5.6) ---------- --------- ----------Operating profit 45.9 40.3 80.0 Investment return 22.6 3.5 30.0Economic assumption changes 1.7 (2.8) 2.1 ---------- --------- ---------- Profit from core business 70.2 41.0 112.1 LAHC - - 28.0 ---------- --------- ==========Total pre-tax profits 70.2 41.0 140.1 ========== ========= ========== * Other profits for 2004 have been restated for the adoption of IFRS2Share-based Payments. The total pre-tax profit for the six months was £70.2 million (2004: £41.0million) representing growth of some 71%. The operating profit for the period was up 14% from £40.3 million to £45.9million. Included within this operating result is new business profit of £24.3million, up 20%. The growth in new business profit reflects the 15% increase innew business, whilst limiting expense growth to 6%. Life operating profit for the period was £37.8 million (2004: £32.2 million) anda full analysis of this result can be found later in this annoucement. Newbusiness profits increased by 15% from £12.9 million for the prior year to £14.9million. Unit trust operating profit for the period was £13.1 million (2004: £12.5million) and a full analysis of this result can be found later in thisannouncement. Within this operating profit the new business profit increased by29% to £9.4 million, principally as a result of the higher new business volumes. During the six months there has been a small deterioration in persistency ratesand this is reflected in a £1.8 million negative experience variance. Other and SDI costs are previously commented on in the IFRS section. The investment variance during the first six months of 2005 was £22.6 million(2004: £3.5 million). This reflects that the average after tax increase in ourfund prices of some 4 - 5 % above the growth assumed in the achieved profitcalculation. The total net assets of the Group on an achieved profit basis at 30 June 2005were £692.3 million (31 December 2004: £640.4 million) resulting in a net assetper share of 156.3 pence (31 December 2004: 145.8 pence). Section 2:Other Matters Noted 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 £2.2 million (2004: £1.7 million),sales of stakeholder products of £0.8 million (2004: £1.2 million) and salesthrough the protection panel of £4.2 million (2004: £4.3 million). The table below provides a breakdown of the expenditure for the combinedfinancial services activities. Table of Expenditure 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 £' Million £' Million £' Million Paid from policy marginsCommission 55.5 50.3 99.1Investment expenses 17.6 11.9 25.2Third party administration 8.9 8.8 20.5 --------- --------- --------- 82.0 71.0 144.8 --------- --------- --------- Direct expensesOther related new business costs 9.5 8.3 16.7Establishment costs 38.2 35.9 71.7Contribution from third partyproduct sales (7.2) (7.2) (14.2) --------- --------- --------- 40.5 37.0 74.2 --------- --------- --------- 122.5 108.0 219.0 ========= ========= ========= (ii) Taxation As highlighted in previous financial commentaries, the UK life company has notbeen receiving full tax relief. Since the year end the position has improved marginally and at 30 June 2005there are approximately £106 million of excess unrelieved expenses being carriedforward which have a potential value of £21.2 million. In addition to theseunrelieved expenses, there is also a further £197 million of expenses, whichunder life company tax regulations are deferred over a period of seven years andwill fall into account in future years. These deferred expenses will ultimatelyhave a value of £39.4 million. The cash crystallisation of these deferred tax assets is dependent upon thelevel and timing of future net realised capital gains. At 30 June 2005 there wasa net unrealised profit position in the unit linked funds of some £254 millionwhich when realised would extinguish the unrelieved expenses being carriedforward. At 30 June 2005 an IFRS deferred tax asset of £7.3 million continues to berecognised in respect of these expenses and in the Achieved Profit thecorresponding value placed on the expenses is £34.0 million. (iii) European Court of Justice VAT case As stated in the full year financial commentary the industry was awaiting anopinion from the European Court of Justice on a case regarding the VAT status ofinsurance related services. On 3 March 2005, the European Court of Justice released its judgment which whenimplemented would