Interim Results - Part 2

13th Sep 2005 07:04

Friends Provident PLC13 September 2005 PART 2 Consolidated income statement on an IFRS basis Half year ended 30 June 2005 Half Half year year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 Notes £m £m £m----------------------------- ------ -------- -------- -------Revenues Gross earned premiums on insurancecontracts 493 677 1,305Less premiums ceded to reinsurers (20) (20) (50)----------------------------- ------ -------- -------- -------Net earned premiums on insurance contracts 473 657 1,255Fee and commission income and income from service activities 248 108 258Net gains on assets at fair value 2,417 600 3,151----------------------------- ------ -------- -------- -------Total revenues 2 3,138 1,365 4,664----------------------------- ------ -------- -------- ------- Benefits, losses and expensesClaims paid and benefits on insurance contracts 772 897 1,769Less amounts receivable from reinsurers (19) (13) (31)----------------------------- ------ -------- -------- -------Net claims paid and benefits on insurance contracts 753 884 1,738Movement in insurance contract liabilities 536 (289) 540Movement in fair value of investment contract liabilities 1,036 320 1,282Transfer to the fund for future appropriations 58 37 95Movement in net assets attributable to unit holders 41 35 71----------------------------- ------ -------- -------- -------Net movement in policyholder liabilities 1,671 103 1,988Net acquisition expenses 135 105 212Administration expenses 209 124 261Investment expenses and charges 49 34 66Finance costs 40 36 71Other expenses 85 45 141----------------------------- ------ -------- -------- -------Total benefits, losses and expenses 2,942 1,331 4,477----------------------------- ------ -------- -------- -------Profit before tax from continuing operations 2 196 34 187----------------------------- ------ -------- -------- -------Policyholder tax (79) - (47)----------------------------- ------ -------- -------- -------Profit before shareholder tax fromcontinuing operations 117 34 140 Total tax expense (79) 8 (46)Less policyholder tax 79 - 47----------------------------- ------ -------- -------- -------Shareholder tax - 8 1----------------------------- ------ -------- -------- -------Profit after tax from continuingoperations 117 42 141----------------------------- ------ -------- -------- ------- Profit/(loss) after tax from discontinuedoperations 11 8 (2) 18----------------------------- ------ -------- -------- -------Profit after tax 125 40 159----------------------------- ------ -------- -------- ------- Attributable to:Equity holders of the parent 103 40 143Minority interest 22 - 16----------------------------- ------ -------- -------- ------- 125 40 159----------------------------- ------ -------- -------- -------Basic earnings per share (pence) from continuing operations 5 5.0 2.3 7.9Diluted earnings per share (pence) from continuing operations 5 5.0 2.3 7.9----------------------------- ------ -------- -------- ------- Underlying profit before tax and reconciliation to profit before tax Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 Notes £m £m £m---------------------------- ------ --------- -------- -------Underlying profit before tax 125 101 171Non recurring items 3 (29) (9) (55)Amortisation of acquired intangible assets (32) (5) (21)Amortisation of present value of acquired in-force business (14) (6) (10)Short term fluctuations in investment return 44 (38) 27Variation in value of equity option on convertible debt (9) (10) (10)---------------------------- ------ --------- -------- -------Profit before tax attributable toshareholders 85 33 102Policyholder tax 97 1 85Returns on Group controlled fundsattributable tothird parties 14 - ----------------------------- ------ --------- -------- -------Profit before tax from continuingoperations 196 34 187---------------------------- ------ --------- -------- ------- Underlying profit represents profit (based on longer-term investment return)excluding returns on Group controlled funds attributable to third parties andbefore impairment of goodwill, amortisation and impairment of acquiredintangible assets and the present value of in-force business and non-recurringitems. Consolidated balance sheet on an IFRS basisAt 30 June 2005 30 June 30 June 31 Dec 2005 2004 2004 Notes £m £m £m-------------------------- ------- --------- --------- ---------AssetsIntangible assets:Goodwill 646 368 586Present value of acquired in-force business 382 182 177Investment management contracts 552 84 590Other 129 38 35-------------------------- ------- --------- --------- --------- 1,709 672 1,388-------------------------- ------- --------- --------- ---------Property, plant and equipment 71 155 168 Investments:Investment property 1,791 1,528 1,527Investment in associates 5 5 5Other investments 38,041 29,544 31,112-------------------------- ------- --------- --------- --------- 39,837 31,077 32,644-------------------------- ------- --------- --------- ---------Deferred acquisition expenses 870 662 743Amounts recoverable under reinsurance ceded 136 7 112 Debtors and other assets:Income tax receivable 41 31 49Other receivables 399 353 255Other assets 283 296 293Cash and cash equivalents 2,357 1,107 2,249-------------------------- ------- --------- --------- --------- 3,080 1,787 2,846-------------------------- ------- --------- --------- ---------Total assets 45,703 34,360 37,901-------------------------- ------- --------- --------- --------- LiabilitiesInsurance contracts 14,789 13,307 14,230Investment contracts 23,562 16,755 17,880Fund for future appropriations 156 85 161Interest bearing loans and borrowings 1,700 879 1,217Accruals and deferred income 414 145 306Other payables 914 711 847Provisions 295 78 185Net asset value attributable to unit holders 749 525 576-------------------------- ------- --------- --------- ---------Total liabilities 42,579 32,485 35,402-------------------------- ------- --------- --------- ---------EquityShare capital 8 214 172 199Share premium 8 2,035 1,447 1,799Reserves 8 471 332 421-------------------------- ------- --------- --------- ---------Equity attributable to equity holders of the parent 8 2,720 1,951 2,419-------------------------- ------- --------- --------- ---------Minority interest 404 (76) 80-------------------------- ------- --------- --------- ---------Total equity and liabilities 45,703 34,360 37,901-------------------------- ------- --------- --------- --------- Consolidated statement of recognised income and expenses on an IFRS basisHalf year ended 30 June 2005 Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m-------------------------------- -------- -------- -------Actuarial gains/(losses) on defined benefit plans 5 (1) (9)Profit on deemed disposal of share in asset management business - - 36Foreign exchange (losses)/gains on other movements (28) - 2Deferred tax 5 - 1-------------------------------- -------- -------- -------Net income recognised directly in equity (18) (1) 30Profit for the period after tax 125 40 159-------------------------------- -------- -------- -------Total recognised income and expenses for the period 107 39 189-------------------------------- -------- -------- -------Attributable to:Equity holders of the parent 93 38 174Minority interest 14 1 15-------------------------------- -------- -------- ------- 107 39 189-------------------------------- -------- -------- ------- Consolidated cash flow statement on an IFRS basis*Half year ended 30 June 2005 Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m------------------------------ ---------- -------- -------Operating activitiesProfit after tax 125 40 159Net (decrease)/increase in operational assets/liabilities (736) 112 824------------------------------ ---------- -------- -------Net cash (outflow)/inflow from operating activities (611) 152 983------------------------------ ---------- -------- -------Investing activitiesPurchase of internally generated intangible assets (6) (6) (13)Acquisition of subsidiaries, net of cash acquired 400 (20) (182)Acquisition of property, plant and equipment (7) (12) (41)Disposal of subsidiaries, net of cash disposed of 2 - ------------------------------- ---------- -------- -------Net cash used in investing activities 389 (38) (236)------------------------------ ---------- -------- -------Financing activitiesIssue of share capital, net of expenses - 1 230Issue of share capital by subsidiary undertakings, net of expenses 1 - -Proceeds from issue of long term debt, net of expenses 495 - 374Net movement in other borrowings (3) 33 17Finance costs (36) (25) (76)Dividends paid to equity holders of the parent (103) (84) (134)Dividends paid to minority interest (16) (3) (5)Cash received in respect of unclaimed demutualisation shares - - 25------------------------------ ---------- -------- -------Net cash inflow/(outflow) from financing activities 338 (78) 431------------------------------ ---------- -------- -------Increase in cash and cash equivalents 116 36 1,178------------------------------ ---------- -------- -------Exchange losses on cash and cash equivalents (8) - -Cash and cash equivalents at beginning of period 2,249 1,071 1,071------------------------------ ---------- -------- -------Cash and cash equivalents at end of period 2,357 1,107 2,249------------------------------ ---------- -------- -------*Under IFRS, the cashflow statement includes all cashflows of the Group,including those relating to the long-term funds. Previously, under MSS, thecashflow statement excluded the cashflows of the long-term funds. Notes to the interim IFRS statements 1. International Financial Reporting Standards results The International Financial Reporting Standards results were approved by theBoard of Directors on 12 September 2005. EU law (IAS Regulation EC 1606/2002) requires that the annual consolidatedfinancial statements of the Group for the year ended 31 December 2005, beprepared in accordance with International Financial Reporting Standards adoptedfor use in the EU. The interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areendorsed by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005, the Group's first annual reporting date atwhich it is required to use adopted IFRS. Based on these IFRS rules, thedirectors have made assumptions about the accounting policies expected to beapplied, which are as set out in the transition to IFRS section of this report,when the first annual IFRS financial statements are prepared for the year ending31 December 2005. The IFRS that will be effective (or available for early adoption) in the annualfinancial statements for the year ending 31 December 2005 are still subject tochange and to additional interpretations and therefore cannot be determined withcertainty. Accordingly, the accounting policies for 2005 will be determinedfinally only when the annual financial statements are prepared. The Report and Accounts for the year ended 31 December 2004 have been deliveredto the Registrar of Companies and include an independent auditors' report whichwas unqualified and did not contain a statement under section 237(2) or (3) ofthe UK Companies Act 1985. The IFRS interim statements include certain statements in full, e.g.consolidated income statement and consolidated balance sheet, which in futureinterim statements will be included in summary form. 2. Segment information The directors consider that the