Interim Results- Part 1

8th Aug 2007 07:00

Friends Provident PLC08 August 2007 8 August 2007 Friends Provident plc - Interim results for the half year ended 30 June 2007 Steady progress across three core businesses Group highlights: •Continued progress in Life & Pensions new business profits - up 7% to £95 million (2006: £89m) •UK Life & Pensions sales up 12% to £2,257 million (2006: £2,020m) •Group pensions sales up 11% at £1,298 million (2006: £1,167m) •Robust International result against strong comparatives - sales up 16% at £1,171 million (2006: £1,012m) •Asset Management making satisfactory progress in early stages of three-year plan - eight initiatives launched in first half of year •Financial position remains robust with Group capital resources exceeding Group capital requirements by approximately £1 billion •Proposed merger with Resolution will improve cash position, enhance growth prospects and deliver shareholder value EEV basis* IFRS basis* Half year ended 30 June Half year ended 30 June 2007 2006 Change 2007 2006 ChangeGroup underlyingprofit before tax £264m £247m 7% £111m £120m (8)%Group profit before tax £363m £60m 505% £102m £48m 113%Life & Pensions PVNBP £3,428m £3,032m 13% - - -Contribution to profits fromLife & Pensions new business £95m £89m 7% - - -Margin on Life & Pensionsnew business 2.8% 2.9% (3)% - - -Pro forma embedded value £3,808m £3,660m# 4% - - -Pro forma embedded valueper share £1.77 £1.73# 2% - - -Underlying earningsper share 8.9p 8.0p 11% 4.6p 3.8p 21%Basic earnings per share 13.6p 3.8p 258% 2.2p (0.6)p n/aInterim dividend per share 2.70p 2.65p 2% 2.70p 2.65p 2% *See notes to editors#As at 31 December 2006 Philip Moore, group chief executive, said: 'The Friends Provident Group continues to make good headway in UK andInternational life and pensions, despite the competitive nature of the UKmarket. In asset management, F&C has made satisfactory progress in executing thefirst phase of its three-year accelerated growth plan. In the UK, group pensions remains the key growth driver, with our leading-edgeproposition capturing significant levels of new business from the ongoing trendaway from defined benefit and trustee schemes - a trend expected to continuewell into the future. Our good progress in the UK is tempered by the effect of the flat andcompetitive protection market. This, together with adverse persistency oninvestment products, will lengthen the timescale for reaching our ambitious 2008target for UK new business profits. Beyond the UK, Friends Provident International (FPI) and Lombard both deliveredgood performances against strong comparatives. Their excellent prospects areenhanced by new offices in Singapore, Switzerland and the UAE. FPI expects tocontinue to increase its pensions business in Germany, exporting the strengthsof our efficient UK platform. F&C is successfully rolling out its three-year growth plan to timetable,building on the improved investment performance achieved last year. High qualitypersonnel have been recruited and a range of initiatives deployed to improverevenues and increase margin. More are planned for later this year. Friends Provident continues to deepen its distribution relationships andunderstanding of its customers through the acquisitions of Sesame and PantheonFinancial Limited, new overseas licenses, and strengthened links with strategicpartners. Friends Provident remains a strong, standalone company with excellent prospectsfor profitable growth, differentiated by our focus on customer service, enabledby leading-edge technology. We are confident that the proposed merger withResolution to form Friends Financial Group will add significantly to thisposition and deliver increased shareholder value. The combined Group will applyits enhanced scale, distribution and financial capabilities to furthercapitalise on attractive opportunities in both the UK and Internationalmarkets.' - Ends - For further information, please contact:Nick Boakes Friends Provident plc +44 (0) 845 641 7814Di Skidmore Friends Provident plc +44 (0) 845 641 7833Chris Ford Friends Provident plc +44 (0) 845 641 7832Vanessa Neill Finsbury Limited +44 (0) 20 7251 3801Alex Simmons Finsbury Limited +44 (0) 20 7251 3801 Ref: H155 Notes to editors: 1. An interview with Philip Moore, group chief executive and JimSmart, group finance director, will be available to view in video, audio andtext formats at www.friendsprovident.com and www.cantos.com from 7.00am today. 2. An analyst presentation will take place at 9.00am today at MerrillLynch Financial Centre, 2 King Edward Street, London EC1. 3. The analyst presentation will be webcast live and can be viewed onthe Friends Provident website: www.friendsprovident.com/results 4. The presentation slides will be available from 9.00am today onwww.friendsprovident.com/presentations 5. For more information on Friends Provident including, photos,awards, fast facts, presentations, and media contacts please visit the mediasection at www.friendsprovident.com/media 6. Financial reporting datesDividend dates:Shares go ex dividend 10 October 2007Record date 12 October 2007Dividend paid 23 November 2007Financial Reporting Calendar:F&C Asset Management plc quarter 3 funds under management 30 October 2007Friends Provident quarter 3 Life & Pensions new business 30 October 2007 7. European Embedded Value (EEV) underlying profit is a measure ofprofit which excludes profit generated within policyholder funds that is notallocated to shareholders. Management consider that underlying profit betterreflects the performance of the Group and focus on this measure of profit in itsinternal monitoring of the Group's EEV results. EEV underlying profit is basedon expected investment return and excludes: (i) amortisation and impairment ofAsset Management acquired intangible assets (ii) effect of economic assumptionchanges (iii) non-recurring items; and is stated after deducting interestpayable on Step-up Tier one Insurance Capital Securities (STICS). 8. International Financial Reporting Standards (IFRS) underlyingprofit is a measure of profit which excludes profit generated withinpolicyholder funds that is not allocated to shareholders. Management considerthat underlying profit better reflects the performance of the Group and focus onthis measure of profit in its internal monitoring of the Group's IFRS results.IFRS underlying profit is based on longer-term investment return and excludes:(i) policyholder tax (ii) returns attributable to minority interests inpolicyholder funds (iii) non-recurring items (iv) amortisation and impairment ofacquired intangible assets and present value of acquired in-force business; andis stated after deducting interest payable on STICS. 9. Pro forma embedded value is the shareholders' equity on an EEVbasis, adjusted to bring the value of F&C to its market value. 10. New business sales are reported on the Present Value of New BusinessPremiums (PVNBP) basis, which represents new single premiums plus the expectedpresent value of new business regular premiums. PVNBP for the second quarter isreported in an appendix at the end of this announcement. A table detailing saleson an Annualised Premium Equivalent (APE) basis (annualised new regular premiumsplus 10% of single premiums) is also included. 11. Underlying earnings per share is based on the EEV/IFRS underlyingprofit after tax attributable to ordinary shareholders of the parent company. 12. The Internal Rate of Return (IRR) is equivalent to the discount rateat which the present value of the after tax cash flows expected to be earnedover the lifetime of the business written is equal to the capital invested tosupport the writing of the business. All assumptions and expenses in thecalculation of IRR are consistent with those used for calculating thecontribution from new business. 13. The Payback Period is the time at which the value of the expectedcash flows, after tax, is sufficient to have recouped the capital invested tosupport the writing of the business. The cash flows are discounted at theappropriate risk-discount rate and calculated on the same assumptions andexpense basis as those used for the contribution from new business. 14. Margins are defined as the pre tax contribution from new businessgenerated by each product type, divided by the new business volume for thatproduct. Contribution is calculated using economic assumptions at the beginningof the period, and is quoted after the cost of required capital, share basedpayments and including an apportionment of fixed acquisition expenses acrossproducts. 15. 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, performanceor achievements, from time to time, of Friends Provident plc, its subsidiariesand subsidiary undertakings or industry results to be materially different fromany future results, performance or achievements expressed or implied by suchforward-looking statements. Such risks, uncertainties and other factors include,among others, adverse changes to laws or regulations; risks in respect oftaxation; unforeseen liabilities from product reviews; asset shortfalls againstproduct liabilities; changes in the general economic environment; levels andtrends in mortality, morbidity and persistency; restrictions on access toproduct distribution channels; increased competition; and the ability to attractand retain personnel. These forward-looking statements are made only as at thedate of this announcement and, save where required in order to comply with theListing Rules, there is no obligation on Friends Provident plc to update suchforward-looking statements. BUSINESS REVIEW Group progress and outlook We have made further progress in the first half of 2007 in each of the Group'sthree core businesses, benefiting from a well-diversified and balanced portfolioof operations. Across the Group we will continue to focus on customer serviceand use of technology as differentiators, while distribution is a key area ofdevelopment for each of our businesses. The proposed merger with Resolution toform Friends Financial Group will increase our ability to take advantage ofprofitable opportunities and deliver increased shareholder value. In the UK, we saw another strong performance from pensions as we took advantageof the continuing opportunity to write profitable business from the marketmovement away from defined benefit and trustee schemes. Overall, whilst we aremaking good progress, we believe the effect of the flat and competitiveprotection market for 2007 will lengthen the time needed to reach our ambitious2008 target for UK new business profits. The FSA has formally opened consultation on the future structure of thedistribution landscape in the UK, and we will contribute to that debate. Wecontinue to expect a structural shift in the UK individual savings market, overa number of years, to wealth management platforms. We will make our initiallaunch in this market by the end of the year. Our International businesses accounted for over a third of our life and pensionsnew business profits in the first half. FPI and Lombard have both performed wellagainst very strong comparatives. In particular, FPI sales in the second quarterwere at record levels as activity picked up again in its biggest market, HongKong. Both firms are pushing into new territories: Switzerland in the case ofLombard; and Singapore, Germany and the UAE for FPI. These initiatives are amongthose expected to support the outlook for sustainable double-digit growth infuture years. F&C is making satisfactory progress in delivering its turnaround plans, withinvestment in staff, new products and infrastructure. A number of new productshave been launched and are starting to build performance records. Theimprovements in investment performance in 2006 have continued in most areas into2007. Further product launches are planned, as well as development ofdistribution capability. During the first half we took opportunities to acquire two profitable UKdistribution businesses reflecting Friends Provident's view of the importance ofquality distribution to the financial services sector. The acquisition of thesesuccessful businesses builds on our strategy to strengthen and develop ourrelationships with the distribution community by investing in intermediarieswith growth prospects and favourable investment returns. We also continue toseek out opportunities to increase the distribution of our productsinternationally, while F&C is taking steps to increase distribution of its assetmanagement products. We have further advanced our risk management strategy through an innovativetransaction to reinsure a large proportion of our annuity book with Swiss Re.This transaction is consistent with our attitude to longevity risk, and hasmodestly aided the financial results. Within the first half 2007 EEV result, there is a charge of £7m for persistency.This reflects lapse experience to date on legacy with-profit bonds in the UK andon investment portfolio bonds. If current trends continue, we would expect toincur a total persistency charge of approximately £70m in our full year 2007results. The proposed merger with Resolution will create a significant new force in theUK life and pensions market. Through its combination of new business capabilityand cash flow generation, Friends Financial can provide shareholders with bothprofitable new business growth and growing dividend income. Given its enhancedscale and capability, Friends Financial will be well placed to participate infuture consolidation in the UK life and pensions sector over time. AssetManagement will remain central to Friends Financial's strategy. It is proposedthat Resolution Asset Management and F&C will be combined, with a total of £165billion of funds under management as at 31 December 2006. This business willretain its separate listing, with the Group maintaining a majority holding. UK LIFE AND PENSIONS Our view of the Market Our expectation remains that the UK life and pensions market will show modestgrowth overall for the year. The FSA has opened consultation on the provision of advice with its RetailDistribution Review. We intend to play our full part in shaping the out-turn ofthe consultation, and in particular we support the aim of providing high qualityadvice to consumers. There is some concern that the initial proposals set out bythe FSA may reduce demand for advised sales, access to suitable products, or thehealth of the independent advice sector. We expect the market for products forindividuals who value fully independent advice to be relatively unaffected asthe proposals reflect the existing business model. We note that the IFA sectoras a whole has been very successful in the past in adapting to regulatoryinitiatives. It is possible that the existing broad trend across the markettowards lower levels of initial commission will be supported by the result ofthe review. ProtectionWe reiterate our view expressed in previous announcements that the protectionmarket will remain, at best, flat in 2007. This market is significantly affectedby the turnover in the housing market. The number of advances was broadly flatyear-on-year in the first half. Of these advances a proportion relate toinvestment properties, where term cover or income protection is not typicallybought. Competitor activity is strong and this is a fast-moving, price-sensitivemarket. InvestmentsThe investment market has seen continued activity with the main success factorsincluding brand strength, competitive commission levels and distributorfamiliarity with products. A number of players have run