lead to VAT becoming due on the administration charges inrelation to insurance related outsourced contracts. HM Revenue & Customs has recently issued a consultation document containingdraft legislation which is intended to take effect from 1 January 2006. St. James's Place Capital is intending to respond to this consultation documentand we are continuing to review the options available to reduce or mitigate thepotential adverse impact. As part of this review we will be assessing in the second half of 2005 the levelof the £4.0 million provision established last year. (iv) Development in Achieved Profit Reporting As noted in the 2004 full year Financial Commentary, St. James's Place Capitalintends to adopt the new European Embedded Value Principles (the EEV principles)from the end of 2005. The adoption of the principles will impose a number ofchanges in our current methodology and we will make an announcement on theimpact of the restatement in the fourth quarter of the year. Based on an initial, qualitative assessment of the likely changes of the move tothe EEV principles, we have the following comments at this stage: (a) Some of the issues relevant to the other organisations do not affect SJPC.In particular we do not write significant financial guarantees and options, orwith-profits or annuity business, nor do we have a pension fund deficit or debt. (b) There will be a number of areas which will need to be reviewed, with somelevel of change being likely. In particular: • the risk margin included in the discount rate. We currently expect thatthe discount rate will reduce somewhat. • the methodology for allocating expenses between acquisition andmaintenance costs, including the allocation of overheads, any anticipatedexpense overruns and holding company operating expenses. We currently expectthat a larger proportion of expenses will be allocated to in-force policies andless to new business. • the required capital to support the business (over and above the valueplaced on the liabilities). This currently allows for the requirements of theSolvency 1 Directive, but the review will also incorporate thinking about SJPC'srisk appetite and the results of the individual capital assessment work. Wecurrently do not expect that the required capital will differ significantly fromthe Solvency 1 level. • the treatment of expected future non-contractual increases, such asindexation increases. The EEV principles suggest that the value of these shouldideally be included within the new business value of the original contract whenit is written. SJPC's current approach is to include the value of such increasesas they arise, as this treatment is aligned with our reported new businessfigures. We will further examine this treatment, but it is unlikely we willchange our practice going forward. Alongside these changes in methodology, additional disclosure is required. (v) Analysis of Achieved ProfitThe table below provides a summarised breakdown of the Achieved Profit positionat the reporting dates: 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 £' Million £' Million £' Million Value of in-force - Life 436.2 363.9 400.0 - Unit trust 114.5 92.6 104.8Net assets 141.6 104.6 135.6 --------- --------- --------- 692.3 561.1 640.4 ========= ========= ========= (vi) Share options maturityOptions outstanding under the various share option schemes at 30 June 2005amount to 49.2 million (31 December 2004: 52.3 million). The total number of options including those in the SJP Employee Trust, togetherwith their anticipated proceeds, are set out in the table below: Earliest date of exercise Average Number of Anticipated exercise price share options proceeds outstanding ---------------- --------------- ------------ £ Million £' Million Immediate 1.69 21.9 37.1Jul - Dec 2005 1.44 5.2 7.5Jan - Jun 2006 0.94 4.8 4.5Jul - Dec 2006 1.39 3.1 4.3Jan - Jun 2007 1.65 5.1 8.4Jul - Dec 2007 1.52 4.4 6.7Jan - Jun 2008 1.04 2.4 2.5Jul - Dec 2008 1.33 0.6 0.8Jan - Jun 2009 1.57 0.7 1.1Jul - Dec 2009 1.50 0.4 0.6Jan - Jun 2010 2.20 0.5 1.1Jul - Dec 2010 1.00 0.1 0.1 --------- --------- 49.2 74.7 ========= ========= Included within those share options that are immediately exercisable are 11.3million options with an expiry date before the end of July 2007 with anticipatedproceeds of £15.1 million. PART 3 ACHIEVED PROFIT COMBINED LIFE AND UNIT TRUST The following information shows the result for the Group, adopting an achievedprofit