Group has three business segments, UK Life &Pensions, International Life & Pensions and Asset Management. The profit reported as arising on the Life & Pensions business in this sectionincludes the return on the net pension liability and on corporate net assets. i) Total RevenueHalf year ended 30 June 2005 UK International Life & Life & Asset Pensions Pensions Management Total £m £m £m £m-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts and investment contract deposits written 1,385 271 110 1,766Less: investment contract deposits written (897) (266) (110) (1,273)-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts 488 5 - 493Other Revenue 2,208* 288 149 2,645-------------------------- -------- ---------- ---------- -------Total Revenue 2,696 293 149 3,138-------------------------- -------- ---------- ---------- -------* Including £14m corporate revenue Half year ended 30 June 2004 UK International Life & Life & Asset Pensions Pensions Management Total £m £m £m £m-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts and investment contract deposits written 1,269 189 54 1,512Less: investment contract deposits written (596) (185) (54) (835)-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts 673 4 - 677Other Revenue 601* 28 59 688-------------------------- -------- ---------- ---------- -------Total Revenue 1,274 32 59 1,365-------------------------- -------- ---------- ---------- -------* Including £6m corporate revenue Year ended 31 December 2004 UK International Life & Life & Asset Pensions Pensions Management Total £m £m £m £m-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts and investment contract deposits written 2,651 406 75 3,132Less: investment contract deposits written (1,355) (397) (75) (1,827)-------------------------- -------- ---------- ---------- -------Gross earned premiums on insurance contracts 1,296 9 - 1,305Other Revenue 3,007* 197 155 3,359-------------------------- -------- ---------- ---------- -------Total Revenue 4,303 206 155 4,664-------------------------- -------- ---------- ---------- -------* Including £18m corporate revenue Asset Management revenue derived from external customers of £112m (half yearended 30 June 2004: £42m; year ended 31 December 2004: £77m) is included within'fee and commission income and income from service activities' in the incomestatement. Asset Management revenue derived from the Life & Pensions segment of £18m (halfyear ended 30 June 2004: £17m; year ended 31 December 2004: £34m) is eliminatedon consolidation. Other revenue includes commissions, interest, dividends, net unrealised gains oninvestments and gains and losses arising on sale of investments. ii) Segment result Half year Half year Year ended ended ended 30 June 2005 30 June 2004 31 Dec 2004 £m £m £m--------------------------- ---------- ---------- ----------Life & Pensions UK* 196 27 191Life & Pensions International 3 7 29Asset Management (3) - (33)--------------------------- ---------- ---------- ----------Total profit before tax as per the income statement 196 34 187--------------------------- ---------- ---------- ----------* Includes corporate costs of £16m for the half year ended 30 June 2005 (halfyear ended 30 June 2004: £21m; year ended 31 December 2004: £30m) 3. Non-recurring items Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m--------------------------- ---------- ---------- ----------Closure of Direct Sales operation - (2) 2Life & Pensions integration costs 2 4 9Provision for misselling/complaints - 6 14Gross up for shareholder tax - - 7--------------------------- ---------- ---------- ----------Life & Pensions non-recurring items 2 8 32--------------------------- ---------- ---------- ----------Asset Management integration costs 14 1 19Asset Management Reinvestment Plan costs 13 - 4--------------------------- ---------- ---------- ----------Asset Management non-recurring items 27 1 23--------------------------- ---------- ---------- ----------Total non-recurring items 29 9 55--------------------------- ---------- ---------- ---------- 4. Dividend The final dividend of £103m paid on 31 May 2005 was based on 2,057 millionshares in issue at a rate of 5.00 pence per share. The interim dividend for 2005 of £54m is based on 2,096 million shares in issueas at 30 June 2005 at a rate of 2.60 pence per share. Previously, under MSS, dividends were accrued in the period they related to,regardless of when they were declared. Under IFRS, dividends declared after thebalance sheet date are not recognised in the financial statements. The dividenddeclared on 12 September 2005 is therefore not recognised in these financialstatements. 5. Earnings per share (EPS) a. Basic and underlying earnings per share from continuing operations Underlying earnings per share have been calculated based on underlying profit,after tax, and on the profit after tax attributable to equity holders of theparent, as the directors believe the former earnings per share figure gives abetter indication of operating performance. Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Earnings EPS Earnings EPS Earnings EPS £m pence £m pence £m pence-------------------- -------- ------- -------- ------ -------- -------Profit after tax attributable to equity holders of the parent 103 5.0 40 2.3 143 7.9Short term fluctuations in investment return (44) (2.1) 38 2.2 (27) (1.5)Variation in value of equity option on convertible debt 9 0.4 10 0.6 10 0.6Non-recurring items 29 1.4 9 0.5 55 3.0Amortisation of acquired intangible assets 46 2.2 11 0.6 31 1.7Minority interest on items excluded from underlying profit (19) (0.9) (1) (0.1) (14) (0.8)Tax credit on items excluded from underlying profit (9) (0.4) (8) (0.4) (11) (0.6)-------------------- -------- ------- -------- ------ -------- -------Underlying profit, after tax, attributable to equity holders of the parent 115 5.6 99 5.7 187 10.3Weighted average number of shares for the period (millions) 2,065 1,723 1,808-------------------- -------- ------- -------- ------ -------- ------- b. Diluted earnings per share from continuing operations Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Earnings EPS Earnings EPS Earnings EPS £m pence £m pence £m pence-------------------- -------- ------- -------- ------ -------- -------Profit after tax attributable to equity holders of the parent 103 5.0 40 2.3 143 7.9Dilutive effect of - - - - - - options -------------------- Diluted earnings pershare 103 5.0 40 2.3 143 7.9-------------------- -------- ------- -------- ------ -------- ------- Half year ended Half year ended Year ended 30 June 2005 30 June 2004 31 Dec 2004 Weighted Weighted Weighted average average average number of number of number of shares shares shares millions millions millions-------------------- ------------- ------------- ------------- Basic 2,065 1,723 1,808Dilutive effect of options 14 11 11-------------------- ------------- ------------- -------------Diluted 2,079 1,734 1,819-------------------- ------------- ------------- ------------- Options over 44,075,113 (2004: 45,436,588) shares are outstanding under thegroup's option schemes as at 30 June 2005. Of these, 29,945,237 (2004:34,008,756) options were not dilutive for the period shown because the marketprice of the company's share was below the option price or the performancecriteria were not met. There were £273 million (2004: £269m) bonds in issueconvertible to ordinary shares at any time on or after 27 December 2005 orearlier, if certain conditions are met. If all these bonds were converted at theearliest conversion date, 166,081,870 new shares would be issued. c. Earnings per share from discontinued operations Discontinued operations have no impact on profit after tax attributable toequity holders. Earnings per share from discontinued operations is thereforezero. 6. Longer-term investment return The longer-term investment return is calculated in respect of equity and fixedinterest investments by applying the longer-term rate of return for eachinvestment category to the quarterly weighted average of the correspondingassets, after adjusting for the effect of any short-term market movements. Thedirectors have determined the longer-term rates of investment return to be asfollows: Longer-term rates of investment return 30 June 30 June 31 Dec 2005 2004 2004 % % %------------------------ ---------- ----------- ----------Equities and properties 7.50 7.50 7.50Government fixed interest 5.00 5.00 5.00Other fixed interest 5.75 5.75 5.75------------------------ ---------- ----------- ---------- 7. Staff pension schemes a) Friends Provident pension scheme The Group operates one principal defined benefit scheme, the Friends ProvidentPension Scheme ("FPPS"), to which the majority of the Group's Life and Pensionsemployees belong. The scheme's assets are administered by F&C Asset Managementplc, a subsidiary undertaking. The employer paid contributions of £6m to the Scheme for the half year ended 30June 2005, in accordance with the schedule of contributions for the periodagreed between the employer and the Scheme trustees. Contributions to the Schemerecommenced in January 2004. The employees contributions are 1% of pensionablesalary from January 2004, 2% from January 2005 increasing to 3% from January2006 and will be reviewed thereafter (subject to a maximum of 5%). Employercontributions commenced at 13% of pensionable salaries from January 2004, 14%from January 2005 and rising to 15% from January 2006. Details of the latestvaluation for the principal scheme are given below: FPPS--------------------------- ---------------------------Date of last valuation 30 September 2004Method of valuation Projected UnitScheme Actuary Towers PerrinMarket value of assets at last valuation date £636mLevel of funding 91%--------------------------- --------------------------- The actuarial valuation was updated to 30 June 2005 by the Scheme Actuary. Themajor assumptions used by the Actuary are best estimates chosen from a range ofpossible actuarial assumptions, which, due to the timescale covered, may notnecessarily be borne out in practice. The major assumptions are set out below: 30 June 30 June 31 Dec 2005 2004 2004 % % %---------------------------------- -------- ------- --------Inflation assumption 2.70 2.70 2.90Rate of increase in salaries* 3.30 3.20 3.50Rate of increase in pensions in payment 2.70 2.70 2.75Discount rate 5.10 5.75 5.50---------------------------------- -------- ------- --------* Plus allowance for salary scale increases. b) Other pension schemes F&C Group operates two core defined benefit pension schemes in the UnitedKingdom and several overseas multi-employer defined benefit schemes. Both of thecore schemes are closed to new entrants with all new F&C employees eligible tobenefit from defined contribution arrangements. Lombard does not operate a staffpension scheme. c) Details of the principal scheme and Group IFRS pension liability The fair value of the principal scheme's assets (FPPS), which are not intendedto be realised in the short term and may be subject to significant change beforethey are realised, and the present value of the scheme's liabilities which arederived from cash flow projections over long periods and are thus inherentlyuncertain, were: Expected rate of return Value 30 30 31 30 30 31 June June Dec June June Dec 2005 2004 2004 2005 2004 2004 % % % £m £m £m----------------------- ------ ------ ------ ------ ------- ------Fixed interest bonds 5.10 5.50 5.25 101 87 95Index-linked bonds 5.00 5.25 5.00 101 84 96Equities 7.10 7.60 7.10 414 364 380Derivatives - - - 91 23 71Cash 4.00 4.00 4.00 13 21 23----------------------- ------ ------ ------ ------ ------- ------Market value of plan assets excluding non-transferable assets 720 579 665Present value of scheme liabilities (753) (616) (706)----------------------- ------ ------ ------ ------ ------- ------Deficit in the FPPS scheme on an IFRS basis (33) (37) (41)Deficit in the F&C schemes on an IFRS basis (25) (8) (18)----------------------- ------ ------ ------ ------ ------- ------Group pension liability included in provisions (58) (45) (59)----------------------- ------ ------ ------ ------ ------- ------ Under IAS 19, Employee benefits, the pension obligation is recognised in theGroup's consolidated balance sheet and has been grossed up for deferred tax. Themarket value of the schemes assets exclude units held in the internal linkedfunds (classified as non-transferable assets). This presentation has no impacton shareholders' equity as the internal investment contract liability is alsoexcluded. However non-transferable assets are taken into account in determiningthe pension liability in the actuarial valuation. A reconciliation of the Grouppension liability included in provisions and the net pension liability asdetermined by actuarial valuations is set out below. 