marketing promotions andhave specialised sales forces. We too are increasing resource for training andengagement with strategic partners. In time, there will be a structural change in this market as advisors adopt Wrapplatforms. It will take a number of years for bulk migration of assets to occur,and our perception is that as yet most networks and individual IFAs are at anearly stage of the selection process. Group pensionsWithin group pensions activity is, and will continue to be, driven by theoverarching shift in retirement benefits from defined benefit to definedcontribution provision. In the initial phase, defined benefit schemes haveclosed to new members, and over 80% of private employers have now taken thisstep. In addition to newly set up schemes, there is a significant market in therestructuring of established, older schemes seeking reliable and efficientservice and competitive charges. Further phases of the transition consist ofclosing schemes to accruals from existing members and buy-out of schemeliabilities. The first of these is starting to add to the defined contributionmarket, while the latter is not an area we are active in. The market consists of two segments; schemes where the advisors are paid initialcommission; and those with trail commission or fee-based remuneration. There isa slow drift in the market towards the latter, which results in lower newbusiness strain. While some providers cater to only one segment, we have astrong foothold in both giving us a resilient position as the market evolves. The Government released a white paper on Personal Accounts during the secondquarter. We welcome the intention to encourage saving by a section of thepopulation that has not, to date, provided for its retirement. However, thewhite paper left much uncertainty on key implementation issues, such as thepremium collection mechanism. The paper stated again the Government's intentionto focus Personal Accounts on the target market (low to moderate earners) and tominimise damage to existing pension provision. We believe that any levellingdown of existing provision will be concentrated among smaller schemes andemployers. Individual pensionsThe individual pensions market grew strongly in 2006 driven by the PensionsA-Day regulatory changes, so we have seen a healthy but quieter market in 2007.Although commission levels are gradually reducing, margins are low with initialcommission the norm. We mainly write single premiums where the cash straincharacteristics are less onerous. We are not active in the individual SIPPmarket. DWP rebate business is dictated by government systems, so although it isslowing over time, the pattern of rebate premiums in any year is unpredictable. AnnuitiesWe see the individual annuity market continuing to grow. Although we wouldexpect to see the latest longevity data gradually reflected in pricing, weanticipate margins will remain attractive. We continue to focus on internalvestings and we do not write bulk annuities. Our trading performance and outlook 6 months to 30 June 2007 vs 6 months to 30 June 2006 H1 2007 H1 2006 New New business business profits PVNBP Margin profits PVNBP Margin £m £m % £m £m %Protection 14.3 202 7.1 17.6 199 8.8Investment 1.4 268 0.5 6.2 364 1.7Individual Pensions 5.3 256 2.1 2.2 137 1.6DWP Rebates 7.8 87 8.9 2.0 34 5.9Group Pensions 23.4 1,298 1.8 18.8 1,167 1.6Annuities 9.3 146 6.4 6.1 119 5.1UK Life and Pensions 61.5 2,257 2.7 52.9 2,020 2.6 Overall, new business volumes have risen strongly, driven by continued growth inboth individual and group pensions. The overall margin has increased to 2.7%(2006: 2.6%). Protection - Sales up 2% at £202 million (2006: £199m)In the first half we have adjusted pricing to target particular segments wherewe have traditionally held lower market share, particularly in larger sumsassured. Margins were maintained against the second half of 2006, although theywere down year-on-year as our pricing in the first half of 2006 was, on thewhole, less competitive. Application counts for sums assured greater than£250,000 have increased significantly in major products. We have also taken theinitiative to adopt a best practice approach on claims affected bynon-disclosure that should help to build confidence in our critical illnessproducts. The precise out-turn from our pricing activity and group protection developmentsis hard to predict although early indications are encouraging. We expect toadvance our market share for 2007. Investments - Sales down 26% at £268 million (2006: £364m)Through the half, our sales of investment products were subdued. We launched aspecial offer on our investment portfolio bond and this has stemmed decliningsales. Our guaranteed bond was launched in the first quarter but has notattracted the expected support in a market with several established products. These are thin margin products and a higher than expected lapse experience isreflected in a reduced first half margin. As we redevelop our investment productrange we are building in features to reduce the risk of high lapse rates. The focus during the remainder of 2007 is to complete the revision of ourproduct range to better compete with the market leaders. During this transitionwe do not expect significant growth in our share of this highly competitivemarket. We are making good progress getting onto investment panels which willbenefit us in 2008. In the longer term, we are confident that our wrap product will meet the needsof the IFA market for platform products. This will be delivered in a series ofreleases. We are making good progress with the first release, to selected IFAsto test the core mutual fund functionality, scheduled for November. After robusttesting, subsequent releases will roll out straight through processing,projection tools, and increased fund and asset choice over 2008-9. There willthen be ongoing development to further improve the proposition and meetindividual IFA needs. Group pensions - Sales up 11% at £1,298 million (2006: £1,167m)Our strong service-oriented proposition places us consistently among the leadersin this market and the first half has shown further growth. 2006's A-Day changesare still helpful in this market, although to a lesser extent than in the firsthalf of 2006. We are increasingly using our pricing expertise and marketposition to target the most profitable schemes as advisors select providers. Asthe in-force book grows, new premiums from existing schemes are helping to drivesales at a lower cost. Margins have risen slightly year-on-year, in part due tooperational leverage. We would expect them to remain broadly stable through theremainder of the year. We now have 618,000 scheme members on our platform. As we get more schememembers on our platform our efficiency improves and we now have £28m of assetsunder management for each of our customer service employees. We now have £6.7bnunder management, an increase of 56% since 30 June 2006. At this stage of thedevelopment of the business the income from these assets does not yet cover thenew business cost, and the net cash outflow for this business in the first halfwas approximately £40m. The internal rate of return (IRR) on new business was9.4%. This IRR excludes the benefit of potential future annuity business aspolicies mature. We believe that the economics of the business will continue toimprove as the proportion of incremental business and the proportion of nilcommission new business increases. Our best estimate is that the business willbe cash neutral by around 2011 and cash positive beyond that. Individual pensions - Sales up 87% at £256 million (2006: £137m)This is a market where we have not traditionally been strong. A competitiveproduct has allowed us to increase our market share. Stable marketing costs haveincreased margins slightly and we expect these to be maintained going forward. DWP rebates - Premiums up 156% at £87 million (2006: £34m)We received an unusually large amount of DWP rebates in the second quarter. Webelieve this was due to rebates being paid earlier than in previous years. Annuities - Sales up 23% at £146 million (2006: £119m)We have maintained a consistent approach to the annuity market, pricing toreflect risk and maintain acceptable margin. We expect to see continued growthat a modest rate, reflecting growing maturities from our in-force pension book. INTERNATIONAL LIFE AND PENSIONS Our view of the market Friends Provident International (FPI) - provides regular and single premiumsavings, protection and pension products in Asia, Europe, the Middle East andthe UK. FPI operates in markets that are dynamic, well-regulated and with demandfor independently-advised sales. We have seen a return of activity in the Hong Kong market, FPI's largest market,where FPI sales were very buoyant early in 2006 but quietened in the second halfof last year. The market for single premium products in the UK was also veryactive around the end of the tax year, although this market is very competitiveand offers lower margins than other markets. We have also started to sell products in a niche of the German pensions market,where sales are heavily weighted to the fourth quarter. Lombard - provides bespoke financial and estate planning solutions for high networth individuals (HNWIs) and ultra HNWIs across Europe and beyond. Distributionis mainly through private banks and high end independent advisers, where Lombardhas built lasting relationships. As noted earlier this year, there were tax changes announced in a number ofterritories in 2006 that were expected to reduce demand in those markets. Thesehave largely played out as expected, with significantly lower new business inLatin America, a newly developed market in 2006, and Sweden, which is one ofLombard's smaller markets. Meanwhile there has been increased demand in SouthernEurope. Timing of tax year ends across Europe mean that the fourth quarter will remainthe most significant by far, although some volatility will also remain inquarterly results due to Lombard's growing success in the market for largecases. Our trading performance and outlook 6 months to 30 June 2007 vs 6 months to 30 June 2006 H1 2007 H1 2006 New New business business profits PVNBP Margin profits PVNBP Margin £m £m % £m £m % FPI 16 523 3.1 16 466 3.5Lombard 17 648 2.7 20 546 3.6International Life andPensions 33 1,171 2.8 36 1,012 3.6 First half 2006 saw very strong sales volumes and margins. First half 2007 saleswere ahead of the comparative although new business profits were slightlybehind, reflecting the inherent volatility in margin from geographical, productand case size mix. Friends Provident International PVNBP by region H1 2007 H1 2006 £m £mEurope (excluding UK) 121 101UK 105 76Asia 203 201Middle East 46 43Rest of World 48 45Total FPI 523 466 FPI's first half sales are up 12% on a very strong comparative. The UK bondmarket contributed increased sales around the tax year end. Our partnership withUNED in Germany to distribute pension products has had an encouraging start andaccounts for around 5% of FPI sales. The margin has reduced slightly due to mix of territories, and a number of largeportfolio bonds, which tend to be lower margin. We expect that the full yearmargin will be broadly at the same level as in the first half. In June FPI was granted a federal licence in the UAE, while the Singapore branchhas now launched a personal bond product which is the first of its kind inSingapore. These developments are expected to support growth in future years. Lombard PVNBP by region H1 2007 H1 2006 £m £mUK and Nordic 108 114Northern Europe 126 121Southern Europe 179 109Rest of World 14 19Total excluding large cases 427 363Large cases 221 183Total 648 546 Sales volumes are 19% up on 2006, due to a strong Southern European result,reflecting the positive market conditions, and the issuance of several largecases (defined as greater than €10m). In volume terms, this more than offset thenegative impacts of 2006 tax changes in a number of markets. New business profits in first half 2007 were slightly down on an especiallystrong first half 2006 figure, which was itself 66% up on first half 2005.Margin has been impacted by a combination of factors, including geographical mixand the affects of some very large cases. In addition there has been increasedinvestment aimed at enhancing the company's long-term market developmentcapacity and operational capability. We expect that the full year 2007 marginwill improve from the first half figure. As anticipated, the growth outlook for the remainder of 2007 is below thehistorical trend line. A number of markets are expected to have a quieter yeardue to tax changes, but under-performance from such markets should in part beoffset by large cases and over-performance in stronger markets, such as SouthernEurope. Progress in the development of relationships with preferred Swiss-basedpartners has been good, although new business generation will take someconsiderable time to develop, in line with expectations. The longer termprospects for the business remain very positive, sales and new business profitscontinuing to be substantially weighted towards final quarter. ASSET MANAGEMENT Business developments As set out earlier in the year, a three-year accelerated growth plan is beingimplemented with the goal of increasing underlying earnings per share by 50%from 2007 to 2009. Progress is in line with expectation after the first sixmonths of the plan. In the first half of 2007 we have built on 2006's improvedinvestment performance by recruiting talented staff and establishing new highermargin and specialist products. We have developed the Asset Managementinfrastructure and the operational outsourcing contract with Mellon wasterminated in the first half to ensure a consistent approach to clientservicing. The initiatives we have executed in the first half of the year include: • Liability Driven Investment - our pooled funds have the support of six major consulting firms • Alternatives - successfully launched a fixed income hedge fund and a listed fund of hedge funds, and we have started fund raising on a further fund focussed on foreign exchange instruments • Collateralised Debt Obligation - risk management structure implemented and first deal completed • Private equity - strengthened our team and launched a new fund of funds • GTAA - our new fund has attracted in excess of €300 million • Real estate - launched a new Portuguese property development fund • Multi-manager - launched F&C Lifestyle, a unique range of fund of funds linked to a third-party risk profiling tool, with distribution deals announced with Paradigm, Lighthouse Group, and Thinc Destini • Enhanced cross-selling - US SRI product launched and recruited staff in a number of territories Further product developments are planned for the second half, including entry into the short/long funds product segment, and a fiduciary management service inThe Netherlands. We will now look to improve distribution, and during the first half we recruitedhigh quality staff to strengthen our capabilities in this area, as well asbuilding the F&C brand through a new three-year sponsorship deal with BirminghamCity Football Club. Our trading performance and outlook Investment performance on existing products has remained strong, and as detailedabove we have launched a significant number of new products. Assets undermanagement decreased from £104.1 billion as at 31 December 2006 to £101.3billion at 30 June 2007. Outflows were in line with expectation, while theaverage fee rate has increased to 