basis for reporting life and unit trust business. SUMMARISED ACHIEVED PROFIT CONSOLIDATED PROFIT & LOSS ACCOUNT (unaudited) 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 --------- --------- --------- £' Million £' Million £' Million Life business 37.8 32.2 62.9Unit trust business 13.1 12.5 29.5Other * (3.2) (1.4) (6.8) --------- --------- --------- 47.7 43.3 85.6 IT systems development (1.8) (3.0) (5.6) --------- --------- --------- Operating profit 45.9 40.3 80.0 Investment return variances 22.6 3.5 30.0Economic assumption changes 1.7 (2.8) 2.1 --------- --------- --------- Profit from core business 70.2 41.0 112.1 LAHC - - 28.0 --------- --------- --------- Achieved profit on ordinary activitiesbefore tax 70.2 41.0 140.1 TaxLife business (16.2) (8.4) (23.4)Unit trust business (5.9) (4.2) (11.6)Other 2.2 - 1.2LAHC - - - --------- --------- --------- (19.9) (12.6) (33.8) Profit on ordinary activities after tax 50.3 28.4 106.3 ========= ========= ========= Dividends 6.9 6.4 11.8 Pence Pence PenceProposed dividend per share 1.3 1.25 2.85Basic earnings per share 11.5 6.6 24.5Diluted earnings per share 11.0 6.4 23.7 * Other profit for 2004 has been restated for the adoption of IFRS 2"Share-based Payment" ACHIEVED PROFIT CONSOLIDATED BALANCE SHEET 30 June Restated* Restated* 2005 30 June 31 December 2004 2004 -------- --------- --------- £' Million £' Million £' Million AssetsIntangible assets Deferred acquisition costs 305.6 285.6 294.4 Value of long-term business in-force - long-term insurance 396.8 334.3 362.9 - unit trusts 114.5 92.6 104.8Property & equipment 6.2 6.9 6.9Deferred tax assets 56.2 46.1 54.9Investment property 195.5 37.6 129.8Investments Equities 6,090.3 5,048.8 5,637.9 Fixed income securities 623.7 630.1 656.3 Investment in collective investment schemes 468.2 288.2 381.4 Currency forwards 4.0 5.3 0.2Reinsurance share ofinsurance provisions 81.5 88.8 70.3Insurance contract receivables 9.2 4.5 8.5Income tax assets 12.3 5.3 7.8Other receivables 96.6 74.8 89.9Cash & cash equivalents 1,168.8 940.7 897.2 -------- --------- --------- Total assets 9,629.4 7,889.6 8,703.2 ======== ========= ========= LiabilitiesInsurance contractliability provisions 392.3 304.8 307.3Other provisions 19.5 0.8 17.7Financial liabilities Investment contracts 7,976.0 6,506.6 7,236.2 Borrowings 20.7 45.0 22.4 Currency forwards 3.8 2.4 6.6Deferred tax liabilities 122.0 89.3 103.8Reinsurance payables 11.3 10.9 11.3Payables related todirect insurance contracts 12.5 15.1 11.2Deferred income 237.4 227.9 231.8Income tax liabilities 6.0 4.6 5.1Other payables 67.1 70.3 51.2Net asset value attributableto unit holders 68.5 50.8 58.2 -------- --------- --------- Total liabilities 8,937.1 7,328.5 8,062.8 ======== ========= ========= Net assets 692.3 561.1 640.4 ======== ========= ========= Shareholders' equityShare capital 66.5 65.3 65.9Share premium 22.3 10.6 15.9Other reserves (8.5) (8.3) (8.4)Retained earnings 612.0 493.5 567.0 -------- --------- --------- Total shareholders' equity 692.3 561.1 640.4 ======== ========= ========= Net asset per share 156.3p 128.8p 145.8p * The 2004 balance sheet has been restated to be consistent with the format ofthe IFRS balance sheet NOTES TO THE ACHIEVED PROFIT RESULTS I. BASIS OF PREPARATION The information enclosed shows the Group's results as measured on an achievedprofit basis, which includes the results of the both the Group's long-termassurance and unit trust business on a basis determined in accordance with theABI Guidance "Supplementary Reporting for long term assurance business (theachieved profits method)" issued in December 2001. The objective of the achievedprofit basis is to provide shareholders with more realistic information on thefinancial position and performance of the Group than that provided by theInternational Financial Reporting Standards ("IFRS") basis. As described in greater detail later in this announcement, the Group hasrestated its accounts at 30 June 2004 and 31 December 2004 in accordance withIFRS. This has not impacted on the Achieved Profit results for Life and UnitTrust business but has affected Other profit and the presentation of the balancesheet. Further detail on these changes is included in our results on the IFRSbasis. Except as noted below, the achieved profit accounting policies used by the Groupin the preparation of this interim report are consistent with those applied inpreparing the achieved profit results in