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m-------------------------------- -------- --------- --------Group pension liability included in provisions (58) (45) (59)Non-transferable assets 37 33 34Deferred tax 7 3 7-------------------------------- -------- --------- --------Net pension liability (14) (9) (18)-------------------------------- -------- --------- --------Analysed: FPPS 3 (3) (5)F&C (17) (6) (13)-------------------------------- -------- --------- -------- (14) (9) (18)-------------------------------- -------- --------- -------- 8. Statement of changes in equity Half year ended 30 June 2005 Share Share capital premium Reserves Total £m £m £m £m------------------------- -------- -------- --------- --------Balance as at 31 December 2004 and opening balance at 1 January 2005 199 1,799 421 2,419Profit for the period - - 103 103Net income recognised directly in equity - - (10) (10)Share based payments - 2 9 11Dividend - - (103) (103)Reclassify convertible debt as equity - - 51 51Allotment on acquisition of Lombard 15 234 - 249------------------------- -------- -------- --------- --------Balance at 30 June 2005 214 2,035 471 2,720------------------------- -------- -------- --------- -------- Half year ended 30 June 2004 Share Share capital premium Reserves Total £m £m £m £m------------------------- -------- -------- -------- --------Balance as at 31 December 2003and opening balance at 1 January 2004 172 1,446 376 1,994Profit for the period - - 40 40Net income recognised directly in equity - - (1) (1)Share based payments - 1 1 2Dividend - - (84) (84)------------------------- -------- -------- -------- --------Balance at 30 June 2004 172 1,447 332 1,951------------------------- -------- -------- -------- -------- Year ended 31 December 2004 Share Share capital premium Reserves Total £m £m £m £m------------------------- -------- -------- -------- --------Balance as at 31 December 2003 and opening balance at 1 January 2004 172 1,446 376 1,994Profit for the period - - 143 143Net income recognised directly in equity - - 31 31Share based payments 1 2 4 7Dividend - - (133) (133)Share placing 17 212 - 229Movements in respect of unclaimed shares issued on demutualisation - 15 - 15Allotment on acquisition of F&C 9 124 - 133------------------------- -------- -------- -------- --------Balance at 31 December 2004 199 1,799 421 2,419------------------------- -------- -------- -------- -------- 9. Contingent Liabilities Past Sales The Group has made provision for the estimated cost of settling complaints inrespect of past sales. Although the provisions are regularly reviewed, the finaloutcome could be different from the provisions established as these costs cannotbe calculated with certainty and are influenced by external factors beyond thecontrol of management. Such uncertainties include future regulatory actions,possible changes to the time barring rules, media attention and investmentperformance. The majority of the uncertainty relates to endowment mortgagesalthough a number of other products are being reviewed as an ongoing process. Itis expected that the majority of endowment cases requiring compensation will besettled in the next two years. VAT In a current UK VAT Tribunal appeal, a UK investment trust is seeking toestablish that management services to UK investment trusts should be a VATexempt supply, rather than a taxable supply in accordance with current UK VATlaw. If this appeal were successful at the higher UK or European courts, anumber of group companies, in common with other relevant fund managers in theUK, would face claims from those investment trusts to which they have suppliedservices for repayment of the VAT they have charged to them. At present, thedirectors of F&C Asset Management plc are not able to judge the likelihood thatthe VAT Tribunal appeal will be successful, nor are they able to quantify theclaims that may be received or the extent to which such claims could bemitigated and therefore are not able to quantify the potential liability. F&C acquisition In December 2000, when Eureko B.V. acquired F&C Group (Holdings) Limited,approximately 73% of the ordinary issued shares of F&C Group Management Limited,a subsidiary company, were held in the form of two bearer share warrants whichcould not be located prior to the completion of the sale. Eureko B.V. wasindemnified by F&C Group (Holdings) Limited against any losses suffered as aresult of the loss of the old share warrants or the issue of replacement sharewarrants. Since a bearer share warrant issued by a company entitles the bearerto the shares specified in the share warrant, there is a risk that a third partyholding the old share warrants may claim that it is entitled to the specifiedshares in F&C Group Management Limited. If a third party were successful inestablishing a claim in relation to the old share warrants, F&C Group (Holdings)Limited could be liable to indemnify F&C Group Management Limited under theoriginal indemnity arrangements, which could, as set out below, have a materialadverse effect on the F&C Asset Management Group's business, results ofoperations and/or financial condition. Although there is a possibility that a third party may seek to establish that itis entitled to the shares specified in the old share warrants, the directors ofF&C Asset Management plc have been informed that Eureko B.V. has been advisedthat the prospect of a third party succeeding in such a claim is remote. Underthe terms of the 2004 merger between ISIS and F&C, Eureko Holdings has given aspecific indemnity (guaranteed by Eureko B.V.) to F&C Asset Management plc inrespect of losses arising in relation to the lost share warrants to bearer in F&C Group Management Limited (including in respect of the indemnity granted by F&CGroup (Holdings) Limited to F&C Group Management Limited) which is capped atapproximately £432m. 10. Acquisition of subsidiary On 11 January 2005 the Group acquired 100% of Lombard Group SA. Since acquisition, the subsidiary has contributed revenues of £21m and profitbefore tax of £5m to the consolidated profit for the interim period. Details of the estimated total purchase consideration, goodwill and net assetsacquired are as follows: £m------------------------------------------- ---------Value of shares issued 249Direct costs relating to acquisition 10Further consideration 111------------------------------------------- ---------Total purchase consideration (provisional) 370------------------------------------------- ---------Provisional fair value of assets acquired (242)------------------------------------------- ---------Goodwill 128------------------------------------------- --------- The goodwill of £128 million is attributable to the quality, experience andknowledge of Lombard management and staff which is expected to generatesignificant new business value in the foreseeable future. Such experience andknowledge manifests itself in existing business relationships (and the abilityto maintain and further develop these), and processes that are not captured inseparately identifiable intangible assets. The diversification of Lombard'sbusiness and the flexible business model and relative unique competitiveposition also adds significant value. Further consideration represents future payments to be made which are variableon Lombard's performance ("earn-out payments"). Earn-out payments in respect of2004 performance have already been settled in FP shares; further considerationis in respect of earn-out for 2005 and 2006 performance. The payments aredependent on Lombard achieving certain performance thresholds for both newbusiness profits and underlying embedded value. Earn-out payments are payable inFP shares or cash, at FP's option. The payment in respect of 2004 was capped at€90m (£62m) and payment in respect of 2005 will be capped at €85m (£58m) withany excess combined with the final potential payment in respect of the 2006year. The table below illustrates the schedule of payments remaining under threescenarios each of which assumes an average compound growth (CAGR) of 25% in 2005(from a 2003 base) followed by CAGR in 2006 of (a) 0%, (b) 15% and (c) 25%. (a) (b) (c)Further consideration •m £m •m £m •m £m--------------------- ------- ------- ------ ------ ------- -------2005 earn-out payment 82 56 82 56 82 562006 earn-out payment 58 39 81 55 98 66--------------------- ------- ------- ------ ------ ------- -------Total 140 95 163 111 180 122--------------------- ------- ------- ------ ------ ------- ------- For the purposes of calculating the consideration reflected in the financialstatements it has been assumed that CAGR will be 15% in 2006. The fair value of the shares issued was based on the published share price. Balance Sheet impact Book Provisional Provisional value on fair value fair value on acquisition adjustments acquisition £m £m £m----------------------------- --------- --------- ----------Intangible assets 3 101 104Present value of acquired value of in-force business - 229 229Property, plant & equipment 1 - 1Investments 3,750 - 3,750Deferred acquisition expenses 71 - 71Deferred tax asset 8 - 8Other receivables 8 - 8Cash and cash equivalents 400 - 400Investment contracts (4,129) - (4,129)Interest bearing loans and borrowings (27) - (27)Deferred front end fees (52) - (52)Deferred tax liabilities - (85) (85)Other payables (31) - (31)Provisions (5) - (5)----------------------------- --------- --------- ----------Total (3) 245 242----------------------------- --------- --------- ----------Net assets acquired 242----------------------------- --------- --------- ---------- The following specific adjustments have been made to reflect the provisionalfair value of assets acquired on acquisition: • Intangible assets of £101m have been recognised on the balance sheetbeing split £93m and £8m between distribution relationships and brandrespectively. * Acquired value of in-force business of £229m has been recognised on the acquisition. 