23.5 basis points (30 June 2006: 22 basispoints). Retail Our UK retail business has continued to exhibit excellent momentum. Net retailsales of open ended funds during H1 were up 23% compared to an industry-widedecline of 17% in domiciled net retail sales (source: IMA). During the period,the agreement for management of Friends Provident flagship fund products hasbeen renegotiated and the new terms are helpful to the distribution of FriendsProvident investment products. Insurance Insurance net outflows of £2.8 billion included a £1.6 billion outflow ofinsurance funds resulting from the reinsurance of Friends Provident annuitieswith Swiss Re. Fees on these assets were significantly below the average feerate and revenues from it have been substantially replaced by new commitments tohigher margin products. Institutional The £3.3 billion of outflows largely reflected the pipeline of £5.2 billionknown outflows that we highlighted on 31 January 2007. These outflows wereprincipally represented by lower fee Dutch balanced mandates shifting tofiduciary managers, an industry-wide trend in The Netherlands, and were notrelated to investment performance. We generated £1.7 billion in grossinstitutional inflows during H1, a 24% increase on H1 2006. Investment Trusts A net outflow of £0.2 billion reflects a combination of trusts reducing gearing,share buy-backs and also the wind-up of Investors Capital Trust whichnevertheless achieved a very successful rollover of 62% of its assets into a newvehicle of the same name. No investment trust mandates were lost in H1. Financial review Our financial results are presented on two reporting bases: European EmbeddedValue (EEV) and International Financial Reporting Standards (IFRS). The keydifferences between these accounting bases are in respect of the timing ofprofit recognition: • IFRS profits tend to be lower than EEV profits when new business volume is growing because EEV recognises future cash flows in profit, while IFRS does not. • In addition, IFRS does not allow full deferral of acquisition expenses, which is relatively onerous for investment products, such as group pensions. Neither of these bases provides a satisfactory measure of the cash inflows/outflows of the Group. Therefore, we additionally report cash generation inthese results. EEV BASIS EEV is the basis we find more useful because it provides a more representativereflection of the performance of the long-term business that fully recognisesthe shareholders' interest in the in-force portfolio on a risk adjusted basis.When considering EEV results, management focuses on underlying profit as thismeasure better reflects the performance of the Group. Group profitability on the EEV basis Half year ended 30 June Change 2007 2006 % £m £mEEV underlying profit before tax:- UK Life & Pensions +21 186 154- International Life & Pensions +10 53 48- Asset Management -37 32 51- Corporate items +17 (7) (6)EEV underlying profit before tax +7 264 247Other profit items 99 (187)EEV profit before tax +505 363 60 Contribution from Life & Pensions new business +7 95 89Life & Pensions new business margin -3 2.8% 2.9%Life & Pensions return on embeddedvalue (annualised) +22 11.7% 9.6%EEV underlying earnings per share +11 8.9p 8.0pEEV basic earnings per share +258 13.6p 3.8p Group EEV underlying profit before tax has increased by 7% to £264m (2006:£247m). The main increase in profit has been in UK Life & Pensions where thecontribution from new business increased by 17% to £62m (2006: £53m) andpositive experience variances amounted to £19m (2006: £8m negative). Overallprofit from Life & Pensions increased by 18% to £239m (2006: £202m) but, asexpected, profits at our Asset Management business reduced by 37% to £32m (2006:£51m) as we invest in the three year growth plan. The contribution from total Life & Pensions new business, which is included inunderlying profit, has increased by 7% to £95m (2006: £89m). The new businessmargin as a percentage of PVNBP has fallen slightly from 2.9% to 2.8% with anincrease in the UK margin being offset by a reduction in the Internationalmargin. The EEV underlying profit includes a benefit of £12m arising from the annuityreinsurance treaty which transferred annuity longevity risk. The EEV underlying profit also reflects a charge of £7m for persistency. Thisreflects lapse experience to date on legacy with-profit bonds and on investmentportfolio bonds. There has also been a modest deterioration in persistency inold style group pension schemes, which are no longer sold. We will monitor thesetrends in the second half of the year before updating our operating assumptions.If current trends continue, we would expect to incur a total persistency chargeof approximately £70m in our full year 2007 results. The majority of the chargeis expected to be for legacy products and only a small amount is expected to befor pensions business. Group EEV profit before tax has increased to £363m (2006: £60m). This profitmeasure takes into account the impacts of investment return variances, economicassumption changes, non-recurring items and other charges totalling £99mpositive (2006: £187m negative). The investment return variances and economicassumption charges in 2007 were £114m positive whereas in 2006 they werenegative by £108m. In addition, in 2006 there was an impairment charge inrespect of Asset Management acquired intangible assets of £45m. There was noimpairment charge in the first half of 2007. The Life & Pensions return on embedded value has increased from 9.6% to 11.7%reflecting the higher level of underlying profit. The UK return is 10.8% (2006:8.4%) and the International return is 15.7% (2006: 15.9%). The Internationalreturn is marginally down due to a proportionately higher opening embeddedvalue. Underlying EEV earnings per share have increased to 8.9p from 8.0p reflectingthe higher EEV profits and a slightly lower tax charge. EEV deferred tax (UK andInternational) has been calculated at the same rates as 2006. EEV tax will bereviewed at the year-end to ensure that it is calculated in accordance with bestpractice. Reducing the rate of UK corporation tax from 30% to 28% is anticipatedto increase the embedded value by approximately £34m. The basic earnings pershare has risen to 13.6p from 3.8p due to the same factors as above and also theimpact of the other profit items which were positive in 2007 but negative in2006. UK Life & Pensions UK Life & Pensions EEV underlying profit increased by 21% to £186m (2006: £154m)as set out below. Half year ended 30 June Change 2007 2006 % £m £mContribution from new business +17 62 53Profit from existing business:- Expected return -6 88 94- Experience variances 19 (8)- Operating assumption changes - -Development costs +42 (17) (12)Expected return on shareholders' net assets +26 34 27EEV underlying profit before tax +21 186 154 New business margin +4 2.7% 2.6%Return on embedded value +29 10.8% 8.4%Internal rate of return (IRR) per annum +17 11.9% 10.2%Payback period (discounted) 11 years 13 yearsOperating expenses +5 125 119 The contribution from new business has increased by 17% to £62m (2006: £53m)with group pensions amounting to 38% (2006: 36%) and protection 23% (2006: 33%)of the total. The contribution is stated net of the cost of solvency capital of£3m (2006: £4m). The overall margin has increased to 2.7% from 2.6%. Once again the margin hasbenefited from the gearing effect of higher volume and relatively flat expensesbut this has been partially offset by lower margins on the very competitiveprotection business. New business margins by product are discussed within thebusiness review above. The improved profitability is reflected in an increase inIRR to 11.9% (2006: 10.2%) and the overall payback period has reduced to 11years (2006: 13 years). Both IRR and payback are sensitive to business mix whichbenefited from higher DWP rebates in the first half of 2007. The expected return on the value of the in-force book reduced by 6% to £88m (2006: £94m). This decrease from 2006 reflects the reduction in the value of thein-force business partially offset by higher opening discount rates. Withinprofit from existing business are experience variances totalling £19m positive(2006: £8m negative). Favourable variances arose in 2007 in respect ofburnthrough and reinsurance of FPP's annuity business which have been partiallyoffset by other items, including persistency. Development costs have increased to £17m (2006: £12m), reflecting investments tosupport our growth strategy. These mainly consist of investments in developingour wrap platform and continued development of our leading e-commercepropositions. As previously announced, we anticipate development costs to be inthe region of £40m in 2007. The expected return on shareholders' net assets increased by 26% to £34m (2006:£27m) due to higher expected equity and fixed interest rates of return and anincrease in invested net assets. Operating expenses have increased by 5% to £125m (2006: £119m). During the sameperiod PVNBP increased by 12% which continues to demonstrate the efficiency ofour processes and the power of our technology to deliver substantial newbusiness growth at relatively little additional cost. We are continually seekingimproved cost efficiencies and service improvements across the business -particularly through greater use of technology. International Life & Pensions International Life & Pensions EEV underlying profit increased by 10% to £53m(2006: £48m) as set out below. Half year ended 30 June Change 2007 2006 % £m £mContribution from new business -8 33 36Profit from existing business:- Expected return +67 20 12- Experience variances 1 -- Operating assumption changes - -Development costs (2) -Expected return on shareholders' net assets 1 -EEV underlying profit before tax +10 53 48 New business margin -22 2.8% 3.6%Return on embedded value -1 15.7% 15.9%Internal rate of return (IRR) per annum -13 23.1% 26.5%Payback period (discounted) 4 years 4 yearsOperating expenses +17 35 30 The contribution from new business has reduced by 8% to £33m (2006: £36m). TheLombard contribution is £17m (2006: £20m) and the FPI contribution is £16m(2006: £16m). The overall margin has reduced from 3.6% to 2.8% with Lombard achieving 2.7%(2006: 3.6%) and FPI 3.1% (2006: 3.5%). Margins are lower due to business andterritorial mix, higher expense levels and the impact of large case sizes whichare generally at lower margins. Low new business strain results in a high IRR of23.1% (2006: 26.5%) and a relatively short payback period of 4 years (2006: 4years). The expected return on the value of the in-force book increased to £20m (2006:£12m) reflecting the increase in the value of the in-force business. There wereno significant experience variances or operating assumption changes. Development costs amount to £2m (2006: £nil) and represent investments in thedevelopment of infrastructure, new products and e-commerce projects to supportour growth plans. As previously announced, we anticipate development costs to bein the region of £10m in 2007. Operating expenses have increased by 17% to £35m (2006: £30m). During the sameperiod PVNBP has increased by 16%. Our international businesses do notexperience the same degree of expense leverage as the UK business because theyare still building critical mass to support the growing portfolio of products,markets and customers. Nevertheless initiatives are under way to include greateruse of technology to support further growth in the business, improve service andreduce unit costs. Asset Management Asset Management underlying profit reduced by 37% to £32m (2006: £51m) as setout below. Half year ended 30 June Change 2007 2006 % £m £mNet revenues -6 119 126Operating expenses +12 (84) (75)Other expenses (net) (3) -Underlying profit before tax -37 32 51Operating margin -26 30% 41%F&C underlying earnings per share -43 4.2p 7.4p Net revenues reduced by 6% to £119m (2006: £126m) reflecting the effect of netfund outflows in 2006. The average fee rate has risen from 22 basis points in2006 to 23.5 basis points for the first half of 2007 reflecting both the higherfee profile of the new business initiatives and the lower fee nature of many ofthe asset outflows. Funds under management amount to £101bn (31 December 2006:£104bn). Operating expenses represent the ongoing costs of running the business and thesehave increased by 12% to £84m (2006: £75m) reflecting some of the necessaryinvestment in people, enhanced product and distribution capability andassociated infrastructure required to achieve the three year growth plans. Operating margin represents the ratio of operating profit to net revenues anddecreased to 30% from 41%. The decline in operating margin is in line with ourexpectation at this stage of the three year growth plan. As a result of the lower underlying profit, underlying earnings per share havedecreased from 7.4p to 4.2p. Corporate items Half year ended 30 June 2007 2006 £m £mExpected return on net pension liability 4 3Expected return on corporate net assets (4) (3)Corporate costs (7) (6)Corporate items (7) (6) Expected return on corporate net assets includes the STICS interest payable. Other profit items Half year ended 30 June 2007 2006 £m £mInvestment return variances (48) (327)Effect of economic assumption changes 162 219Non-recurring items 6 (12)Impairment of Asset Management acquired intangible assets - (45)Amortisation of Asset Management acquired intangible assets (21) (22)Other profit items 99 (187) The combined impact of investment return variances and economic assumptionchanges is £114m positive (2006: £108m negative). The main factors accountingfor the change in 2007 were (i) a larger fall in the market value of ourconvertible debt than in 2006, (ii) above expected returns on higher unit-linkedfunds under management, (iii) reduced investment losses from shareholderburnthrough and (iv) an improvement in the ability to offset losses againstinvestment gains for tax purposes. The risk-free rates used for Sterling were 5.3% (2006: 4.7%) and 4.8% for theEuro (2006: 4.4%). Non-recurring items consist of the release of part of the provision for historicbusiness review and endowment review of £9m (2006: £1m). F&C integration costsin 2007 were £nil (2006: £7m) and F&C Reinvestment Plan costs were £3m (2006:£6m). During the first half of 2006 the level of fund losses at F&C resulted in a £45mimpairment charge in respect of the carrying value of intangible assets. Duringthe first half of 2007, outflows were broadly in line with expectations and as aresult there was no requirement to perform an impairment review nor recogniseany impairment charge. IFRS BASIS We present IFRS results in accordance with the EU regulations requiring allEuropean listed groups to prepare IFRS accounts. When considering IFRS results,management focuses on underlying profit as this measure better reflects theperformance of the Group. Group profitability on the IFRS basis Half year ended 30 June Change 2007 2006 % £m £mIFRS underlying profit before tax:- UK Life & Pensions +38 76 55- International Life & Pensions -55 9 20- Asset Management -37 32 51- Corporate items (6) (6)IFRS underlying profit before tax -8 111 120Other profit items -88 (9) (72)IFRS profit before taxfrom continuing operations +113 102 48IFRS underlying earnings per share +21 4.6p 3.8pIFRS basic earnings/(loss) per share 2.2p (0.6)pDividend per share +2 2.70p 2.65pDividend cover on underlying basis 1.1 times 1.0 times Group IFRS underlying profit before tax has fallen by 8% to £111m (2006: £120m)with total Life & Pensions underlying profit up 13% to £85m (2006: £75m) andAsset Management underlying profit down 37% to £32m (2006: £51m). IFRSunderlying profit includes a benefit of £11m from the annuity reinsurance treatyafter writing off related deferred acquisition costs. Group IFRS profit before tax from continuing operations has increased by 113% to£102m (2006: £48m). This profit measure takes into account the actual investmentreturns achieved during the year, offset by the impacts of non-recurring andother items. It is also shown gross of policyholder tax and minority interests.In net terms these were £9m negative in 2007 and £72m negative in 2006, asdiscussed below. Underlying IFRS earnings per share have increased to 4.6p from 3.8p mainlyreflecting a lower tax charge that has arisen from calculating deferred tax at28% (previously 30%) and greater utilisation of both expenses and tax losses.The basic earnings per share have increased to 2.2p from a loss of 0.6p,reflecting a lower tax charge and lower exceptional costs in 2007. UK Life & Pensions UK Life & Pensions underlying profit (which consists of new business strain,in-force profit and expected return on shareholders' net assets) has increasedby 38% to £76m (2006: £55m). New business strain, which on an IFRS basis is stated after the deferral ofcertain acquisition costs, has reduced to £44m (2006: £75m). Although PVNBP hasincreased by 12%, the new business strain has been favourably impacted by anumber of events. These include the changes arising from the partialimplementation of PS06/14 at the end of 2006 and changes to morbidityassumptions implemented at the same time. The in-force profit has reduced to £83m (2006: £105m). This reduction is mainlycaused by the same factors that have reduced the new business strain (forexample, implementation of the PS06/14 reserving rules for some products in thesecond half of 2006 reduces new business strain but reduces in-force profitsarising later in the life of the contract), and also as a result of thereinsurance of the annuity portfolio of FPP. It is anticipated that futurein-force profits will grow, reflecting the increasing size of the in-force book. As previously mentioned, we are implementing the new PS06/14 rules on a phasedbasis over 2 years and these had a positive impact in the second half of 2006 ofapproximately £33m. It is anticipated that there will be a similar item in thesecond half of 2007. The other underlying profit component is the expected return on shareholders'net assets. The expected return in 2007 was £37m (2006: £25m). The longer-terminvestment return rates were: equities 8.0% (2006: 7.25%), property 7.0% (2006:6.25%), gilts 5.0% (2006: 4.25%) and other fixed interest 5.5% (2006: 4.75%). International Life & Pensions International Life & Pensions underlying profit amounts to £9m (2006: £20m) madeup of FPI of £3m (2006: £18m), Lombard £5m (2006: £1m) and other £1m (2006:£1m). New business strain in International Life & Pensions has almost doubled to £21m(2006: £11m) mainly as a result of higher sales and larger case sizes. Thein-force profit amounted to £29m (2006: £30m). Although the in-force profitsbenefited from the growth in the size of the in-force book, there were somesmall basis changes that increased the surplus in 2006. The expected return onshareholders' net assets was £1m (2006: £1m). Asset Management Asset Management underlying profit has reduced by 37% to £32m (2006: £51m). Forthe Asset Management business, underlying profits under IFRS are the same asunder EEV and are discussed in the EEV section above. Corporate items Corporate items included in underlying profits total £6m negative (2006: £6mnegative). These items comprise the expected return on the net pension liabilityof £4m positive (2006: £3m positive), expected return on corporate net assets of£3m negative (2006: £3m negative), less corporate costs of £7m (2006: £6m). Other profit items Half year ended 30 June 2007 2006 £m £mPolicyholder tax 19 5Returns on Group controlled funds attributable to thirdparties 30 52Non-recurring items 6 (12)Amortisation of Asset Management acquired intangible assets (21) (22)Amortisation of acquired present value of in-force business (13) (12)Amortisation of Life & Pensions acquired intangible assets (4) (4)Impairment of Asset Management acquired intangible assets - (45)Interest payable on STICS 26 26Short-term fluctuations in investment return (52) (60)Other profit items (9) (72) The other profit items excluded from underlying profit but included in profitbefore tax are shown above. The non-recurring items, amortisation and impairmentof Asset Management intangible assets are the same as under EEV and discussed inthe EEV section. The other main items are set out below: •Policyholder tax and returns on Group controlled funds attributable to third parties (the latter mainly representing the minority interest held in F&C Commercial Property Trust, which is 53% owned by the Group's long-term funds) are excluded from underlying profit, as neither is attributable to shareholders. •Within the calculation of underlying IFRS profit (as in EEV) we account for the STICS as debt to reflect the economic reality. However IFRS rules require that STICS is accounted for as equity in calculating IFRS profit before tax and consequently STICS interest is added back and treated as an appropriation of profit. •The short-term fluctuations in investment return of £52m negative (2006: £60m negative) reflect differences between the actual and expected investment returns. The main reason for the negative variances has been the increases in fixed interest yields. CASH GENERATION AND LONG-TERM BORROWINGS Shareholder cash generation is set out below: Half year ended 30 June 2007 2006 £m £mUK Life & Pensions:- New business strain (126) (175)- In-force surplus 127 159- Taxation 12 (1)International Life & Pensions:- New business strain (45) (39)- In-force surplus 52 48- Taxation - (1)Life & Pensions net cash operating surplus 20 (9)One-off items 56 -Other operating deficit (4) -Investment return 85 34F&C dividend received 18 18Cash generated by the businesses before financing items 175 43Dividends paid (110) (108)Securitisation (38) (37)Financial reinsurance - (12)Investment in subsidiaries (net of assets acquired) (48) (59)Other finance items (mainly issue of shares) 4 12Total movement (17) (161) The decrease in cash resources of £17m for the half year ended 30 June 2007reconciles as follows: 30 June 31 Dec 2007 2006 Movement £m £m £mShareholders' invested net assets 1,233 1,164 69Less: intangible assets acquired (48) - (48)Securitisation 55 93 (38)Shareholder cash resources 1,240 1,257 (17) Total cash generated before application to financing items amounted to £175m -up from £43m in 2006. The main changes were: lower UK Life & Pensions newbusiness strain; the positive impact of one-off items; and higher investmentreturns. The cash generated before financing items was deployed to pay the 2006 finaldividend of £110m, provide for repayment of securitisation of £38m, andacquisition of subsidiaries of £48m. Overall, there was a net outflow of fundsof £17m, much improved over the £161m outflow in 2006. The UK Life & Pensions new business strain has reduced to £126m from £175m. Thisreduction is mainly due to the mix of sales (in particular the DWP rebates) andbasis changes to protection business made at the end of 2006. The UK in-force surplus has reduced to £127m from £159m. The 2007 surplusincludes a number of net positive items, including reserve releases, which we donot expect to repeat in the second half of 2007. In the second half of 2006, weimplemented the reserving rule changes in PS06/14 for some products, whichgenerated cash of £151m in respect of in-force business. Implementation of thechanges in PS06/14 for the remainder of the impacted products in the second halfof 2007 is expected to release a similar amount of surplus. The net underlying cash strain in the UK, taking into account the future impactof PS06/14 and excluding the one-off items, is anticipated to be in the order of£80m. Our view is that the in-force surplus is likely to grow by £20m - £30m perannum and the net cash strain, in the absence of unforeseen events, isanticipated to be eliminated in 3 - 4 years. The International Life & Pensions businesses generated a cash surplus of £7m(2006: £8m). In the medium term, we would expect a modest cash strain as thebusinesses pursue their growth plans. The one-off positive item arises from reinsurance of FPP's annuities to SwissRe. The higher investment return arises from higher equity returns and a furtherreduction in the mark to market value of the corporate debt, partially offset bylower returns on fixed interest securities. In order to fund our future growth plans until the net cash strain iseliminated, our stand alone plan was to raise lower tier 2 debt of up to £500m.In the light of the proposed merger with Resolution, this funding plan has beenpostponed. The Group's long-term borrowings, including STICS (which are treated as equityin IFRS) are set out below: Long-term borrowings 30 June 31 Dec Coupon 2007 2006 % £m £mSubordinated liabilities:£260m F&C subordinated debt 2026 Various 258 258£10m Lombard undated subordinated loans Various 10 10Debenture loans:£280m Box Hill Life Finance plc securitisation notes - class A-1 due 2016 3m LIBOR + 0.20 54 198£100m Box Hill Life Finance plc securitisation notes - class A-2 due 2019 3m LIBOR + 0.23 100 100£230m F&C Commercial Property Trust (a policyholder investment) secured bonds due 2017 5.23 229 229€35m Lombard financial reinsurance treaty EURIBOR + 2.0 24 24£18m Friends Provident plc loan notes due LIBOR - 0.75 18 18 2011£26m Friends Provident plc loan notes due LIBOR - 0.75 26 - 2012Convertible bonds:£290m Friends Provident plc convertible bonds due 2007 5.25 287 283Total long-term borrowings 1,006 1,120Subordinated borrowings(designated as equity under IFRS):£300m Friends Provident plc STICS callable 2019 6.875 297 297£500m Friends Provident plc STICS callable 2015 6.292 495 495 Total long-term borrowings including STICS 1,798 1,912 Borrowings are valued on an IFRS basis, net of capitalised issue costs. Interest on the £260m F&C subordinated debt is 6.75% until 19 December 2016thereafter at 3m LIBOR + 2.69%. Of the £280m class A-1 securitisation notes, £144m was repaid in April 2007 as aresult of surplus emergence in 2006. The £290m convertible bonds have a final maturity date of 11 December 2007. Thebonds are due to be converted into ordinary shares at a conversion price of£1.71. Shareholders' equity Dividend The interim dividend declared for 2007 is 2.7 pence per share (2006: 2.65p), up2% and in line with our stated policy of dividend growth up to the rate ofinflation. This will be payable in November at a cost of £58m (2006: £56m). The annualised dividend cover calculation shows that the dividend is covered 1.1times (2006: 1.0 times) by IFRS underlying profit after tax and minorityinterests. At 30 June 2007, distributable reserves of Friends Provident plc andFriends Provident Life and Pensions Limited combined amounted to £820m. Market value At 30 June 2007, the Company's share price was £1.79 (31 December 2006: £2.17)and its market capitalisation amounted to £3,853m (31 December 2006: £4,603m).The share price of F&C, our listed Asset Management subsidiary, was £1.84 (31December 2006: £2.11) and its market capitalisation amounted to £888m (31December 2006: £1,018m). Our 52% holding in F&C amounted to £467m (31 December2006: £534m). Embedded value The embedded value, on a pro forma basis, has increased by 4% to £3,808m (31December 2006: £3,660m) and comprises: 30 June 31 Dec 2007 2006 £m £mShareholders' invested net assets 1,233 1,164Value of in-force Life & Pensions business 2,150 2,031Market value of Asset Management business 467 534Provision for future corporate costs (47) (47)Net pension asset/(liability) 5 (22)Pro forma embedded value 3,808 3,660Pro forma embedded value per share £1.77 £1.73 At 30 June 2007, the Shareholders' net assets were invested broadly in a mix of45% equities and 55% fixed interest securities and cash. Financial strength The Group remains financially strong and our financial standing has beenmaintained during the first half of 2007 despite the payment of our 2006 finaldividend and the acquisitions of Sesame and Pantheon Financial. We continue tomanage our business on the basis of our economic capital whilst ensuring that wecomply with all other capital requirements. These include the realistic solvencyrequirement for our FPLP with-profits business, our regulatory solvencyrequirements for the remainder of our businesses and our Group solvencyrequirements as detailed below. Life & Pensions capital position The total available capital resources, calculated in accordance with FRS 27 on arealistic basis for the FPLP With-Profits Fund and on a regulatory basis for allother funds, is £2.5bn (31 December 2006: £2.5bn). The regulatory capitalrequirement is £0.6bn (31 December 2006: £0.7bn). Therefore, the excess capitalresources over the capital requirement is £1.9bn (31 December 2006: £1.8bn). Thebulk of the Group's capital is held outside the with-profits funds and,consequently, can be deployed around the Group as required with a relativelyhigh degree of flexibility. Group solvency The Group is required to comply with the Insurance Groups Directive, whichrequires a very prudent measure of excess capital resources as it excludes anysurplus capital within the long-term funds. This is formally measured on anannual basis, and we estimate that at 30 June 2007, Group capital resourcesexceeded Group capital requirements by approximately £1.0bn (31 December 2006:£1.0bn). Financial strength ratings External agencies, such as Standard and Poor's, Moody's and Fitch regularlyperform independent assessments of the financial strength of life companies andpublish their ratings. There were no changes to the ratings up to 30 June 2007with Standard and Poor's rating for FP plc being A- with a stable outlook. Sincethe announcement of the proposed merger with Resolution plc, Standard and Poor'sand Moody's have both placed their ratings 'on creditwatch with negativeimplications' to reflect the current uncertainty regarding the proposed merger.Fitch have affirmed their ratings. FPLP Realistic solvency The assets and liabilities of the FPLP With-Profits Fund are valued on arealistic basis. Policyholder liabilities (including options and guarantees) arevalued using a market consistent stochastic model. At 30 June 2007, surplus assets amounted to £189m (31 December 2006: £220m) andthe Risk Capital Margin (RCM) was £189m (31 December 2006: £220m). Our objectiveis to manage the Fund so that, over time, the RCM should be covered by assetswithin the Fund. Accordingly any excess assets have been reserved forpolicyholders so that surplus assets are equal to the RCM. The FPLP With-Profits Fund Realistic Balance Sheet is resilient in the event offalls or rises in investment markets. This is due in large measure to theactions we have taken to hedge the provisions made to cover the cost ofguarantees and options. FPLP Regulatory solvency In addition to a realistic basis, the solvency for FPLP's With-Profits Fund isassessed on a regulatory basis. The two calculations are then compared and themore onerous requirement is applied. At 30 June 2007 and 31 December 2006 themore onerous requirement for FPLP has been the realistic basis. A summary of the 'twin