the financial statements for the yearended 31 December 2004. II. METHODOLOGY AND ASSUMPTIONS The achieved profits methodology recognises as profit the discounted value ofthe expected future statutory surpluses arising from the contracts in-force atthe period end ("the value of long-term business in-force"). These futuresurpluses are calculated by projecting future cash flows using realisticassumptions for each component of the cash flow. Actuarial assumptions for themortality, morbidity and persistency experience of the contracts and theexpenses and taxation expected to be incurred are based on recent experience andare reviewed annually. The future economic and investment conditions are basedon the period end conditions and are likely to change from year to year. Economic Assumptions The principal economic assumptions used within the cash flows at 30 June 2005are set out below. 30 June 30 June 31 December 2005 2004 2004 Risk discount rate (net of tax) 7.75% 8.5% 8.0%Future investment returns:- Gilts 4.25% 5.0% 4.5%- Equities 6.75% 7.5% 7.0%- Unit-linked funds: - Capital growth 3.35% 4.5% 3.7% - Dividend income 2.9% 2.5% 2.8% - Total 6.25% 7.0% 6.5%Expense inflation 4.0% 4.5% 4.25%Indexation of capital gains 1.6% 2.0% 1.8% The risk discount rate is used to discount the projected future cash flows fromthe business in-force to a present value. The rate is set by reference to theassumed future investment returns. The assumed future pre-tax returns on fixed interest securities are set byreference to the 15 year gilt yield index. The other investment returns are setby reference to this assumption. The expense inflation and indexation of capital gains assumptions are based onthe rate of inflation implicit in the current valuation of 15 year index-linkedgilts (currently 2.6%). This figure is increased by a 1.5% loading to reflectincreases in earnings to derive the expense inflation assumption and is reducedby 1% to derive the indexation of capital gains. Experience Assumptions The principal experience assumptions, which are reviewed annually, were derivedas follows: • The persistency experience is derived where possible from the Company'sown experience, or otherwise from external industry experience. • Maintenance expenses have been set in line with the costs charged by theCompany's third party administrators, together with an allowance for theCompany's own maintenance costs. • Mortality and morbidity assumptions have been set by reference to theCompany's own experience, published industry data and the rates charged by theCompany's reassurers. A provision of £7.0 million before tax (31 December 2004: £6.9 million) has beenset up within the cash flows to provide for adverse morbidity experience oncritical illness plans. Other items The value of new business has been established at the end of the reportingperiod. It has been calculated using actual acquisition costs. In projecting future surpluses allowance has been made for the cost ofmaintaining a statutory solvency margin on the business in-force. Future taxation has been determined assuming a continuation of the current taxlegislation. The achieved profits results are calculated on an after-tax basis and aregrossed up to the pre-tax level for presentation in the profit and loss account.The rate of tax used was 30% except for the Irish life business, which wasgrossed up at 12.5%. These are unchanged from 31 December 2004. III. COMPONENTS OF LIFE AND UNIT TRUST ACHIEVED PROFIT The pre-tax components of the achieved profit result for life and unit trustbusiness are shown below. Life business 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 ---------- --------- --------- £'Million £'Million £'Million New business contribution 14.9 12.9 23.7Profit from existing businessUnwind of discount rate 21.4 20.2 38.1Experience variances (0.2) (1.8) (2.8)Operating assumption changes - (0.7) 0.7Investment income 1.7 1.6 3.2 ---------- --------- ---------Life operating profit before tax 37.8 32.2 62.9 Investment return variances 16.0 1.9 20.6Economic assumption changes 1.8 (2.8) 2.3 ---------- --------- ---------Life profit before tax 55.6 31.3 85.8 Attributed tax (16.2) (8.4) (23.4) ---------- --------- ---------Life profit after tax 39.4 22.9 62.4 ========== ========= ========= New business contribution after tax is £10.6 million (30 June 2004: £9.4million).Unit trust business 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 ---------- --------- --------- £' Million £' Million £' Million New business contribution 9.4 7.3 14.3Profit from existing business Unwind of discount rate 5.5 5.0 9.3 Experience variances (1.8) 0.2 5.9 Operating assumption changes - - - ---------- --------- ---------Unit trust operating profitbefore tax 13.1 12.5 29.5 Investment return variances 6.6 1.6 9.4Economic assumption changes (0.1) - (0.2) ---------- --------- ---------Unit trust profit before tax 19.6 14.1 38.7 Attributed tax (5.9) (4.2) (11.6) ---------- --------- ---------Unit trust profit after tax 13.7 9.9 27.1 ========== ========= ========= New business contribution after tax is £6.6 million (30 June 2004: £5.1million). 6 Months 6 Months 12 MonthsUnit trust and life business Ended Ended Endedcombined 30 June 30 June 31 December 2005 2004 2004 ---------- --------- --------- £' Million £' Million £' Million New businesscontribution 24.3 20.2 38.0Profit from existing business Unwind of discount rate 26.9 25.2 47.4 Experience variances (2.0) (1.6) 3.1 Operating assumption changes - (0.7) 0.7Investment income 1.7 1.6 3.2 ---------- --------- ---------Operating profit before tax 50.9 44.7 92.4 Investment return variances 22.6 3.5 30.0Economic assumption changes 1.7 (2.8) 2.1 ---------- --------- ---------Profit before tax 75.2 45.4 124.5Attributed tax (22.1) (12.6) (35.0) ---------- --------- ---------Profit after tax 53.1 32.8 89.5 ========== ========= ========= New business contribution after tax is £17.2 million (30 June 2004: £14.5 million). IV. SENSITIVITIES The table below shows the impact of changes in economic assumptions on thecombined life and unit trust reported value of new business and value oflong-term business in-force of changes to the risk discount rate, the assumedrate of long-term investment return and market movements. Change in new business contribution Change in the post-tax value of long-term business in-force Pre-tax Post-tax -------- -------- -------- £' Million £' Million £' Million Reported value at 30 June 2005 24.3 17.2 511.3 Risk discount rate +1% (3.7) (2.6) (32.2) -1% 3.9 2.8 34.1 Investment return +1% 3.5 2.5 28.4 -1% (3.3) (2.4) (27.0) Current x110% (2.3) (1.7) (21.5)withdrawal rate x90% 2.5 1.8 23.5 Unit values +10% - - 47.5 -10% - - (43.8) V. RECONCILIATION OF IFRS FIGURES TO ACHIEVED PROFIT FIGURES 30 June 30 June 31 December 2005 2004 2004 -------- -------- --------- £' Million £' Million £' Million IFRS profit before tax 13.1 8.2 39.0Movement in life value of in-force 43.4 23.5 74.2Movement in unit trust value of in-force 13.7 9.3 26.9 -------- -------- ---------Achieved profit before tax for life andunit trust business 70.2 41.0 140.1 ======== ======== ========= IFRS net assets 229.5 184.7 222.2Less: acquired value of in-force (69.0) (71.9) (70.5)Add: deferred tax on acquired value ofin-force 20.5 21.4 21.0Add: life value of in-force 396.8 334.3 362.9Add: unit trust value of in-force 114.5 92.6 104.8 -------- -------- ---------Achieved profit net assets for life andunit trust business 692.3 561.1 640.4 ======== ======== ========= PART 4 INTERNATIONAL FINANCIAL REPORTING STANDARDS CONSOLIDATED INCOME STATEMENT Note 6 Months 6 Months 12 Months Ended Ended Ended 30 June 30 June 31 December 2005 2004 2004 -------- --------- --------- £' Million £' Million £' Million Insurance premium revenue 126.8 111.7 255.1Less premiums ceded to reinsurers (12.7) (12.9) (27.2) -------- --------- ---------Net insurance premium revenue 114.1 98.8 227.9 Fee and commission income 39.2 29.5 62.7 -------- --------- ---------Profit on sale of investment inLife Assurabce Holding Corporation - - 28.0Other investment income 593.1 257.1 821.9 -------- --------- ---------Total investment income 593.1 257.1 849.9 -------- --------- ---------Total revenue (net of reinsurance payable) 746.4 385.4 1,140.5 Other operating income 0.3 0.5 1.5 -------- --------- ---------Net income 2 746.7 385.9 1,142.0 Policy claims and benefits incurred (61.2) (59.0) (105.4)Less reinsurance recoveries 15.2 13.2 21.7 -------- --------- ---------Net policyholder claims and benefitsincurred (46.0) (45.8) (83.7) Change in insurance contract liabilities (75.7) 68.7 54.6Change in investment contract liabilities (485.5) (291.0) (840.7) Fees, commission and other acquisition costs (98.9) (86.7) (179.2)Administration expenses (26.0) (20.7) (49.8)Other operating expenses (1.5) (1.5) (3.0) -------- --------- ---------Related Shares:
St James's Place