11. Discontinued operations The Group had a controlling interest in ISIS Private Equity, which is a venturecapital organisation. ISIS Private Equity controlled a number of underlyinginvestee companies which were owned primarily through investments by the variouslife and pension funds. As a result, these underlying companies have beenconsolidated in the IFRS balance sheet. The Group disposed of its controllinginterest on 30 June 2005. Consequently, consolidation of the Group's remaininginterest is not required at 30 June 2005. The results of the trading activitiesup to the date of disposal are reported as discontinued operations in the IncomeStatement. An analysis of the result of discontinued operations is as follows: Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004 £m £m £m------------------------------ --------- --------- --------Revenue 165 140 325Expenses (151) (134) (281)------------------------------ --------- --------- --------Results from trading operations 14 6 44------------------------------ --------- --------- --------Profit on disposal of subsidiaries 22 - ------------------------------- --------- --------- --------Loss on discontinuation (54) - -Transfer to the fund for future appropriations 29 (6) (18)------------------------------ --------- --------- --------Profit before tax 11 - 26------------------------------ --------- --------- --------Tax (3) (2) (8)------------------------------ --------- --------- --------Profit/(loss) for the year after tax fromdiscontinued operations 8 (2) 18------------------------------ --------- --------- -------- Explanation of transition to IFRS As stated in note A, these are the Group's first consolidated financialstatements prepared in accordance with IFRS. In preparing its opening IFRS balance sheet at 1 January 2004, the Group hasrestated amounts reported previously in financial statements prepared on an MSSbasis. The accounting policies, together with details of the basis of preparation andtransitional arrangements on the first time adoption of IFRS are set out below.In addition, an explanation of how the transition from MSS to IFRS has affectedthe Group's financial position, financial performance and cash flows is set outin the following tables and notes. The level of disclosure contained in the primary statements is designed toassist with the understanding of the transition to IFRS. Future statements willnot contain this level of detail. Accounting Policies A. Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) issued by the International AccountingStandards Board (IASB) and adopted for use in the European Union. These are theGroup's first financial statements prepared under IFRS. Previous financialstatements were prepared in accordance with the provisions of the UK CompaniesAct 1985, the Association of British Insurers (ABI) Statement of RecommendedPractice (SORP) 2003 and generally accepted accounting principles in the UnitedKingdom (MSS). In October 2004 the European Commission voted to partially adopt IAS 39,Financial Instruments: Recognition and Measurement. This "carve-out" version ofIAS 39 removes the use of the fair value option for financial liabilities andrelaxes the rules for hedge accounting. The Group has adopted the IASB'srecently issued fair value amendments as these are expected to be endorsed bythe EC in time for adoption into the Group's 2005 full year financialstatements. The Group has early adopted the amendment to IAS 19 Employee benefits publishedin December 2004 for the same reason. In addition, the Group has applied the principles contained in FRS 27, LifeAssurance as an improvement to its accounting policies as permitted by IFRS 4,Insurance Contracts. This requires liabilities to policyholders under contractsof insurance to be measured on a realistic basis in accordance with theFinancial Services Authority's Realistic Balance Sheet Regulations (RBS). The principal accounting policies adopted in preparing the 2005 interimfinancial statements and the restated 2004 balance sheets and income statementare set out below. B. Transitional arrangements on first time adoption of IFRS Companies are required to apply their IFRS accounting policies retrospectivelyto determine IFRS opening balance sheets and comparative figures. However, IFRS1 First-Time Adoption of International Financial Reporting Standards provides anumber of exemptions to this general principle. The Group has not takenadvantage of the exemptions to retrospective application set out in IFRS 1 andhas applied all relevant standards retrospectively with three exceptions: • The Group has elected to apply IFRS 3 Business Combinationsretrospectively to business combinations effected from 9 July 2001, the date ofdemutualisation, to the date of transition from MSS to IFRS. • The Group has elected to apply the IFRS 1 exemption relating toforeign exchange translation differences as a result of which the cumulativetranslation differences for all foreign operations are deemed to be zero at thedate of transition to IFRS. • The Group has elected to apply IFRS 2 to share options that weregranted after 7 November 2002 and had not vested at the date of transition toIFRS. The Group has also elected not to apply the exemption from disclosure forcomparative periods permitted within IFRS 4, Insurance Contracts, IFRS 5,Non-current Assets Held For Sale And Discontinued Operations, IAS 32, FinancialInstruments: Disclosure and Presentation and IAS 39, Financial Instruments:Recognition and Measurement. Also, where estimates had previously been made under MSS, consistent estimates(after adjustments to reflect any difference in accounting policies) have beenmade for the same date on transition to IFRS (ie judgments affecting the Group'sopening balance sheet have not been revisited for the benefit of hindsight). C. Consolidation (i) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies so as to obtain economic benefits, generallyaccompanying a shareholding of more than one half of the voting rights. The consolidated financial statements incorporate the assets, liabilities andresults of the company and its subsidiaries. The results of subsidiariesacquired or sold during the period are included in the consolidated results fromthe date of acquisition or up to the date of disposal. (ii) Associates and Joint Ventures (JV's) Associates are all entities over which the Group has significant influence butnot control, generally reflecting between 20% and 50% of the voting rights.Investments in associates are accounted for by the equity method of accountingand are initially recognised at cost. The Group's investment in associatesincludes goodwill (net of any impairment loss) identified on acquisition. Joint Ventures are those entities, where the terms of the contractual agreementensure that the parties involved jointly manage the control of the entity;notwithstanding that the Group's share of the underlying assets & liabilitiesmay be more than 50%. The Group recognises its interests in joint ventures usingthe equity method. D. Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are different tothose of other business segments. A geographical segment is engaged in providingproducts or services within a particular economic environment that are subjectsto risks and returns that are different to those of segments operating in othereconomic environments. The directors consider that the Group has three primary reportable businesssegments, reflecting the management structure. These are: • UK Life & Pensions • International Life & Pensions • Asset Management E. Foreign currencies The assets and liabilities of foreign operations are translated to sterling atforeign exchange rates ruling at the balance sheet date. The revenues andexpenses of foreign operations are translated to sterling at foreign exchangerates approximating the rates ruling at the dates of the transactions. Foreignexchange differences arising on the translation to presentational currency areclassified as equity and transferred to the Group's foreign currency translationreserve (FCTR) within retained earnings and reported in the statement ofrecognised income and expenses (SORIE). These exchange differences arerecognised in the income statement in the period in which the operation isdisposed of. Monetary assets and liabilities denominated in foreign currencies are translatedat the exchange rate ruling at the balance sheet date, and any exchangedifferences arising are taken to the income statement. Non-monetary assets and liabilities measured at historical cost in a foreigncurrency are translated using the exchange rate at the date of the transaction.As a result, no exchange differences arise. Non-monetary assets and liabilitiesstated at fair value in a foreign currency are translated at the rate at thebalance sheet date. Where fair value movements in assets and liabilities arereflected in the income statement, the corresponding exchange movements are alsorecognised in the income statement. Where fair value movements in assets andliabilities are reflected directly in equity, the corresponding exchangemovements are also recognised directly in equity. Goodwill and intangibles attributable to the acquisition of foreign operationsare translated at the rate at the balance sheet date and the resulting exchangemovements are also taken to the FCTR within reserves. F. Property, plant and equipment Properties occupied by the Group, are stated initially at cost and subsequentlyat their revalued amounts, being the fair value on the basis of their existinguse at the date of revaluation. Valuations are performed annually by independentvaluers, who hold a recognised and relevant professional qualification and haverecent experience in the location and category of property being valued. Fairvalue is the amount for which a property could be exchanged betweenknowledgeable, willing parties in an arm's length transaction. Revaluations are performed with sufficient regularity such that the carryingamount does not differ materially from that which would be determined using fairvalues at the balance sheet date. Revaluations of properties are credited to the revaluation surplus inshareholders' equity. Decreases that offset previous increases of the same assetare charged against the revaluation surplus directly to equity; all otherdecreases are charged to the income statement. Plant and equipment is stated at cost less accumulated depreciation and anyrecognised impairment losses. Depreciation is charged so as to write off the cost or valuation of assets,using the straight-line method, over their estimated useful lives, as follows: Motor vehicles 3 to 4 yearsComputer hardware and related software 1 to 4 yearsFixtures, fittings and office equipment 3 to 10 yearsLeased assets Over the term of the lease G. Investment properties Investment property comprises land and/or buildings that is not occupied by thecompanies in the Group and is held to earn rentals, capital appreciation, orboth. The group has adopted the Fair Value model permitted by IAS 40, InvestmentProperty. Accordingly, investment property is included in the balance sheet atits fair value, which is supported by market evidence, based on annualvaluations by independent valuers who hold a recognised and relevantprofessional qualification and have recent experience in the location andcategory of investment property being valued. Fair value is the amount for whicha property could be exchanged between knowledgeable and willing parties in anarm's length transaction. Movements