peaks' test is set out below and has resulted in awith-profits insurance capital component of £1,196m (31 December 2006: £961m)and a regulatory surplus of £494m (31 December 2006: £514m). This regulatorysurplus represents the value of future transfers to shareholders from theWith-Profits Fund of FPLP. Realistic Regulatory 30 June 31 Dec 30 June 31 Dec 2007 2006 2007 2006 £m £m £m £mAvailable capital 189 220 Surplus 2,130 1,933Risk capital margin (189) (220) Long-term insurance capital requirements (440) (458)Realistic peak - - Regulatory peak 1,690 1,475 With-profits insurance capital component (1,196) (961)Surplus - - Surplus 494 514 The Free Asset Ratio (FAR) is a common measure of financial strength. It is theratio of assets less liabilities (including actuarial reserves but before thecapital requirements) expressed as a percentage of actuarial reserves. For FPLPit has increased to an estimated 24.7% at 30 June 2007 (31 December 2006:22.2%). The quality of our regulatory capital is very high and does not include anyimplicit items. Risk management Our actions to reduce financial risk in the business have continued to producetangible benefits, for example with our management of the staff pension scheme,the with-profits fund and the reinsurance of a portfolio of annuities. These areset out below. The Group seeks to take appropriate and managed risks in order to make superiorreturns for its shareholders and customers. The Board's vision for riskmanagement is an environment where business managers can take risks withconfidence, and where consideration of risk is embedded into business planning,decision-making and everyday management. Full details of the Group's riskmanagement framework are contained in our 2006 Report & Accounts. Risk appetite is an expression of the level of acceptable risk. The Board hasset risk appetite for the Group as a whole, and has approved more detailed riskappetite statements for the individual businesses. To manage our risks in linewith the Group's risk appetite, we have taken a number of specific actionsduring 2007, including: Staff pension scheme. The principal defined benefit scheme, Friends ProvidentPension Scheme, has a small surplus of £7m at 30 June 2007 (31 December 2006deficit of £31m). There are ongoing risk management activities in the pensionscheme including (i) closure of the scheme to new entrants in July 2007 with adefined contribution plan for new employees introduced (ii) the equity backingratio of the scheme has reduced to 40% in July (65% at 31 December 2006) and(iii) increased employee and employer contributions for those staff in thepension scheme. The deficit in respect of the F&C defined benefit pensionschemes has reduced to £25m (31 December 2006: £46m deficit). With-profits fund. The overall aim remains to balance risk to shareholders withmaximising returns to policyholders whilst ensuring guarantees are met as theyfall due. There are ongoing risk management activities in the FPLP with-profitsfund including (i) managing the proportion of equities and property backing theasset shares which was 57% at 30 June 2007 (54% at 31 December 2006) (ii)hedging strategies to mitigate market and interest rate risk and (iii) activemanagement of bonuses. Annuities. In April 2007, FPP entered into a reinsurance treaty with Swiss Re toreinsure the mortality and investment (but not expense) risks of FPP's in-forcepension annuity book with effect from 1 January 2007. The value of the statutoryliabilities reinsured was £1.7bn. FPP has retained the management of thepolicyholder relationship and policyholders will not see any change as a resultof this arrangement. Annuity business sold post 1 January 2007 is not covered bythis arrangement. BUSINESS COMBINATIONS During the first half of 2007, the Group acquired two intermediaries - theSesame Group Limited (Sesame) and Pantheon Financial Limited (PantheonFinancial), and settled the final earn-out in respect of Lombard. Sesame, which was acquired on 1 June 2007, is one of the largest providers ofsupport services to financial advisers in the UK including regulatorycompliance, training, research and technology. The consideration was £75m incash with a further balancing payment/receipt dependent on the completionbalance sheet. Pantheon Financial, which was acquired on 14 May 2007, is an independentfinancial adviser specialising in the high net worth and ultra high net worthmarkets. The initial consideration was for £16.8m in cash with potential furtherpayments (estimated at £15m) over the next three years depending on performance. The acquisition of these high quality businesses builds on our successfulstrategy to strengthen and develop our relationships with the distributioncommunity. The final earn-out payment in connection with the acquisition of Lombard wassettled in April 2007 and amounted to €126m. Of this sum €87m was settled inshares and €39m in loan notes. The final earn-out payment was €15m higher thanestimated at the 2006 year-end and has been added to goodwill. The totalconsideration in respect of Lombard amounted to €566m (£394m) as follows: Date •m £mJanuary 2005 initial consideration 265 187April 2005 first earn-out payment 90 62April 2006 second earn-out payment 85 59April 2007 final earn-out payment 126 86Total 566 394 Contents EEV resultsSummary consolidated income statement on an EEV basisConsolidated statement of recognised income and expense on an EEV basisConsolidated movement in ordinary shareholders' equity on an EEV basisConsolidated balance sheet on an EEV basisNotes to the EEV results IFRS resultsConsolidated income statement on an IFRS basisConsolidated underlying profit on an IFRS basisConsolidated balance sheet on an IFRS basisConsolidated statement of recognised income and expense on an IFRS basisSummary consolidated cash flow statement on an IFRS basisNotes to the IFRS results Summary consolidated income statement on an EEV basisFor the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 Notes £m £m £m------------------------ --------- ------- -------- --------Life & PensionsContribution from new business 2(b), 3(a) 95 89 204Profit from existing business: Expected return 108 106 207 Experience variances 20 (8) 7 Operating assumption changes - - (9)Development costs (19) (12) (26)Other net income 1 - -Expected return on shareholders' net assets within the Life & Pensions business 34 27 51------------------------ --------- ------- -------- --------Life & Pensions underlying profit 2(a) 239 202 434Asset Management underlying profit 32 51 89Expected return on net pension 4 3 9liabilityExpected return on corporate net assets (4) (3) (10)Corporate costs (7) (6) (13)------------------------ --------- ------- -------- --------Underlying profit before tax 264 247 509Investment return variances (48) (327) (174)Effect of economic assumption changes 162 219 181Non-recurring items 6 (12) (17)Amortisation of Asset Management acquired intangible assets (21) (22) (43)Impairment of Asset Management acquired intangible assets - (45) (58)------------------------ --------- ------- -------- --------Profit before tax 363 60 398 Tax (59) 10 (101)------------------------ --------- ------- -------- --------Profit for the period 304 70 297------------------------ --------- ------- -------- --------Attributable to: Ordinary shareholders of the parent 290 80 308 Minority interest 14 (10) (11)------------------------ --------- ------- -------- --------Profit for the period 304 70 297------------------------ --------- ------- -------- -------- Year Half year ended ended 30 June 31 Dec 2007 2006 2006Earnings per share pence pence pence------------------------ --------- ------- -------- -------- Basic earnings per share 4 13.6 3.8 14.6 Diluted basic earnings per share 4 13.6 3.8 14.2 Underlying earnings per share 4 8.9 8.0 16.4------------------------ --------- ------- -------- -------- EEV underlying profit is a measure of profit which excludes profit generatedwithin policyholder funds that is not allocated to shareholders. Managementconsider that underlying profit better reflects the performance of the Group andfocus on this measure of profit in its internal monitoring of the Group's EEVresults. EEV underlying profit is based on expected investment return andexcludes: (i) amortisation and impairment of Asset Management acquiredintangible assets (ii) effect of economic assumption changes (iii) non-recurringitems; and is stated after deducting interest payable on STICS. Consolidated statement of recognised income and expense on an EEV basis For the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m---------------------------- -------- ------- -------Actuarial gains/(losses) on defined benefit plans net of tax 35 5 (8)Foreign exchange adjustments - (1) (2)---------------------------- -------- ------- -------Net income/(expense) recognised directly in equity 35 4 (10)Profit for the period 304 70 297---------------------------- -------- ------- -------Total recognised income and expense for the period 339 74 287---------------------------- -------- ------- -------Attributable to: Ordinary shareholders of the parent 321 80 300 Minority interest 18 (6) (13)---------------------------- -------- ------- -------Total recognised income and expense for the period 339 74 287---------------------------- -------- ------- ------- Consolidated movement in ordinary shareholders' equity on an EEV basis For the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------------- ------- ------- -------Total recognised income and expense for the period attributable to ordinary shareholders of the parent 321 80 300Dividends on equity shares (110) (108) (164)Share based payments (impact on EEV reserves) 6 5 12Earn-out payments 2 (59) (87)----------------------------- ------- ------- -------Increase in EEV reserves for the period 219 (82) 61Share based payments (impact on share capital and share premium) 1 12 13----------------------------- ------- ------- -------Net addition to ordinary shareholders' equity 220 (70) 74At beginning of period 3,520 3,446 3,446----------------------------- ------- ------- -------At end of period 3,740 3,376 3,520----------------------------- ------- ------- ------- Consolidated balance sheet on an EEV basisAt 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 Notes £m £m £m------------------------- ------ -------- -------- -------AssetsValue of in-force Life & Pensions business 9 2,150 2,083 2,031Intangible assets 5 683 676 665Property and equipment 83 72 80Investment properties 2,554 2,172 2,426Investment in associates and joint venture 15 14 15Financial assets 45,711 41,816 45,150Deferred acquisition costs 6 11 11 11Reinsurance assets 1,751 141 98Current tax assets 3 3 30Insurance and other receivables 1,084 886 647Cash and cash equivalents 3,654 2,946 3,581------------------------- ------ -------- -------- -------Total assets 57,699 50,820 54,734------------------------- ------ -------- -------- ------- LiabilitiesInsurance contracts 13,135 13,968 13,762Fund for future appropriations 415 436 439Financial liabilities- Investment contracts 34,363 28,739 32,451- Interest bearing loans and borrowings 1,790 1,975 2,045Net asset value attributable to unit 1,013 682 941holdersProvisions 197 236 187Deferred tax liabilities 197 51 166Current tax liabilities 56 118 116Insurance payables, other payables and deferred income 2,229 720 559------------------------- ------ -------- -------- -------Total liabilities 53,395 46,925 50,666------------------------- ------ -------- -------- ------- Equity attributable to: Ordinary shareholders of the parent 3,740 3,376 3,520 Minority interest 564 519 548------------------------- ------ -------- -------- -------Total equity 4,304 3,895 4,068------------------------- ------ -------- -------- -------Total equity & liabilities 57,699 50,820 54,734------------------------- ------ -------- -------- ------- Notes to the EEV results 1. Methodology 1.1 Basis of preparation The EEV results presented in this document have been prepared in accordance withthe European Insurers' Chief Financial Officers Forum's EEV Principles issued inMay 2004 and the Additional Guidance issued in 2005. They provide supplementaryinformation for the period ended 30 June 2007. The EEV basis of reporting is designed to recognise profit as it is earned overthe term of the policy. The total profit recognised over the lifetime of thepolicy is the same as that recognised under the IFRS basis of reporting, but thetiming of recognition is different. The reported embedded value provides an estimate of the value of shareholders'interest in the covered business, excluding any value that may be generated fromfuture new business. This value comprises the sum of the shareholders' networth, the provision for future corporate costs and the value of existingbusiness. The shareholders' net worth is the net assets attributable toshareholders, and is represented by the sum of required capital and freesurplus. The value of existing business is the present value of the projectedstream of future distributable profits available to shareholders from theexisting business at the valuation date, on a best estimate basis allowing forrisk, adjusted for the cost of holding required capital. The supplementary information should be read in conjunction with the Group'sIFRS results. These contain information regarding the Group's financialstatements prepared in accordance with IFRS issued by the InternationalAccounting Standards Board and adopted for use in the EU. The Group's Report & Accounts for the year ended 31 December 2006 containfurther information on the methodologies applied in preparing the EEV result.There have been no significant changes to the methodologies used to preparethese interim results from those used to prepare the Group's Report & Accountsfor the year ended 31 December 2006. The results for covered business as reported under EEV principles are combinedwith the results for the remainder of the business reported in accordance withIFRS, except where EEV principles dictate otherwise. In particular the EEVprinciples have been applied to reflect Step-up Tier one Insurance CapitalSecurities (STICS) as debt rather than equity. In addition, a pro forma embedded value is reported showing ordinaryshareholders' funds on an EEV basis adjusted to include the F&C listedsubsidiary at market value. Shareholders' net assets on an EEV basis for the Group consist of the following: • Life & Pensions net assets; • the Group's share of its investment in the Asset Management business (including the net pension liability) on an IFRS basis; • corporate net assets; • the net pension asset of Friends Provident Pension Scheme (FPPS); • the provision for future corporate costs; and • 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 debtis valued at market value, consistent with the EEV guidance. EEV and other balance sheet items denominated in foreign currencies have beentranslated to sterling using the appropriate closing exchange rate. The newbusiness contribution and other income statement items have been translatedusing an average exchange rate for the relevant period. The EEV results were approved by the Board of Directors on 7 August 2007. 1.2 Covered business The covered business incorporates the Life & Pensions business defined aslong-term business by UK and overseas regulators. The Asset Management and IFA distribution businesses are not included within thedefinition of covered business. 