in the fair value of investment propertiesare taken to the Income Statement in the period in which they arise. H. Intangible assets (i) Goodwill Goodwill arising on business combinations, effected post-demutualisation, is thefuture economic benefits arising from assets that are not capable of beingindividually identified and separately recognised. It is determined by comparingthe excess of the cost of acquisition over the Group's interest in the net fairvalue of the identifiable assets, liabilities and contingent liabilities of theacquiree at the date of acquisition. Where the initial amount of goodwill canonly be determined on a provisional basis at the end of the financial reportingperiod, adjustments are made to the amount of goodwill up to 12 months from thedate of acquisition. Other adjustments to the amount of goodwill are made foramounts that are contingent on future events and on the realisation of potentialbenefits of the acquiree's tax loss carry forwards and other deferred tax assetsthat did not satisfy the criteria for separate recognition on acquisition. Goodwill is initially recognised as an asset and held at cost less anyimpairment subsequently incurred. Any minority interest in goodwill is deductedfrom the carrying value of the minority interest. Goodwill arising on the Group's investment in associates and joint ventures isincluded within the carrying value of these investments. Where the cost of acquisition is less than the acquirer's interest in the netfair value of the identifiable assets, liabilities and contingent liabilities ofthe acquiree, the excess is credited immediately to the Income Statement. The carrying value of goodwill is tested for impairment annually or morefrequently if circumstances indicate that the goodwill might be impaired. Wheregoodwill has become impaired, a charge is made to the Income Statement. When a business or operation is disposed of, the carrying value of the goodwillattributed to that business or operation is included in the calculation of thegain or loss arising on disposal. (ii) Investment management contracts Investment management contracts acquired on business combinations are amortisedon a straight line basis over their expected useful economic lives of between 10and 20 years. (iii) Present value of acquired in-force business ("PVIF") On acquisition of a portfolio of long-term insurance or investment contracts,either directly or through the acquisition of a subsidiary undertaking, the netpresent value of the Group's interest in the expected pre-tax cash flows of thein-force business is capitalised in the balance sheet as an asset. That part ofthe Group's interest, which will be recognised as profit over the lifetime ofthe in-force policies, is amortised and the discount unwound systematically overthe anticipated lives of the related contracts. (iv) Other intangible assets Other intangibles assets are amortised over their anticipated useful lives usingthe straight-line method as follows: Distribution lists: 10-15 yearsBrands: 10 yearsSoftware: 3 yearsInternally generated research and development expenditure: 3 yearsLicenses: 3-5 years All intangible assets with a finite useful life, i.e. all except goodwill whichhas an indefinite useful life, are reviewed annually to identify whether thereare any circumstances that might indicate an impairment has occurred. If suchcircumstances exist the carrying value of the asset is assessed and anyresulting impairment is charged to the Income Statement. Intangible assets are reported gross of deferred tax where applicable. I. Investments Investments in financial assets (i) Classification The Group classifies its investments into the following categories: financialassets at fair value through profit and loss and loans and receivables. Theclassification depends on the purpose for which the investments were acquired. (ii) Measurement Loans are measured on initial recognition at the fair value of the considerationgiven plus incremental costs that are incurred on the acquisition of theinvestment. Subsequent to initial recognition, loans and receivables aremeasured at amortised cost using the effective interest rate method. Financial assets classified as at fair value through profit and loss aremeasured on initial recognition at the fair value of the consideration given,excluding any transaction costs directly attributable to their acquisition.Subsequent to initial recognition, all such financial assets are measured atfair value. Any instrument that does not have a quoted market price in an activemarket and whose fair value cannot be reliably measured is stated at cost, lessimpairment losses, if any. Movements in fair value are taken to the IncomeStatement in the period in which they arise. (iii) Fair value measurement principles The fair value of financial instruments is based on their quoted market price atthe balance sheet date without any deduction for future estimated selling costs.Financial assets are measured at current bid prices, while financial liabilitiesare valued at current offer prices. The fair value of the group's interest in a portfolio of financial instrumentsis the product of the number of units of the instrument and its quoted marketprice. If a quoted market price is not available on a recognised stock exchange, fromthe manager of a portfolio of financial instruments, or from a broker/dealer fornon-exchange traded financial instruments, the fair value of the instrument isestimated using a valuation technique such as recent arms length transactions,reference to similar listed investments or discounted cash flow models.Investments where fair value cannot be measured reliably are measured at costless impairment. J. Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised for the amount by which the asset's carrying amount exceeds itsrecoverable amount. The recoverable amount is the higher of an asset's fairvalue less costs to sell and value in use. For the purposes of assessingimpairment, assets are grouped at the lowest levels for which there areseparately identifiable cashflows (cash-generating units). K. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less and bank overdrafts. L. Treasury shares Where any Group company has a holding in its equity share capital (treasuryshares), the consideration paid, including any directly attributable incrementalcosts (net of tax), is deducted from equity attributable to the Company's equityholders. Where such shares are subsequently sold, reissued or otherwise disposedof, any consideration received is included in equity attributable to theCompany's equity holders, net of any directly attributable incrementaltransaction costs and the related tax effects. M. Insurance contracts (i) Definition Contracts under which the group accepts significant insurance risk from anotherparty (the policyholder) by agreeing to compensate the policyholder if aspecified uncertain future event (the insured event) adversely affects thepolicyholder, are classified as insurance contracts. (ii) Measurement of liabilities Under IFRS, insurance and investment contracts with a discretionaryparticipating feature (DPF) element are measured using accounting policiesconsistent with those previously adopted under MSS, as amended followingadoption of the principles contained in FRS27. The insurance contract liabilities are determined separately for each lifeoperation following an annual investigation of the long-term funds. Theliabilities are initially calculated in accordance with the relevant FSA rulescontained in the Integrated Prudential Sourcebook for Insurers for UKoperations. For overseas operations, insurance contract liabilities arecalculated on recognised actuarial principles, based on local regulatoryrequirements. The valuations are subject to adjustments to reflect relevantaccounting requirements as set out below. The annual investigation is carriedout as at 31 December. For the conventional with profits business in FPLP, the liabilities topolicyholders are determined in accordance with the RBS regulations and inaccordance with the principles contained in FRS 27. These liabilities includeboth declared and constructive obligations for future bonuses not yet declared(excluding the shareholders' share of future bonuses) and an assessment ofoptions and guarantees on a market consistent basis. The RBS basis of valuationincludes eliminating deferred acquisition costs, but allows for future profitsof non-profit business written in the with profits fund to be recognised. The calculation of the liabilities to policyholders in respect of conventionalwith profit business in FPLA and the majority of non-profit business (includinginvestment contracts with a DPF element), is on a net premium basis and inaccordance with MSS. These liabilities include an implicit provision for futurereversionary bonuses, but not terminal bonuses, by means of a reduction in thevaluation interest rate and an assessment of options and guarantees on adeterministic basis. The calculation of liabilities to policyholders in respect of income protectionbusiness is on a gross premium basis and in accordance with MSS. Theseliabilities include explicit allowance for future expenses, but exclude explicitallowance for future bonuses. At the year end, most non-profit liabilities willbe on a gross premium basis. The provision for insurance contract liabilities can never be definitive as tothe overall level of liabilities or their timing and is subject to regularreassessment. (iii) Fund for future appropriations The fund for future appropriations (FFA) represents the amounts relating to withprofit business that has not yet been allocated to policyholders orshareholders. When allocations are determined, appropriate transfers are madeout of this fund. (iv) Liability adequacy test The company carries out a liability adequacy test on its insurance liabilitiesless related deferred acquisition costs and other related intangible assets,annually, to ensure that the carrying amount of its liabilities is sufficient inthe light of estimated future cash flows. Where a shortfall is identified, anadditional provision is made. (v) Benefits payable Claims and surrendersAll claims and surrenders due or notified by the balance sheet date are chargedto the Income Statement. Claims payable include claims handling costs.Reassurance recoveries are accounted for in the same period as the relatedclaim. BonusesBonuses charged to the Income Statement in any given year comprise reversionarybonuses declared in respect of that year, which are provided within thecalculation of the insurance contract liabilities and terminal bonuses paid,which are included within claims paid. (vi) Reinsurance contracts Direct insurance business written is ceded to reinsurers under contracts totransfer risk. The net amounts paid to a reinsurer at the inception of acontract may be less than the amounts recognised as recoverable under suchcontracts. All such differences are recognised in the Income Statement in theperiod in which the reinsurance premium becomes due. Contracts that do not give rise to a significant transfer of insurance risk tothe reinsurer are considered financial reinsurance and accounted for anddisclosed in a manner consistent with their commercial substance. This inparticular, neither gives rise to a net credit in the Income Statement upontheir inception nor the creation of an asset greater than the correspondingliability