1.3 Allowance for risk The allowance for risk in the shareholder cash flows is a key feature of the EEVPrinciples. The EEV guidance sets out three main areas where allowance should bemade for risk in an embedded value: • the risk discount rate; • the allowance for the cost of financial options and guarantees; and • 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 threeareas. 1.4 Deriving risk discount rates A market-consistent embedded value has been calculated for each product line byvaluing the cash flows in line with the prices of similar cash flows traded onthe open market. In principle, each cash flow is valued using the discount rate consistent withthat applied to such a cash flow in the capital markets. For example, an equitycash flow is valued using an equity risk discount rate, and a bond cash flow isvalued using a bond risk discount rate. If a higher return is assumed forequities, the equity cash flow is discounted at this higher rate. In practice, for liabilities where the payouts are either independent or movelinearly with market movements, a method known as the 'certainty equivalentapproach' has been applied whereby all assumed assets earn the risk-free rateand all cash flows are discounted using the risk-free rate. This gives the sameresult as applying the method in the previous paragraph. A market-consistent cost of financial options and guarantees and amarket-consistent cost of holding required capital have also been calculated.The cost of financial options and guarantees includes additional allowance fornon-market risk within the With-Profits Fund. An additional provision has beenmade for operational risks. These are described in more detail within theGroup's Report & accounts for the year ended 31 December 2006. For presentational purposes, a set of risk discount rates has been derived foreach product line, and for in-force and new business, by calculating the riskdiscount rate under a traditional embedded value approach that gives the samevalue as that from the market-consistent embedded value determined above. Thesederived risk discount rates are a function of the assumptions used (eg equityrisk premium and corporate bond spreads). However, as the market-consistentapproach is used, these assumptions do not impact the level of embedded value: ahigher equity risk premium results in an exactly compensating higher riskdiscount rate. 1.5 Financial options and guarantees The burnthrough cost at 30 June 2007 of £28m (31 December 2006: £50m), is splitbetween £15m (31 December 2006: £30m) market risk and £13m (31 December 2006:£20m) non-market risk. The non-market risks include lapses, annuitant longevity,and operational risk within the With-Profits Fund. The allowance for non-marketrisks is made by consideration of the impact of extreme scenarios from oureconomic capital model. Significant amounts of new with-profits business are no longer written and theguarantee levels offered are lower, hence there is no material impact of theburnthrough 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 economiccapital. Regulatory capital includes prudent reserves as well as solvencymargin. Economic capital is determined from internal models, based on thecompany's risk appetite. EEV required capital is set at the higher of regulatory and economic capital.The regulatory requirements have increased as a result of the new businesswritten in 2007 but have reduced as a result of the reinsurance of FPP'sannuities. At the same time the EEV economic capital requirements have increasedas a result of more prudent assumptions. The net result of these changes arethat, in aggregate, the economic capital requirements are higher than regulatoryrequirements by approximately £150m (31 December 2006: £200m). Capital requirements under EEV amounted to £592m (31 December 2006: £652m). 1.7 Non-market risk A provision of £91m (31 December 2006: £85m) has been set up for operationalrisks in the shareholders' funds. This provision has been calculated bycomparing the mean impact of variations in operational risk, as modelled in theeconomic capital calculations, with the existing allowance for operational riskin specific accounting provisions and embedded value projection assumptions. This provision of £91m is equivalent to a 0.4% (31 December 2006: 0.4%) increasein the risk discount rate for UK Life & Pensions business and 0.8% (31 December2006: 0.8%) for International Life & Pensions business, recognising the higheroperational risks in international business. This impacts both embedded valueand the contribution from new business. 1.8 Expenses The EEV guidance requires companies to actively review expense assumptions, andinclude an allowance for holding company (corporate) costs and service companycosts. (a) Corporate costs Corporate costs relate to those costs incurred at the corporate level that arenot directly attributable to the Life & Pensions or the Asset Managementbusinesses. Under EEV methodology, corporate costs are classified as either ongoing costs ordevelopment and one-off costs. For 30 June 2007, £4m (30 June 2006: £4m) ofcorporate costs were regular ongoing corporate costs and £3m (30 June 2006: £2m)were development or one-off costs. Ongoing costs of £6m per annum have beencapitalised in accordance with EEV Principles. The impact is a provision of £47m(31 December 2006: £47m). (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 managementservices to the covered Life & Pensions business. F&C service fee profits in respect of covered Life & Pensions business are notcapitalised under the EEV methodology, as F&C is a separate business segmentwithin the Group and the arrangement between F&C and the Life & Pensionsbusiness is on an arm's length basis. Instead, these profits, approximately £4m(30 June 2006: £7m) are brought into the consolidated income statement on anIFRS basis, and F&C is brought into the pro forma embedded value at marketvalue. Productivity gains have been assumed within the EEV in respect of Internationalbusiness in anticipation of future business growth. The Lombard EEV has beenreduced by £14m (31 December 2006: £13m) for a projected expense overrun for theperiod to 2012. 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. 2. Segmental analysis (a) Life & Pensions EEV ProfitHalf year ended 30 June 2007 Year ended Half year ended Half year ended 31 Dec 30 June 2007 30 June 2006 2006 UK Intn'l Total UK Intn'l Total Total Notes £m £m £m £m £m £m £m------------------ ------- ------- ------- ------- ------- ------ ------ -------Contribution from new business (i) 2(b),3(a) 62 33 95 53 36 89 204Profit from existing business: Expected return 88 20 108 94 12 106 207 Experiencevariances (i)(ii) 19 1 20 (8) - (8) 7Operating assumption changes - - - - - - (9)Development costs (17) (2) (19) (12) - (12) (26)Other net income 1 - 1 - - - -Expected return on shareholders' net assets within the Life & Pensions business 33 1 34 27 - 27 51------------------ ------- ------- ------- ------- ------- ------ ------ -------Life & Pensions EEV underlying profit before tax 186 53 239 154 48 202 434Non-recurringitems (iii) 9 - 9 1 - 1 2Investment return variances 3(e) (174) 6 (168) (374) (17) (391) (186)Effect of economic assumption changes 157 5 162 214 5 219 180------------------ ------- ------- ------- ------- ------- ------ ------ -------Life & Pensions EEV profit before tax 178 64 242 (5) 36 31 430Attributed tax charge 3(f) (52) (10) (62) 1 (8) (7) (121)------------------ ------- ------- ------- ------- ------- ------ ------ -------Life & Pensions EEV profit for the period 126 54 180 (4) 28 24 309------------------ ------- ------- ------- ------- ------- ------ ------ ------- (i) The aggregate adverse impact of persistency within the UK contribution tonew business and UK and International experience variances was £7m. (ii) UK experience variances include the positive variance of £12m from thereinsurance of post-demutualisation annuity business in FPP to Swiss Re. Thebalance of other variances amount to £7m which includes part of the adverseimpact of persistency. (iii) Explanations of the non-recurring items are set out in note 3 to the IFRSsection. (b) New business marginHalf year ended 30 June 2007 Year ended Half year ended Half year ended 31 Dec 30 June 2007 30 June 2006 2006 UK Intn'l Total UK Intn'l Total Total --------------- -------- -------- -------- -------- -------- -------- --------Contribution from new business £62m £33m £95m £53m £36m £89m £204m--------------- -------- -------- -------- -------- -------- -------- --------Present Value of New Business Premiums (PVNBP) £2,257m £1,171m £3,428m £2,020m £1,012m £3,032m £7,074mMargin - PVNBP 2.7% 2.8% 2.8% 2.6% 3.6% 2.9% 2.9%--------------- -------- -------- -------- -------- -------- -------- -------- PVNBP equals new single premiums plus the expected present value of new regularpremium business. (c) Pro forma embedded valueAt 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m--------------------------- --------- -------- --------Ordinary shareholders' equity on an EEV basis 3,740 3,376 3,520Adjustment to the value of the listed Asset Management business to market value 68 75 140--------------------------- --------- -------- --------Pro forma embedded value 3,808 3,451 3,660--------------------------- --------- -------- --------Pro forma embedded value per share £1.77 £1.63 £1.73--------------------------- --------- -------- -------- (d) Summary consolidated balance sheet on an EEV basisAt 30 June 2007 30 June 2007 Intra 30 June 31 Dec Segmental -Group 2006 2006 analysis debt(iv) Total Total Total £m £m £m £m £m---------------------- ---------- -------- ------- -------- -------Life & Pensions - long-term funds 893 - 893 481 778Life & Pensions - shareholders' funds 400 795 1,195 1,119 1,214---------------------- ---------- -------- ------- -------- -------Life & Pensions net assets 1,293 795 2,088 1,600 1,992Corporate net assets (60) (795) (855) (853) (828)---------------------- ---------- -------- ------- -------- -------Shareholders' invested net assets (i) 1,233 - 1,233 747 1,164Attributable net asset value of the Asset Management business net of minority interest (ii), (iii) 399 - 399 609 394Net pension asset/(liability) ofFriends Provident Pension Scheme 5 - 5 (16) (22)---------------------- ---------- -------- ------- -------- -------Shareholders' net worth 1,637 - 1,637 1,340 1,536---------------------- ---------- -------- ------- -------- -------Provision for future corporate costs (47) (47) (47)Value of in-force Life & Pensions business 2,150 2,083 2,031---------------------- ---------- -------- ------- -------- -------Ordinary shareholders' net assets on an EEV basis 3,740 3,376 3,520---------------------- ---------- -------- ------- -------- -------Called-up share capital 217 214 214Share premium account 2,109 2,050 2,051EEV reserves 1,414 1,112 1,255---------------------- ---------- -------- ------- -------- -------Ordinary shareholders' equity on an EEV basis 3,740 3,376 3,520---------------------- ---------- -------- ------- -------- ------- (i) Within Shareholders' invested net assets is a £48m of acquired intangibleassets in relation to the purchase of the two IFA Group's, Sesame and PantheonFinancial. (ii) The attributable net asset value of the Asset Management business includesgoodwill of £333m at 30 June 2007 (31 December 2006: £333m) investmentmanagement contracts net of related tax, £99m (31 December 2006: £104m) andsoftware £1m (31 December 2006:£1m). (iii) The attributable net asset value of the Asset Management business includesthe value of the net pension liability of that business on an IAS 19 Employeebenefits basis, and is net of related tax. The net pension asset of FriendsProvident Pension Scheme (FPPS) is stated on an IAS 19 basis. (iv) Intra-group long-term debt is analysed as follows: Debt Interest payable Year Half year ended ended 30 June 30 June 31 Dec 30 June 31 Dec 2007 2006 2006 2007 2006 2006 £m £m £m £m £m £m----------------- --------- -------- ------- -------- -------- -------Due from F&C to FPLP - 205 - - 6 12Due from FPLPto Friends Provident plc 795 795 795 23 23 46----------------- --------- -------- ------- -------- -------- ------- (e) Life & Pensions net assets segmental information by business segment Year ended Half year ended Half year ended 31 Dec 30 June 2007 30 June 2006 2006 UK Intn'l Total UK Intn'l Total Total £m £m £m £m £m £m £m------------------ ------ ------ ------ ------ ------- ------ -------Life & Pensions net assets 1,252 41 1,293 987 23 1,010 1,197Value of in-force Life & Pensions business 1,566 584 2,150 1,579 504 2,083 2,031------------------ ------- ------ ------- ------ ------- ------- ------- 2,818 625 3,443 2,566 527 3,093 3,228------------------ ------- ------ ------- ------- ------- ------- ------- 3. Life & Pensions EEV profit (a) Contribution from new business The contribution from new business is calculated using economic assumptions atthe beginning of the period. The contribution from new business usingend-of-period economic assumptions was £91m (30 June 2006: £87m). The contribution from new business is quoted after cost of required capital andshare based payments. The table below gives the contribution before cost ofcapital and share based payments. Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m-------------------------------- ------- -------- -------Contribution from new business before cost of capital and share based payments 100 94 212Cost of share based payments (2) (1) (2)Cost of capital (3) (4) (6)-------------------------------- ------- -------- -------Contribution from new business 95 89 204-------------------------------- ------- -------- ------- (b) Profit from existing business - Life & Pensions Profit from existing Life & Pensions business comprises the expected return onthe value of in-force business at the start of the period plus the impact of anychanges in assumptions regarding future operating experience, changes in thereserving basis (other than economic assumption changes) and profits and lossescaused by differences between the actual experience for the period and theassumptions 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 betweenthe expected return on the assets backing the liabilities and the expectedchange in the market-consistent value of the liabilities. Effectively, thisapproach is similar to applying an unwind in the risk discount rate to the valueof the in-force business at the beginning of the year. However, the riskdiscount 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 rateaveraged across all future durations above. (c) Development costs - Life & Pensions Development costs represent investments made to improve future EEV profits, forexample by reducing expenses or increasing future new business volumes. Inparticular, the Life & Pensions costs represent investment in developingadvanced electronic trading systems, e-commerce related activities, and newbusiness service automation and improvement. (d) Expected return on shareholders' net assets The expected return on shareholders' net assets held within the Life & Pensionsbusiness comprises the return on the shareholders' net assets held by the lifeassurance companies within that business, using the investment returnassumptions used to calculate the embedded value at the beginning of the period. The expected return on corporate net assets is the expected investment return onassets held by Friends Provident plc and its non-life subsidiaries. It excludesthe expected return on the net pension liability and the result of the F&Cbusiness, which are shown separately in the summary consolidated incomestatement. (e) Investment return variance The split of the investment return variance in the Life & Pensions EEV profit isshown in the table below: Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------------- ------- -------- --------In respect of net assets at the start of year (38) (50) (16)In respect of covered business (88) (228) (122)----------------------------- ------- -------- --------Investment return variances after tax (126) (278) (138)----------------------------- ------- -------- --------Investment return variances before tax (168) (391) (186)----------------------------- ------- -------- -------- The investment return variance of £(38)m after tax relates to shareholder netassets. The investment return variance in respect of covered business comprises£(102)m after tax, relating to assets backing actuarial liabilities, and £14mafter tax, relating to the value of the in-force business. Together thesevariances amount to £(126)m after tax and £(168)m before tax. (f) Attributed tax charge EEV profits are calculated net of tax and then grossed up at the effective rateof shareholder tax. Except for the expected return on shareholders' net assetsthe full standard rate of UK corporation tax has been used to gross up after taxprofits on UK business and appropriate tax rates have been used for theInternational business. EEV deferred tax (UK and International) has beencalculated at the same rates as 2006. EEV tax will be reviewed at the year-endto ensure that it is calculated in accordance with best practice. Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m-------------------------- -------- -------- ---------Contribution from new business 24 22 51Profit from existing business 35 28 55Development costs (5) (4) (8)Expected return on shareholders' net assets within the Life & Pensions business 11 8 16Non-recurring items 3 - 1Investment return variances (43) (113) (48)Effect of economic assumption changes 48 66 54Prior year tax adjustments (11) - --------------------------- -------- -------- ---------Attributed tax charge 62 7 121-------------------------- -------- -------- --------- 4. Earnings per share Earnings per share have been calculated based on EEV underlying profit for theperiod attributable to ordinary shareholders of the parent, and on profit forthe period attributable to ordinary shareholders of the parent. The directorsbelieve the underlying earnings per share figure gives a better indication ofoperating performance. Basic and underlying earnings per share Half year ended Half year ended Year ended 30 June 2007 30 June 2006 31 Dec 2006 Per Per Per Earnings share Earnings share Earnings share £m pence £m pence £m pence ------------------------ -------- ------- -------- ------- -------- -------Profit after tax for the period attributable to ordinary shareholders of the parent 290 13.6 80 3.8 308 14.6Investment return variances 48 2.2 327 15.5 174 8.2Effect of economic assumption changes (162) (7.6) (219) (10.4) (181) (8.5)Amortisation and impairment of Asset Management acquired intangible assets 21 1.0 67 3.2 101 4.7Non-recurring items (6) (0.3) 12 0.6 17 0.8Tax charge on items excluded from underlying profit (5) (0.2) (71) (3.4) (32) (1.5)Minority interest on items excluded from underlying profit 4 0.2 (27) (1.3) (40) (1.9)------------------------ -------- ------- -------- ------- -------- -------Underlying profit after tax for the period attributable to ordinary shareholders of the parent 190 8.9 169 8.0 347 16.4------------------------ -------- ------- -------- ------- -------- ------- 30 June 30 June 31 Dec 2007 2006 2006 millions millions millions---------------------------- --------- ------------ ------------Weighted average number of ordinary shares 2,130 2,107 2,111---------------------------- --------- ------------ ------------ Diluted basic earnings per share Half year ended 30 June 2007 Half year ended 30 June 2006 Year Weighted Weighted ended average average 31 Dec number of number of 2006 ordinary Per ordinary Per Per earnings shares share earnings shares share share £m millions pence £m millions pence pence ---------------- -------- --------- ------- -------- --------- ------- ------Profit for the period attributable to ordinary shareholders of the parent 290 2,130 13.6 80 2,107 3.8 14.6Dilution (i) - 10 - - 6 - (0.4)---------------- -------- --------- ------- -------- --------- ------- ------Diluted profit after tax attributable to ordinary shareholders of the parent 290 2,140 13.6 80 2,113 3.8 14.2---------------- -------- --------- ------- -------- --------- ------- ------ (i) Details of dilution are set out in note 5 to the IFRS section. 5. Intangible assets on an EEV basis Investment management Goodwill contracts Other TotalCarrying amounts £m £m £m £m---------------------- -------- ------------ --------- -------At 30 June 2006 330 322 24 676At 31 December 2006 333 284 48 665At 30 June 2007 333 264 86 683---------------------- -------- ------------ --------- ------- (a) Goodwill Goodwill is the only intangible asset which has an indefinite useful life andhas been allocated as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------- ---------- -------- --------Asset Management 333 330 333----------------------- ---------- -------- -------- At 30 June 2007, there is no indication that goodwill has been impaired. Inaccordance with IAS 36 Impairment of Assets, goodwill is assessed for possibleimpairment each year by comparing the carrying value of goodwill for eachsegment with its recoverable amount. There has been no goodwill impairment charge in 2007 (30 June 2006: £nil). (b) Investment management contracts See note 7 in the IFRS section. (c) Other intangible assets Other intangible assets include £48m relating to investments in IFAs. Theanalysis of the net book value for each segment is as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m----------------------- ---------- -------- --------Life & Pensions 85 23 47Asset Management 1 1 1----------------------- ---------- -------- --------Total other intangible assets 86 24 48----------------------- ---------- -------- -------- The intangible assets relating to the purchase of the two IFA groups (see note10 to the IFRS results) have been determined provisionally using initialaccounting as permitted by IFRS 3 Business Combinations, and due to the closeproximity of the acquisitions to the balance sheet date, have been categorisedas 'other intangible assets' pending a detailed analysis. 6. Deferred acquisition costs Deferred acquisition costs of £11m (31 December 2006: £11m) relate to AssetManagement business. 7. Reconciliation of movement in pro forma embedded value Total UK Intn'l Life & Life & Life & Pensions Total Pensions Pensions EEV Other EEV £m £m £m £m £m------------------------- -------- -------- -------- --------- -------Pro forma embedded value at 31 December 2006 as originally stated 2,638 590 3,228 432 3,660Adjustment (i) 20 (20) - - -------------------------- -------- -------- -------- --------- ------- 2,658 570 3,228 432 3,660------------------------- -------- -------- -------- --------- -------Contribution from new business 62 33 95 - 95Profit from existing business- Expected return 88 20 108 - 108- Experience variances 19 1 20 - 20Development costs (17) (2) (19) - (19)Other net income 1 - 1 - 1Expected return onshareholders' net assets 33 1 34 - 34Other underlying items - - - 25 25------------------------- -------- -------- -------- --------- -------Underlying EEV profit beforetax 186 53 239 25 264Non-recurring items 9 - 9 (3) 6Investment return variances (174) 6 (168) 120 (48)Effect of economic assumptionchanges 157 5 162 - 162Other non-underlying items - - - (21) (21)------------------------- -------- -------- -------- --------- -------EEV profit before tax 178 64 242 121 363Tax (52) (10) (62) 3 (59)------------------------- -------- -------- -------- --------- -------EEV profit for the period 126 54 180 124 304Net movement recogniseddirectly inthe statement of recognisedincome and expense - - - 35 35Minority interest - - - (18) (18)Dividends on ordinary shares - 1 1 (111) (110)Share based payments - - - 7 7Earn-out payments - - - 2 2Acquisitions 34 - 34 (34) -Adjustment to the value ofthe listedAsset Management business tomarket value - - - (72) (72)------------------------- -------- -------- -------- --------- -------Total movement in EEV 160 55 215 (67) 148------------------------- -------- -------- -------- --------- -------Pro forma embedded valueat 30 June 2007 2,818 625 3,443 365 3,808------------------------- -------- -------- -------- --------- ------- (i) Re-allocation of net assets between businesses. Pro forma EEV comprises the EEV of the entire Group, incorporating the Group'sshare of F&C at market value of £467m (31 December 2006: £534m). 'Other' consists predominantly of Asset Management business and corporate items. 8. 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 andreserves At 1 January 2007 545 652 1,197 2,031 3,228------------------------- -------- -------- -------- -------- --------Contribution from newbusiness (160) 31 (129) 199 70Expected return onexisting business 1 - 1 75 76Experience variances,operatingassumption changes,developmentcosts andnon-recurring items 129 (82) 47 (38) 9Expected profit -transfer to net worth 135 (12) 123 (123) -Expected return onshareholder net worth 11 13 24 - 24Other net income 1 - 1 - 1Prior year taxadjustment 11 - 11 - 11Investment return variancesandeconomic assumptionchanges (7) (10) (17) 6 (11)------------------------- -------- -------- -------- -------- --------Life and Pensions EEV profitfor the period 121 (60) 61 119 180Dividend 1 - 1 - 1Acquisitions 34 - 34 - 34------------------------- -------- -------- -------- -------- --------Shareholders' capital andreservesAt 30 June 2007 701 592 1,293 2,150 3,443------------------------- -------- -------- -------- -------- -------- All items in the table above are shown net of tax. 9. Value of in-force Life & Pensions business on an EEV basis At 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m -------------------------------- ------------ -------- --------Value of in-force allowing for market risk(excludingtime value of options and guarantees) 2,316 2,288 2,215Time value cost of options and guarantees(including the impact of non-market risks) (28) (82) (50)Cost of regulatory solvency capital, plusexcesseconomic capital requirements (47) (39) (49)Provision for operational risks (91) (84) (85)-------------------------------- ------------ -------- --------Value of in-force Life & Pensions business 2,150 2,083 2,031-------------------------------- ------------ -------- -------- 10. Equity attributable to equity holders of the parent Ordinary shareholders' equity on an EEV basis reconciles to equity attributableto equity holders of the parent on an IFRS basis as follows: 30 June 30 June 31 Dec 2007 2006 2006 £m £m £m ------------------------------- --------- ---------- --------Ordinary shareholders' equity on an EEVbasis 3,740 3,376 3,520 Less items only included on an EEV basis:Value of in-force Life & Pensions business (2,150) (2,083) (2,031)Provision for future corporate costs 47 47 47Adjustment of long term debt to marketvalue (13) 73 105 Add items only included on an IFRS basis:Goodwill 339 257 283Other intangible assets 64 74 68Acquired PVIF 247 271 257STICS treated as equity 794 794 810Deferred acquisition costs 1,151 1,087 1,100Deferred front end fees (44) (85) (45)IFRS reserving and other IFRS adjustments (540) (423) (497)------------------------------- --------- ---------- --------Equity attributable to equity holders of theparent on an IFRS basis 3,635 3,388 3,617------------------------------- --------- ---------- -------- 11. EEV assumptions (a) Principal economic assumptions - deterministic Economic assumptions are actively reviewed and are based on the market yields onrisk-free assets at the valuation date. 30 June 30 June 31 Dec 2007 2006 2006UK and International (excluding Lombard): % % %------------------------------- --------- ---------- --------Risk-free rate (i) 5.3 4.7 4.6Investment returns before tax:Fixed interest 4.6-6.1 4.4-5.2 3.9-5.9Equities 8.3 7.7 7.6Properties 7.3 6.7 6.6Future expense inflation:UK business 4.6 4.1 4.3International business 4.6 3.4 4.3UK and OLAB corporation tax rate 30.0 30.0 30.0Isle of Man corporation tax rate 0.0 0.0 0.0Risk discount rate (average):In-force (UK business) 8.1 8.1 7.7In-force (International business) 7.4 6.8 6.8Risk discount rate:New business (UK business) 8.0 6.7 7.2New business (International business) 7.2 6.4 6.5------------------------------- --------- ---------- -------- (i) For UK and FPI business the risk-free rate is set with reference to the giltyield curve at the valuation date. For annuity and with-profits business, aterm-dependent rate allowing for the shape of the yield curve is used as thiscan significantly impact value. For other business, a rate based on theannualised 15-year gilt yield is used. 30 June 30 June 31 Dec 2007 2006 2006Lombard: % % %-------------------------- ---------- -------- --------Risk-free rate 4.8 4.4 4.1Investment returns before tax 6.1 5.7 5.5Future expense inflation 4.1 3.7 4.0Tax rate 25.2 25.8 25.2Risk discount rate (average) - in-force 7.7 7.2 7.0Risk discount rate (average) - new business 7.4 7.2 7.0-------------------------- ---------- -------- -------- The key exchange rates used in respect of Lombard business were a closingexchange rate of 1 Euro = £0.6731 (30 June 2006: 1 Euro = £0.6913) and anaverage exchange rate over the half year of 1 Euro = £0.6762. Margins are added to the risk-free rates to obtain investment return assumptionsfor equity and property. For corporate fixed interest securities the investmentreturn assumptions are derived from an AA-bond yield spread, limited to theactual return on the underlying assets. As we have followed a market-consistentapproach, these investment return assumptions affect only the derived riskdiscount rates and not the embedded value result. Maintenance expenses for UK and International business (excluding Lombard) areassumed to increase in the future at a rate of 1% per annum in excess of theassumed long-term rate of retail price inflation. This is derived from thedifference between the risk-free rate of return and the average of the FTSEActuaries over five-year index-linked gilt yield at 5% and 0% inflation. For Lombard the risk-free rate is the average of the 10-15 year and the over 15year yields using the EuroMTS indices. The investment return assumption is theweighted average (based on an assumed asset mix) of returns on fixed interestsecurities, equities and cash. The Lombard investment return assumption is showngross of tax, but net of fund management charges. Average derived risk discount rates are shown below for the embedded value andthe contribution from new business. The average derived risk discount rate forin-force has increased over 2007 due mainly to a higher risk-free rate. Themarket risk on annuities has fallen owing to a narrowing of corporate bondspreads. There is a reduction in the element of the risk discount rate relatingto options on with-profits business which reflects the reduction in burnthroughcost. A more detailed split of the derived risk discount rates is given in thefollowing table. Derived risk discount rates by product type Derived risk discount rates for new business have been based on end-of-periodeconomic assumptions. 