to the reinsurer. Where a contract can be separated into distinct andseparate elements, these elements are accounted for separately. If there is objective evidence that the amounts recoverable under the terms of areinsurance contract will not be recovered from the reinsurer, the amountrecognised as recoverable under reinsurance ceded is reduced accordingly and theimpairment loss is recognised immediately in the Income Statement. N. Investment contracts Contracts under which the transfer of insurance risk to the Group from thepolicyholder is not significant, are classified as investment contracts.Contracts currently classified as investment contracts are either unit-linked orunitised with-profit contracts. (i) Unit-linked contracts A unit-linked investment contract involves both the transfer of a financialinstrument and the provision of investment management services. The financialinstrument component is classified as a financial liability at fair valuethrough the profit and loss. Provision is made for renewal commissions at the inception of an investmentcontract as intermediaries are not required to perform any service once thepolicy is incepted. (ii) Contracts with discretionary participation features A contract with a discretionary participation feature is a contractual rightheld by a policyholder to receive as a supplement to guaranteed minimumpayments, additional payments: (a) that are likely to be a significant portion of the total contractual payments,(b) whose amount or timing is contractually at the discretion of the issuer and that are contractually based on: (i) the performance of a specified pool of contracts, or a specified type of contract, (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company that issues the contracts Balances representing eligible surplus that has not yet been allocated toshareholders, or policyholders with discretionary participation featurecontracts have been retained as a policyholder liability. Contracts with discretionary participation features are valued using the MSSbasis that is used for insurance contracts. O. Deferred acquisition costs For insurance contracts and investment contracts with a discretionaryparticipation feature, acquisition costs comprise all direct and indirect costsarising from the writing of the contracts. Deferred acquisition costs comprisethe incremental costs of acquiring new contracts, i.e. commissions payable,which are incurred during a financial period and are deferred to the extent thatthey are recoverable out of future fee income. The rate of amortisation ofdeferred acquisition costs on such contracts is proportional to the futuremargins emerging in respect of the related policies, over the lifetime of thepolicies. For investment contracts with no discretionary participation feature and AssetManagement service contracts, deferred acquisition costs comprise allincremental costs that are directly related to the acquisition of the contract,which are incurred during a financial period and are deferred to the extent thatthey are recoverable out of future revenue margins. Deferred acquisition costsare amortised uniformly over the lifetime of the policy. P. Deferred Income Provision Investment contracts with no discretionary participation feature and AssetManagement service contracts. Deferred income provisions are held equal to the difference between the fairvalue of a contribution received and the value of the units allocated to thepolicyholder. Deferred income provisions are also held in respect of fees taken,where that fee is only taken at the start of a contract or over an initialperiod early in the policy or service contract term. These are amortiseduniformly over the lifetime of the policy. Q. Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred and subsequently stated at amortised cost. Any difference between theproceeds, net of transaction costs, and the redemption value is recognised inthe Income Statement over the period of the borrowings, using the effectiveinterest method. Borrowing costs are recognised as an expense in the period in which they areincurred. Preference shares, which must be redeemed on a specific date, are classified asliabilities. The dividends on these preference shares are recognised in theIncome Statement as interest expense. The fair value of the liability portion of a convertible bond is determinedusing a market interest rate for an equivalent non-convertible bond. This amountis recorded as a liability on an amortised cost basis until extinguished onconversion or maturity of the bonds. The remainder of the proceeds is allocatedto the conversion option. This is recognised and included in shareholders'equity, net of tax effects. R. Provisions Where, as a result of the Group's past activities, a legal or constructiveobligation arises and it is possible to make a reliable estimate of the amountof the obligation, a provision is established for the estimated amount andcharged to the Income Statement. No provision is established where a reliableestimate of the obligation cannot be made. S. Deferred Tax Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amount of assets and liabilities in the financialstatements and the corresponding tax basis used in the computation of taxableprofit. This is accounted for using the balance sheet liability method andincludes tax on revaluation gains and losses on investments recognised in theIncome Statement. Deferred taxation is recognised in the Income Statement for the period, exceptto the extent that it is attributable to a gain or loss that is recogniseddirectly in the statement of recognised income and expense. In this case theattributable deferred taxation is shown separately in the statement ofrecognised income and expense. Deferred taxation is calculated at the tax ratesthat are expected to apply in the period when the liability is settled or theasset realised. Deferred tax liabilities are generally recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the asset to berecovered. Deferred tax assets and liabilities are offset when they relate to taxes leviedby the same taxation authority and Company or Group intends to settle itscurrent tax assets and liabilities on a net basis. T. Employee benefits (i) Pension obligations Defined benefits schemePension schemes are in operation for employees of certain subsidiaryundertakings. The principal schemes, to which the majority of employees belong,are of the funded defined benefit type with assets managed by F&C AssetManagement plc, a subsidiary undertaking. The schemes provide benefits based onfinal pensionable salary. The assets of the schemes are held in separate trusteeadministered funds. The pension costs relating to the principal schemes areassessed annually by an independent, qualified actuary. The pension liability recognised in the balance sheet is the present obligationof the employer, being the present value of the schemes liabilities less thevalue of the plan assets in the scheme. The pension costs for the schemes are analysed into: (a) Current service costCurrent service cost is the actuarially calculated present value of the benefitsearned by the active employees in each period. (b) Past service costPast service costs, relating to employee service in prior periods arising in thecurrent period as a result of the introduction of, or improvement to, retirementbenefits, are recognised in the income statement on a straight-line basis overthe period in which the increase in benefits vest. (c) Settlements or curtailmentsSettlements or curtailments are recognised in the Income Statement to the extentthat they are not allowed for in the actuarial assumptions. Losses onsettlements or curtailments are measured at the date on which the employerbecomes demonstrably committed to the transaction. Gains on settlements orcurtailments are measured at the date on which all parties, whose consent isrequired, are irrevocably committed. (d) Net expected return on pension assetNet expected return on the pension asset comprises the expected return on thepension scheme assets less interest on scheme liabilities. The actuarial gains and losses which arise from any new valuation and fromupdating the latest actuarial valuation to reflect conditions at the balancesheet date are taken to the SORIE for the period. The attributable deferredtaxation is shown separately in the SORIE. The costs of defined contribution schemes are charged to the Income Statement inthe period in which they are payable. Multi-employer defined benefit schemesThe group participates in several multi-employer defined benefit schemes inEurope. These schemes are defined benefit schemes but the employers are unableto identify their share of the underlying assets and liabilities. The employersaccount for the contributions to the scheme in the same manner as the definedcontribution schemes. Defined Contribution SchemesContributions made to this scheme are charged to the Income Statement as theybecome payable in accordance with the rules of the scheme. Other long-term employee benefitsOther long-term employee benefits are recognised as the discounted present valueof the defined benefit obligation at the balance sheet date. Termination benefitsTermination benefits are recognised as a liability and an expense when the Groupterminates the employment of an employee before the normal retirement date. (ii) Share based payment schemes: The Company and certain subsidiary undertakings offer share based paymentschemes to employees of the Group, depending on eligibility. The fair value ofthese equity-settled share based payments is measured at the grant date andexpensed on a straight-line basis over the vesting period in the incomestatement. At each balance sheet date, the Group revises its estimate of the number ofoptions that are expected to become exercisable. It recognises the impact of therevision of original estimates, if any, in the Income Statement, with acorresponding adjustment to equity over the remaining vesting period. For cash settled schemes, the fair value of the share based payment is measuredat the grant date and expensed over the vesting period in the income statementwith a corresponding credit to liabilities. The estimated fair value of cashsettled awards are re-measured at each reporting date until the payments areultimately settled. U. Leases Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. (i) The Group as lessee Assets held under finance leases are recognised as assets of the group at theirfair value at the date of acquisition or, if lower, at the present value of theminimum lease payments. The corresponding liability to the lessor is included inthe balance sheet as a finance lease obligation. Lease payments are apportionedbetween finance charges and reduction of the lease obligation so as to achieve aconstant rate of interest on the remaining balance of the liability. Financecharges are charged directly against income. Rentals payable under operatingleases are charged to expenses in the Income Statement in the period to whichthey relate. (ii) The Group as lessor Rental income from operating leases is recognised on a straight-line basis overthe lease term. V. Revenue recognition (i) Premiums Premium income in respect of single premium business and pensions business notsubject to contractual regular premiums, is accounted for when the premium isdue for payment. For all other classes of business, premium income is