30 June 2007 UK with- UK Other Average International profits annuity UK UK Sterling EuroEmbedded value % % % % % %----------------- --------- -------- ------- -------- -------- ------Risk-free rate 5.3 5.3 5.3 5.3 5.3 4.8Market risks 2.5 6.2 1.8 2.1 1.3 2.1(non-options)Options - market risks 1.5 - - 0.2 - -Options - non-market 1.3 - - 0.1 - -risksOther non-market risks 0.4 0.4 0.4 0.4 0.8 0.8----------------- --------- -------- ------- -------- -------- ------Risk discount rate 11.0 11.9 7.5 8.1 7.4 7.7----------------- --------- -------- ------- -------- -------- ------ 31 December 2006 UK with- UK Other Average International profits annuity UK UK Sterling EuroEmbedded Value % % % % % %----------------- --------- -------- ------- --------- -------- ------Risk-free rate 4.6 4.6 4.6 4.6 4.6 4.1Market risks 2.7 7.6 1.6 2.2 1.4 2.1(non-options)Options - market risks 2.6 - - 0.3 - -Options - non-market 1.8 - - 0.2 - -risksOther non-market risks 0.4 0.4 0.4 0.4 0.8 0.8----------------- --------- -------- ------- --------- -------- ------Risk discount rate 12.1 12.6 6.6 7.7 6.8 7.0----------------- --------- -------- ------- --------- -------- ------ 30 June 2007 International UK Sterling EuroContribution from new business % % %---------------------- ---------------------- -------- ------Risk-free rate 5.3 5.3 4.8Market risks 2.3 1.1 1.8Non-market risks 0.4 0.8 0.8---------------------- ---------------------- -------- ------Risk discount rate 8.0 7.2 7.4---------------------- ---------------------- -------- ------ 31 December 2006 International UK Sterling EuroContribution from new business % % %--------------------------------- ----------- -------- ------Risk-free rate 4.6 4.6 4.1Market risks 2.2 1.1 2.1Non-market risks 0.4 0.8 0.8--------------------------------- ----------- -------- ------Risk discount rate 7.2 6.5 7.0--------------------------------- ----------- -------- ------ With-profits and annuity business are subject to more investment risk than theremaining business, and so the appropriate risk discount rates are higher. (b) Principal economic assumptions - stochastic The cost of options and guarantees is determined using The Smith Model Pluseconomic scenario generator. The model is calibrated to market conditions at thevaluation date and correlations between the asset classes are derived fromhistoric data, consistent with the model used for the Realistic Balance Sheet. Risk-free rates are calibrated to the Gilt yield curve. Equity volatility iscalibrated to replicate the implied volatility of FTSE 100 put options held bythe FPLP With-Profits Fund. Property holdings are modelled as a mix of equityand gilt assets, calibrated to derive a level of running yield and volatility asobserved in historical data. Sample implied volatilities by asset class 30 June 2007 Term (years) 5 15 25 35---------------------- -------- --------- -------- -------15-year risk-free zero coupon bonds 7.4% 4.9% 4.6% 5.3%15-year corporate bonds 9.4% 8.4% 7.2% 9.2%Equity 18.4% 19.0% 20.5% 21.8%Property 15.5% 16.3% 17.7% 19.1%---------------------- -------- --------- -------- ------- 31 December 2006 Term (years) 5 15 25 35---------------------- -------- --------- -------- -------15-year risk-free zero coupon bonds 7.1% 4.7% 4.6% 5.1%15-year corporate bonds 9.4% 8.6% 8.3% 8.8%Equity 17.1% 18.2% 19.6% 20.8%Property 15.1% 16.4% 17.9% 19.0%---------------------- -------- --------- -------- ------- The volatility represents the variation of return around the average for theparticular asset class. Bonus rates are set at levels which fully utilise the assets supporting thein-force business over its lifetime and are consistent with the economicassumptions and the Group's bonus policy. (c) Other assumptions Other assumptions are regularly reviewed having regard to past, current andexpected future experience, and any other relevant data. These are set so as tobe best estimate assumptions. The assumed rates of mortality, morbidity, lapse, surrender, conversion topaid-up and early retirement, which are reviewed annually, have been derivedfrom analyses of the Group's recent operating experience and industry studies.In particular, improvements in annuitant mortality have been assumed to followthe medium cohort for males and 75% of this for females. Allowance for commission is based on the Group's recent experience. Consolidated income statement on an IFRS basis For the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 Notes £m £m £m------------------------------ ------- -------- ------- -------Revenue Gross earned premiums 507 489 980Premiums ceded to reinsurers (1,732) (49) (84)------------------------------ ------- -------- ------- -------Net earned premiums (1,225) 440 896 Fee and commission income and incomefrom service activities 286 258 565Investment income 1,443 437 3,697------------------------------ ------- -------- ------- -------Total revenue 504 1,135 5,158------------------------------ ------- -------- ------- ------- Claims, benefits and expenses Gross claims and benefits paid 818 816 1,587Amounts receivable from reinsurers (86) (22) (43)------------------------------ ------- -------- ------- -------Net claims and benefits paid 732 794 1,544------------------------------ ------- -------- ------- ------- Insurance contracts liabilities (2,264) (690) (764)Investment contracts liabilities 1,342 434 2,620Transfer to fund for future appropriations (6) 43 19Movement in net assets attributable to unitholders 63 12 131------------------------------ ------- -------- ------- -------Movement in policyholder liabilities (865) (201) 2,006------------------------------ ------- -------- ------- ------- Acquisition expenses 201 126 412 Administrative and other expenses 272 324 618Finance costs 63 44 88------------------------------ ------- -------- ------- -------Total claims, benefits and expenses 403 1,087 4,668------------------------------ ------- -------- ------- ------- Share of profit of associates and joint 1 - 1venture ------- -------- ------- ------------------------------------- Profit before tax from continuing 102 48 491operations Policyholder tax (19) (5) (124)------------------------------ ------- -------- ------- ------- Profit before shareholder tax fromcontinuing operations 83 43 367------------------------------ ------- -------- ------- -------Total tax credit/(charge) 5 8 (70)Policyholder tax 19 5 124------------------------------ ------- -------- ------- -------Shareholder tax 24 13 54------------------------------ ------- -------- ------- -------Profit for the period 2 107 56 421------------------------------ ------- -------- ------- -------Attributable to:Equity holders of the parent: (i)Ordinary shareholders 47 (12) 276Other equity holders 26 26 52------------------------------ ------- -------- ------- ------- 73 14 328Minority interest 34 42 93------------------------------ ------- -------- ------- -------Profit for the period 107 56 421------------------------------ ------- -------- ------- -------Earnings per shareBasic earnings/(loss) per share (pence) 5(a) 2.2 (0.6) 13.1Diluted earnings/(loss) per share (pence) 5(b) 2.2 (0.6) 12.8------------------------------ ------- -------- ------- ------- (i) All profit attributable to equity holders of the parent is from continuingoperations. Consolidated underlying profit on an IFRS basis For the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 Notes £m £m £m----------------------------- ------ ------- ------- -------Profit before tax from continuing operations 102 48 491Policyholder tax (19) (5) (124)Returns on Group-controlled fundsattributableto third parties (30) (52) (104)----------------------------- ------ ------- ------- -------Profit before tax excluding profitgenerated within policyholder funds 53 (9) 263Non-recurring items 3 (6) 12 17Amortisation of Asset Management acquiredintangible assets 21 22 43Amortisation of acquired present value ofin-force business 13 12 25Amortisation of Life & Pensions acquiredintangible assets 4 4 7Impairment of Asset Managementacquired intangible assets 7 - 45 58Interest payable on Step-up Tier oneInsurance Capital Securities (STICS) (26) (26) (52)Short-term fluctuations in investment return 52 60 39----------------------------- ------ ------- ------- -------Underlying profit before tax 111 120 400Tax on underlying profit (3) (22) 6Minority interest in underlying profit (10) (17) (29)----------------------------- ------ ------- ------- -------Underlying profit after tax attributable toordinary shareholders of the parent 98 81 377----------------------------- ------ ------- ------- -------Earnings per shareUnderlying earnings per share (pence) 5(a) 4.6 3.8 17.9----------------------------- ------ ------- ------- ------- IFRS underlying profit is a measure of profit which excludes profit generatedwithin policyholder funds that is not allocated to shareholders. Managementconsider that underlying profit better reflects the ongoing performance of theGroup and focus on this measure of profit in its internal monitoring of theGroup's IFRS results. IFRS underlying profit is based on longer-term investment return and excludes:(i) policyholder tax, (ii) returns attributable to minority interests inpolicyholder funds, (iii) non-recurring items, (iv) amortisation and impairmentof acquired intangible assets and present value of acquired in-force business;and is stated after deducting interest payable on STICS. Consolidated balance sheet on an IFRS basis At 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 Notes £m £m £m-------------------------- ------ -------- -------- --------Assets Intangible assets 7 1,434 1,476 1,405Property and equipment 83 72 80Investment properties 2,554 2,172 2,426Investments in associates and joint 15 14 15ventureFinancial assets 45,711 41,816 45,150Deferred acquisition costs 1,162 1,098 1,111Reinsurance assets 1,737 194 85Current tax assets 3 3 30Insurance and other receivables 1,042 841 606Cash and cash equivalents 3,654 2,946 3,581-------------------------- ------ -------- -------- --------Total assets 57,395 50,632 54,489-------------------------- ------ -------- -------- -------- Liabilities Insurance contracts 13,135 13,968 13,762Fund for future appropriations 433 455 439Financial liabilities- Investment contracts 34,761 29,068 32,821- Interest bearing loans and borrowings 1,020 1,108 1,130Net asset value attributable to unit 1,013 682 941holdersProvisions 150 276 215Deferred tax liabilities 337 223 318Current tax liabilities 56 118 116Insurance payables, other payablesand deferred income 2,301 827 582-------------------------- ------ -------- -------- --------Total liabilities 53,206 46,725 50,324-------------------------- ------ -------- -------- -------- Equity attributable to equityholders of the parentAttributable to ordinary shareholders:Share capital 8 217 214 214Share premium 8 2,109 2,050 2,051Other reserves 8 515 330 542-------------------------- ------ -------- -------- -------- 2,841 2,594 2,807Attributable to other equity holders 8 794 794 810-------------------------- ------ -------- -------- -------- 3,635 3,388 3,617 Minority interest 8 554 519 548-------------------------- ------ -------- -------- -------- Total equity 8 4,189 3,907 4,165-------------------------- ------ -------- -------- -------- Total equity and liabilities 57,395 50,632 54,489-------------------------- ------ -------- -------- -------- Consolidated statement of recognised income and expense on an IFRS basis For the half year ended 30 June 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 definedbenefit schemes netof tax 31 - 31 4 35Foreign exchangeadjustments (1) - (1) - (1)Revaluation of owneroccupied properties 2 - 2 - 2Shadow accounting (2) - (2) - (2)------------------------ ---------- --------- --------- -------- ------Net income recogniseddirectly in equity 30 - 30 4 34Profit for theperiod 47 26 73 34 107------------------------ ---------- --------- --------- -------- ------Total recognised incomeandexpense for theperiod 77 26 103 38 141------------------------ ---------- --------- --------- -------- ------ For the half year ended 30 June 2006 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 definedbenefit schemes netof tax 1 - 1 4 5Foreign exchangeadjustments 8 - 8 - 8------------------------ ---------- --------- --------- -------- ------Net expense recogniseddirectly in equity 9 - 9 4 13Profit for theperiod (12) 26 14 42 56------------------------ ---------- --------- --------- -------- ------Total recognised incomeandexpense for theperiod (3) 26 23 46 69------------------------ ---------- --------- --------- -------- ------ For the year ended 31 December 2006 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 (losses)/gainson defined benefit schemes net of tax (8) - (8) 1 (7)Foreign exchangeadjustments (10) - (10) (2) (12)Revaluation of owneroccupied properties 6 - 6 - 6Shadow accounting (6) - (6) - (6)------------------------ ---------- --------- --------- -------- ------Net expense recogniseddirectly in equity (18) - (18) (1) (19)Profit for theperiod 276 52 328 93 421------------------------ ---------- --------- --------- -------- ------Total recognised incomeand expense for theperiod 258 52 310 92 402------------------------ ---------- --------- --------- -------- ------ Summary consolidated cash flow statement on an IFRS basis For the half year ended 30 June 2007 Year Half year ended ended 30 June 31 Dec 2007 2006 2006 £m £m £m-------------------------------- ------- ------- -------Operating activitiesProfit for the period 107 56 421Net increase in operational assets and liabilities 353 602 991-------------------------------- ------- ------- -------Pre-tax cash inflow from operating activities 460 658 1,412Tax paid (1) (65) (86)-------------------------------- ------- ------- -------Net cash inflow from operating activities 459 593 1,326-------------------------------- ------- ------- -------Investing activitiesAcquisition of subsidiaries, net of cash acquired (i) 5 (41) (21)Reduction in participation in subsidiaries,net of cash disposed - 50 49Compensation from mandate loss - 27 27Additions to internally generated intangible assets (13) (6) (18)Purchase of property and equipment (4) (6) (11)-------------------------------- ------- ------- -------Net cash (outflow)/inflow frominvesting activities (12) 24 26-------------------------------- ------- ------- -------Financing activitiesFinance costs (59) (42) (81)STICS interest (42) (42) (52)Proceeds from issue of long term debt, net ofexpenses - - 258Repayment of long term debt (144) (83) (312)Net movement in other borrowings, net of expenses 7 17 12Dividends paid to equity holders of the parent (110) (108) (164)Dividends paid to minority interest (26) (27) (46)-------------------------------- ------- ------- -------Net cash outflow from financing activities (374) (285) (385)-------------------------------- ------- ------- -------Increase in cash and cash equivalents 73 332 967-------------------------------- ------- ------- -------Balance at beginning of period 3,581 2,614 2,614-------------------------------- ------- ------- -------Balance at end of period 3,654 2,946 3,581-------------------------------- ------- ------- ------- (i) This amount consists of cash settled consideration of £92m plus acquisitioncosts of £2m, net of cash acquired of £99m. See note 10 for further details ofacquisitions in the period. This information is provided by RNS The company news service from the London Stock Exchange

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