accountedfor in the year in which it falls due. Reinsurance premiums are accounted forwhen due for payment. (ii) Fee and commission income and income from service activities These comprise fees and charges from unit-linked investment contracts issued bythe life and pensions business, fees earned by the Asset Management businessfrom the sale and management of retail investment products and from managinginvestments in the institutional market. Fees and charges in respect of unit-linked investment contracts and the sale andmanagement of retail investment products are recognised as the investmentmanagement services are provided. Recurring fees (including front-end feesreceived on regular contribution contracts) are recognised as earned on anaccruals basis. Other fees received at the inception of a contract are deferredand are recognised as the recurring fees are earned. (iii) Income from investment assets All income received from investments is recognised in the Income Statement andincludes dividends, interest, rental income, gains and losses arising from achange in fair value of investment properties, investments in associatesaccounted for using the equity method, and financial assets designated oninitial recognition, as at fair value through profit and loss. Dividend income from listed and unlisted securities is recognised as revenuewhen the right to receive payment is established. For listed securities this isthe date the security is listed as ex-dividend. For unlisted securitiesincluding shares held in group companies, this is the due date of payment. All purchases and sales of investment assets designated at initial recognitionas at fair value through profit and loss are recognised/derecognised at tradedate, which is the date that the Group commits to purchase or sell the asset. W. Taxation The tax expense represents the sum of the current year tax expense and themovement in deferred tax. Taxation is based on profits and income for the period as determined inaccordance with the relevant tax legislation, together with adjustments toprovisions for prior periods, except where it relates to an item which isrecognised in equity. Tax payable is calculated using tax rates that have been enacted orsubstantively enacted by the balance sheet date. X. Dividends payable Dividends payable are recognised as a liability on the date of declaration byeither the directors or, if subject to their approval, by the shareholders. Consolidated balance sheetAt 31 December 2004 MSS as reported Adjustments IFRS £m £m £m--------------------------- ------------- --------- --------AssetsIntangible Assets:Goodwill 751 (165) 586Present value of acquired in-force business 145 32 177Investment management contracts - 590 590Other 6 29 35--------------------------- ------------- --------- -------- 902 486 1,388--------------------------- ------------- --------- --------Property, plant and equipment 25 143 168 Investments:Investment property 1,146 381 1,527Investments in associates 1 4 5Other investments 19,940 11,172 31,112--------------------------- ------------- --------- -------- 21,087 11,557 32,644--------------------------- ------------- --------- --------Deferred acquisition expenses 1,080 (337) 743Amount recoverable under reinsurance ceded 112 - 112Assets held to cover linked liabilities 13,024 (13,024) - Debtors and other assets:Income tax receivable 49 - 49Other receivables 188 67 255Other assets 251 42 293Cash and cash equivalents 278 1,971 2,249--------------------------- ------------- --------- -------- 766 2,080 2,846--------------------------- ------------- --------- --------Total assets 36,996 905 37,901--------------------------- ------------- --------- -------- Liabilities Insurance contracts 31,638 (17,408) 14,230Investment contracts - 17,880 17,880Fund for future appropriations 935 (774) 161Interest bearing loans and borrowings 1,192 25 1,217Accruals and deferred income:Deferred front end fees - 112 112Deferred tax liabilities - 194 194Other payables:Income tax payable 130 26 156Other payables 471 220 691Provisions 169 16 185Net assets value attributable to unit holders - 576 576--------------------------- ------------- --------- --------Total liabilities 34,535 867 35,402--------------------------- ------------- --------- --------EquityShare capital 199 - 199Share premium 1,799 - 1,799Reserves 446 (25) 421--------------------------- ------------- --------- --------Equity attributable to equity holders ofthe parent 2,444 (25) 2,419--------------------------- ------------- --------- --------Minority interest 17 63 80--------------------------- ------------- --------- --------Total equity and liabilities 36,996 905 37,901--------------------------- ------------- --------- -------- Analysis of adjustments to the IFRS balance sheet at 31 December 2004 Consolidation Investment of additional Business Revenue Dividend Investment FRS valuation Entities Combinations Deferral Recognition contracts 27 Other Total £m £m £m £m £m £m £m £m £m ------- -------- -------- ------ -------- ------- ------ ------ -----AssetsGoodwill - 68 (233) - - - - - (165)Present valueof acquired in-forcebusiness - - 32 - - - - - 32Investmentmanagementcontracts - - 590 - - - - - 590Otherintangibles - - 7 - - - - 22 29Property,plant andequipment - 90 - - - - - 53 143Investmentproperty - - - - - - - 381 381Investments inassociates - - - - - - - 4 4Otherinvestments (77) 464 - - - - - 10,785 11,172Deferredacquisitionexpenses - - - 40 - - (377) - (337)Amountrecoverableunderreinsurance - - - - - - - - -cededAssets held tocover linkedliabilities - - - - - - - (13,024)(13,024)Income tax - - - - - - - - -receivableOtherreceivables - 61 - - - - - 6 67Other assets - 18 - - - - - 24 42Cash and cashequivalents - 126 - - - - - 1,845 1,971------------ ------- -------- -------- ------ -------- ------- ------ ------ ------Total assets (77) 827 396 40 - - (377) 96 905------------ ------- -------- -------- ------ -------- ------- ------ ------ ------LiabilitiesInsurancecontracts (2) - - - - - 294 (17,700)(17,408)Investmentcontracts (42) - - - - 272 - 17,650 17,880Fund forfutureappropriations (21) 40 - (96) - (39) (664) 6 (774)Interestbearing loansandborrowings - - - - - - - 25 25Deferred frontend fees - - - 110 - - - 2 112Deferred taxliabilities - - 201 - - - (7) - 194Income taxpayable - - - - - - - 26 26 Other payables - 270 - (103) - 53 220Provisions - 3 - - - - - 13 16Net assetvalueattributableto unitholders - 576 - - - - - - 576------------ ------- -------- -------- ------ -------- ------- ------ ------ ------TotalLiabilities (65) 889 201 14 (103) 233 (377) 75 867------------ ------- -------- -------- ------ -------- ------- ------ ------ ------EquityShare - - - - - - - - -capitalShare - - - - - - - - -premiumReserves (12) - 66 26 103 (233) - 25 (25)------------ ------- -------- -------- ------ -------- ------- ------ ------ ------Equityattributabletoequity holdersof theparent (12) - 66 26 103 (233) - 25 (25)------------ ------- -------- -------- ------ -------- ------- ------ ------ ------Minorityinterest - (62) 129 - - - - (4) 63------------ ------- -------- -------- ------ -------- ------- ------ ------ ------Total equityandliabilities (77) 827 396 40 - - (377) 96 905------------ ------- -------- -------- ------ -------- ------- ------ ------ ------ Opening consolidated balance sheet At 1 January 2004 MSS as reported Adjustments IFRS £m £m £m------------------------------ -------- ---------- ----------AssetsIntangible assets:Goodwill 406 (58) 348Present value of acquired in-force business 154 34 188Investment management contracts - 90 90Other 10 28 38------------------------------ -------- ---------- ---------- 570 94 664------------------------------ -------- ---------- ----------Property, plant and equipment 24 113 137 Investments:Investment property 1,243 185 1,428Investments in associates 1 - 1Other investments 19,161 10,398 29,559------------------------------ -------- ---------- ---------- 20,405 10,583 30,988------------------------------ -------- ---------- ----------Deferred acquisition expenses 973 (377) 596Amount recoverable under reinsurance ceded 103 - 103Assets held to cover linked liabilities 11,094 (11,094) - Debtors and other assets:Deferred tax assets - 12 12Income tax receivable - - -Other receivable 171 79 250Other assets 216 36 252Cash and cash equivalents 156 921 1,077------------------------------ -------- ---------- ---------- 543 1,048 1,591------------------------------ -------- ---------- ----------Total assets 33,712 367 34,079------------------------------ -------- ---------- ---------- LiabilitiesInsurance contracts 29,825 (16,133) 13,692Investment contracts - 16,213 16,213Fund for future appropriations 535 (486) 49Interest bearing loans and borrowings 858 10 868Accrual and deferred income:Deferred front end fees - 119 119Deferred tax liabilities - 48 48Other payables:Incomes tax payable 25 22 47Other payables 344 123 467Provisions 116 23 139Net asset value attributable to unit olders - 511 511------------------------------ -------- ---------- ----------Total liabilities 31,703 450 32,153------------------------------ -------- ---------- ----------EquityShare capital 172 - 172Share premium 1,446 - 1,446Reserves 347 28 375------------------------------ -------- ---------- ----------Equity attributable to equity holders ofthe parent 1,965 28 1,993------------------------------ -------- ---------- ----------Minority interest 44 (111) (67)------------------------------ -------- ---------- ----------Total equity and liabilities 33,712 367 34,079------------------------------ -------- ---------- ---------- Analysis of adjustments to the balance sheet at 1 January 2004 Consolidation Investment of additional Business Revenue Dividend Investment FRS valuation Entities Combinations deferral recognition contracts 27 Other Total £m £m £m £m £m £m £m £m £m -------- -------- ------ ------- ------- ----- ------ ------ -----AssetsGoodwill - 20 (78) - - - - - (58)Present value ofacquiredin forcebusiness - - 34 - - - - - 34Investmentmanagementcontracts - - 90 - - - - - 90Otherintangibles - 7 - - 21 28Property,plant andequipment - 66 - - - - - 47 113Investmentproperty - - - - - - - 185 185Investments in - - - - - - - - -associatesOtherinvestments (64) 437 - - - - - 10,025 10,398Deferredacquisitionexpenses - - - 81 - - (458) - (377)Amountrecoverableunderreinsurance - - - - - - - - -cededAssets held tocover linkedliabilities - - - - - - - (11,094)(11,094)Deferred taxassets - - - - - - 12 - 12Income tax - - - - - - - - -receivableOtherreceivables - 55 - - - - - 24 79Other assets - 14 1 - - - - 21 36Cash and cashequivalents - 78 - - - - - 843 921------------- ------- -------- -------- ------ ------- ------- ----- ----- ------Total assets (64) 670 54 81 - - (446) 72 367------------- ------- -------- -------- ------ ------- ------- ----- ----- ----LiabilitiesInsurancecontracts (2) - - - - - (107) (16,024)(16,133)Investmentcontracts (27) - - - - 254 - 15,986 16,213Fund forfutureappropriations (22) 23 - (95) - (58) (339) 5 (486)Interest-bearingloans andborrowings - - - - - - - 10 10Deferred frontend fees - - - 119 - - - - 119Deferred taxliabilities - - 53 - - - - (5) 48Income taxpayable - - - - - - - 22 22Other payables - 169 - (84) - 38 123Provisions - - - - - - - 23 23Net asset valueattributableto unit holders - 511 - - - - - - 511------------- ------- -------- -------- ------ ------- ------- ----- ----- -----TotalLiabilities (51) 703 53 24 (84) 196 (446) 55 450------------- ------- -------- -------- ------ ------- ------- ----- ----- -----EquityShare capital - - - - -Share premium - - - - -Reserves (13) - 79 57 84 (196) - 17 28------------- ------- -------- -------- ------ ------- ------- ----- ----- ----Equityattributable toequityholders of theparent (13) - 79 57 84 (196) - 17 28------------- ------- -------- -------- ------ ------- ------- ----- ----- ----Minorityinterest - (33) (78) - - - - - (111)------------- ------- -------- -------- ------ ------- ------- ----- ----- ----Total equityandliabilities (64) 670 54 81 - - (446) 72 367------------- ------- -------- -------- ------ ------- ------- ----- ------ ---- Reconciliation of income statement at 31 December 2004 Benefit losses Revenue and expenses Profit after tax Notes £m £m £m--------------------- ------ --------- ------------ -----------Under MSS as published 4,588 4,329 177Investment valuation (i) (13) (13) 2Consolidation of additional entities (ii) 71 71 18Business combinations (iii) - (13) 19Revenue deferral (iv) 11 43 (32)Dividend recognition (v) - - -Investment contracts (vi) - 38 (38)Convertible bonds (vii) (10) 5 (15)Other adjustments (ix) 17 17 28--------------------- ------ --------- ------------ -----------Under IFRS 4,664 4,477 159--------------------- ------ --------- ------------ ----------- Reconciliation of equity at 30 June 2004 Notes £m--------------------- ------ ---------------------------Under MSS as published 1,991Investment valuation (i) (13)Consolidation of additional entities (ii) -Business combinations (iii) 89Revenue deferral (iv) 39Dividend recognition (v) 48Investment contracts (vi) (203)Convertible bonds (vii) (23)Other adjustments (ix) 23--------------------- ------ ---------------------------Under IFRS 1,951--------------------- ------ --------------------------- Reconciliation of income statement at 30 June 2004 Benefit losses Revenue and expenses Profit after tax Notes £m £m £m--------------------- ------ -------- ------------ ----------- Under MSS as published 1,323 1,298 73Investment valuation (i) 4 4 -Consolidation of additional entities (ii) 35 35 -Business combinations (iii) - (9) 11Revenue deferral (iv) 6 24 (18)Dividend recognition (v) - - -Investment contracts (vi) - 8 (8)Convertible bonds (vii) (10) 3 (13)Other adjustments (ix) 7 (32) (5)--------------------- ------ -------- ------------ -----------Under IFRS 1,365 1,331 40--------------------- ------ -------- ------------ ----------- Notes to the analysis of adjustments to the financial statements at 31 December2004 as a result of the transition to IFRS. The MSS balance sheet has been presented in a format consistent with IFRS. Nochanges have been made to the previously reported MSS numbers. i) Investment valuation Under IAS 39, 'Financial Instruments Recognition and Measurement' all of theGroup's investments are valued at fair value. The standard requires fair valuesfor listed investments to be calculated on a bid basis rather than the mid basisused for some of the Group's assets under MSS. This change in the valuation islargely offset by a corresponding change to the insurance and investmentliabilities and the fund for future appropriation. ii) Consolidation of additional entities IFRS requires the consolidation of special purpose vehicles such as open-endedinvestment companies, limited partnerships and private equity companies that arenot consolidated under MSS. The requirement for consolidation of such entitiesarises from a broader definition of when an entity is considered to be under thecontrol of an investor. iii) Business Combinations The Business Combinations adjustment is made up of the following adjustments: Reversal of amortisation of goodwill:In accordance with IAS 38, Impairment of Assets, goodwill is no longeramortised, but is, instead subject to an annual impairment review. Recognition of intangible assets: Intangible assets such as the distribution list and acquired PVIF have beenrecognised on acquisitions under IFRS with a corresponding reduction in goodwillpreviously recognised under MSS. iv) Revenue deferral Revenue deferral adjustment is a result of: Deferred Acquisition Costs (DAC) adjustment:The DAC asset has been reduced on investment contracts, as only incrementalacquisition costs (ie commissions) can be deferred under IFRS. Under MSS,non-incremental acquisition costs (eg salaries) could be deferred (IFRS allowsthis for insurance contracts, which continue to be measured under MSS). Thisasset reduction reduces the amortisation charge from DAC on in-force business,however this is offset by a greater reduction in revenue from the write down ofDAC on new business. Front end fees adjustment:The Group now sells relatively few products with front end fees. The positiveimpact on the income statement reflects a reversal of prior year's deferralwhich exceeds the negative effect of new business. v) Dividend recognition In accordance with IAS 10, Events after the Balance Sheet Date, proposeddividends declared after the balance sheet date are no longer treated as aliability. vi) Investment contracts The adjustment is largely the result of the reduction under MSS of actuarialliabilities in respect of capital units - effectively capitalising future annualmanagement charges. IFRS does not allow this treatment. In addition, sterlingreserves are eliminated as the cashflows used in the sterling reservescalculation are used under IFRS within the IFRS DAC recoverability test.Overall, sterling reserves are positive (ie increase the liability). Thereforethe elimination of sterling reserves reduces the liability, offsetting theincrease from the capital units adjustment. vii) Convertible bonds Under IFRS, the convertible bond is separated into a liability, measured atamortised cost and an embedded derivative, being the option to convert toequity. An additional liability arises from the embedded derivative, due to theoption of the issuer to settle in cash. As an embedded derivative the liabilitymust be separately included at fair value. A deed poll election, effective May2005, enabled the option to be classed as equity thereby eliminating the need tofair value thereafter. viii) FRS 27 FP has adopted the principles contained in FRS 27 as an improvement to itscurrent accounting policies, as permitted under IFRS 4. This has resulted in theFPLP With-Profits Fund being stated in the balance sheet on a realistic basisfor the interim 30 June 2005 and the comparatives as at 31 December 2004, 30June 2004 and 1 January 2004. These adjustments have no impact on netshareholders funds or profit before tax. ix) Other adjustments Non-transferrable pension assets:When calculating the net pension surplus/deficit plan assets excludenon-transferable financial instruments issued by the entity and held by thefund; non-transferable financial instruments include units in linked fundsissued by the reporting entity. The adjustment is purely presentational and doesnot impact shareholders' funds. However, the variance between actual andexpected return on non-transferrable assets flows is recognised in the IncomeStatement rather than in reserves. Deferred tax liabilities:Movement in deferred tax arising, being the deferred tax impact of IFRSadjustments, other than the deferred tax adjustment related to intangibles whichhas been included in the business combinations adjustment. Recognition of internally generated intangible assets:In accordance with IAS 38, certain development expenditure written offimmediately under MSS, must be capitalised. The deferral of current year'sdevelopment costs are offset by the amortisation of previous years capitalisedexpenses. Present value of acquired in-force business:Under IAS12, PVIF is grossed up for taxation and a corresponding deferred taxliability is created. Appendix - Analysis of Life & Pensions new business Gross new premiums written by type Regular premiums Single premiums Half year Half year Year Half year Half year Year ended ended ended ended ended ended 30 June 30 June 31 Dec 30 June 30 June 31 Dec 2005 2004 2004 2005 2004 2004UK operations £m £m £m £m £m £m------------------- -------- -------- ------- -------- -------- ------- LifeProtection 34 35 74 - - -Investment 1 1 2 295 268 575------------------- -------- -------- ------- -------- -------- ------- 35 36 76 295 268 575------------------- -------- -------- ------- -------- -------- -------PensionsIndividual Pensions 6 6 12 59 46 93DWP Rebates - - - 7 12 135Group Pensions 90 73 137 201 136 267Annuities - - - 141 153 278------------------- -------- -------- ------- -------- -------- ------- 96 79 149 408 347 773------------------- -------- -------- ------- -------- -------- -------UK Life andPensions 131 115 225 703 615 1,348------------------- -------- -------- ------- -------- -------- ------- International OperationsLombard - - - 350 - -Friends ProvidentInternational 27 24 49 185 117 253------------------- -------- -------- ------- -------- -------- -------International Life & Pensions 27 24 49 535 117 253------------------- -------- -------- ------- -------- -------- -------------------------- -------- -------- ------- -------- -------- -------Total Life &Pensions 158 139 274 1,238 732 1,601------------------- -------- -------- ------- -------- -------- ------- Annualised Premium Equivalent (APE) by type Half year Half year Year ended ended ended 30 June 30 June 31 Dec 2005 2004 2004UK Operations £m £m £m------------------------------------- -------- -------- -------LifeProtection 34 35 74Investment 31 28 59------------------------------------- -------- -------- ------- 65 63 133------------------------------------- -------- -------- -------PensionsIndividual Pensions 12 10 21DWP Rebates 1 1 14Group Pensions 110 87 164Annuities 14 15 28------------------------------------- -------- -------- ------- 137 113 227------------------------------------- -------- -------- -------UK Life and Pensions 202 176 360------------------------------------- -------- -------- ------- International OperationsLombard 35 - -Friends Provident International 45 36 74------------------------------------- -------- -------- -------International Life & Pensions 80 36 74------------------------------------- -------- -------- -------Total Life & Pensions 282 212 434------------------------------------- -------- -------- ------- Annualised Premium Equivalent (APE) represents annualised new regular premiumsplus 10% of single premiums. In classifying new business premiums the following basis of recognition isadopted: * Single new business premiums consist of those contracts under which there is no expectation of continuing premiums being paid at regular intervals; * Regular new business premiums consist of those contracts under which there is an expectation of continuing premiums being paid at regular intervals, including repeated or recurrent single premiums where the level of premiums is defined, or where a regular pattern in the receipt of premiums has been established; * Non-contractual increments under existing group pensions schemes are classified as new business premiums; * Transfers between products where open market options are available are included as new business; and * Regular new business premiums are included on an annualised basis. This information is provided by RNS The company news service from the London Stock Exchange

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