Preliminary Results - Part 1

11th Mar 2008 07:02

Friends Provident PLC11 March 2008 11 March 2008 Friends Provident plc - Preliminary results for the year ended 31 December 2007 (Unaudited) Financial highlights • 2007 results as indicated at 31 January 2008 o £16m EEV underlying profit (£20m indicated) o £322m EEV underlying profit before cost recategorisation (£300m indicated) o £251m accelerated amortisation of deferred acquisition costs within IFRS underlying profit before tax* with a further £100m to be recognised in 2008 (up to £400m indicated) • Friends Provident International increased new business contribution by 50%• Pro forma embedded value* per share 160p• Proposed total dividend for 2007 of 8.0p Business highlights • 2007 financial results support rationale for new strategic direction• Renewed focus on core strengths in protection and group pensions in UK• Committed to improving disclosure with significant improvements already delivered• Progressing implementation of new strategy with further update to be given at 2008 interim results Group financial key performance indicators:+------------------------------------------------+----------+------------+| | 2007 | 2006 |+------------------------------------------------+----------+------------+| | | |+------------------------------------------------+----------+------------+|IFRS underlying (loss)/profit before tax* | £(46)m| £400m|+------------------------------------------------+----------+------------+|IFRS (loss)/profit before tax from continuing | £(113)m| £491m||operations | | |+------------------------------------------------+----------+------------+|Basic (loss)/earnings per share | (5.0)p| 13.1p|+------------------------------------------------+----------+------------+|Shareholder cash generation | £177m| £340m|+------------------------------------------------+----------+------------+|Contribution from new business* | £206m| £204m|+------------------------------------------------+----------+------------+|Internal rate of return on new business* | 14.4%| 12.7%|+------------------------------------------------+----------+------------+|Cash payback on new business* | 9 years| 9 years|+------------------------------------------------+----------+------------+|EEV underlying profit before tax* | £16m| £509m|+------------------------------------------------+----------+------------+|Pro forma embedded value* | £3,725m| £3,660m|+------------------------------------------------+----------+------------+|Group solvency excess capital resources (i) | £1.3bn| £1.0bn|+------------------------------------------------+----------+------------+|Total shareholder return | (21.5)%| 19.0%|+------------------------------------------------+----------+------------+|Dividend per share (note 7) | 8.00p| 7.85p|+------------------------------------------------+----------+------------+ *See Appendix 1 (i) 2007 Group Solvency excess capital resources is an estimate Sir Adrian Montague, executive chairman, said: "We are fully focused on implementing the strategic review to gain the benefitsfrom it swiftly and efficiently. What will emerge is a self-financing,transparent and growing company built around its expertise in manufacturing andadministering life and pensions products. Our strong positions in protection andpensions form the foundation of our UK business, and developing the moreprofitable international markets through Friends Provident International is ourpriority. We look forward confidently to returning the company to profitablegrowth. I am immensely proud of our own people for the way that they are sustaining thehigh levels of service that have become the hallmark of Friends Provident." - Ends - For further information, please contact:Nick Boakes Friends Provident plc +44 (0) 845 641 7814Vanessa Neill Finsbury Limited +44 (0) 20 7251 3801Alex Simmons Finsbury Limited +44 (0) 20 7251 3801 Ref: I028 Notes to editors: 1. An interview with Sir Adrian Montague, executive chairman and JimSmart, chief financial officer, will be available to view in video, audio andtext formats at www.friendsprovident.com and www.cantos.com from 7.00am today. 2. An analyst presentation will take place at 9.30am today at JPMorgan Cazenove, 20 Moorgate, London, EC2R 6DA. 3.The analyst presentation will be webcast live and can be viewedlive and on demand on the Friends Provident website: www.friendsprovident.com/results 4.The presentation slides will be available from 9.30am today onwww.friendsprovident.com/presentations 5.For more information on Friends Provident including, photos,awards, fast facts, presentations, and media contacts please visit the mediasection at www.friendsprovident.com/media 6. Financial reporting dates Dividend dates: Shares go ex dividend 16 April 2008 Record date 18 April 2008 Dividend paid 27 May 2008 Financial Reporting Calendar: F&C Asset Management plc quarter 1 funds under management and business flows 25 April 2008 Friends Provident interim management statement plus quarter 1 new business 29 April 2008 Friends Provident plc Annual General Meeting 22 May 2008 F&C Asset Management plc interim results and quarter 2 2008 funds under management and business flows 6 August 2008 announcement (provisional) Friends Provident plc interim results 7 August 2008 F&C Asset Management plc quarter 3 funds under management and business flows announcement 31 October 2008 Friends Provident interim management statement plus quarter 3 new business 31 October 2008 7. Dividend per share includes the interim dividend of 2.7p paid in November 2007 and the proposed final dividend of 5.3p payable in May 2008, which is subject to approval at the Annual General Meeting. 8. Certain statements contained in this announcement constitute 'forward-looking statements'. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements, from time to time, of Friends Provident plc, its subsidiaries and subsidiary undertakings or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, adverse changes to laws or regulations; risks in respect of taxation; unforeseen liabilities from product reviews; asset shortfalls against product liabilities; changes in the general economic environment; levels and trends in mortality, morbidity and persistency; restrictions on access to product distribution channels; increased competition; and the ability to attract and retain personnel. These forward-looking statements are made only as at the date of this announcement and, save where required in order to comply with the Listing Rules, there is no obligation on Friends Provident plc to update such forward-looking statements. OVERVIEW TRADING Our 2007 trading and financial results announced today are in line with thosereported at the end of January, underlining the rationale for our full strategicreview and the appropriateness of our new strategic direction. The new strategyis further supported by positive developments in our core businesses. Annual Premium Equivalent (APE) sales increased 15% in the UK and 18% overseas,delivering an overall increase of 16%. Advances in the UK were driven by ourstrong position in pensions, and overseas, Friends Provident International (FPI)in particular delivered another strong performance, further cementing itsposition as an effective engine for growth. As previously reported, the underlying economics of our 2007 UK trading were notgood enough. In particular the cash generated from sales, before one-offadjustments, was less than the cost of shareholder dividends, as was ongoingunderlying IFRS profits, again before one-off items. These results reflect that our product persistency experience was worse than wasbeing assumed, particularly for UK business, and the consequent assumptionchange reduced EEV profit by £158m overall. Included within this result is anadverse impact of £15m on the contribution from UK new business, which endeddown 11% on 2006 levels despite the higher levels of sales. The overall UKinternal rate of return (IRR) at 11.7% was helped by regulatory changes butremains at an unsatisfactory level. NEW STRATEGY The new strategy was announced at the end of January this year. Since then, ourconversations with management at leading UK intermediary firms have beenencouraging, with widespread support for our focus on protection and pensions,and broad support for our market positioning. The strength of our underlyingpropositions remains an attraction to these intermediaries. The new strategy is designed to address the poor underlying economics of tradingoutlined above by elevating profit above volume growth. Its most direct impactis to reduce the capital intensity of the UK business, which will be achievedprimarily by ceasing to write new group pension schemes where initial commissionis required, and by no longer pursuing an ambition in wealth management beyondthe manufacture and administration of life and pensions products. Cashconsumption will be reduced further by adopting a more selective approach toindividual pensions and to savings & investment products, competing only whenthe prospective returns make it worth doing so. Our UK trading focus therefore centres around our established strengths in grouppensions and protection business. The improved cash flows anticipated willsupport investment in FPI, our strategy being to grow the international businessfaster than the UK. FPI will pursue growth in savings & investment, pensions andprotection markets with attractive margins, and this is the trading priority ofthe Group. The new strategy includes reducing the cost base by at least £40m bythe end of 2009. Once fully implemented, the new strategy is expected to add two percentagepoints to the overall IRR, with the prospect of further improvement over time. The Group will be self-financing and therefore does not expect any need toaccess the capital markets. The three businesses that now fit less comfortably within the new strategy -Lombard, F&C Asset Management and Pantheon Financial - continue to developsuccessfully. We are working with their respective management teams to establishstrategies for maximising shareholder value while minimising disruption to thesegood businesses. Swift and efficient implementation of the new strategy is now our focus toensure that the inherent benefits will emerge as soon as practicable and, asannounced, an update on progress can be expected at the time of interim resultsin August 2008. In the meantime, we can report that a senior team is in placesolely to oversee implementation and good progress is already being made. IMPACT OF ONE-OFF CHANGES AND DISCLOSURE An important element of the new strategy is the adoption of improved financialtransparency and disclosure, including the segmentation of Life & Pensionsunderlying profit, and analyses provided by product on both cash and IFRS bases. Some associated decisions have had the effect of further reducing 2007 profits. In particular, the capitalisation of £20m of development expenses, reclassifiedas maintenance expenses, reduces IFRS profits by £112m and EEV profits by £238m.A further £68m reduction in EEV profits arises from capitalising additionalcorporate costs. The writing off of intangibles, especially in connection with our withdrawalfrom Wraps, reduces both EEV and IFRS profits by some £15m. Whilstimplementation of the remaining changes arising from the FSA Policy StatementPS06/14 led to a £138m release of shareholder cash. After a review of estimatedamortisation profile of deferred acquisition costs on protection business thenet impact on IFRS profit was negative £34m. Largely as a result of the reserving changes, the overall IRR for 2007 is 14.4%and this, together with other key metrics, is likely to fall back initially assome of the key financial aspects of the strategic review are implemented. The 2007 underlying profit on an EEV basis is in line with our announcement of31 January 2008 and the underlying profit on an IFRS basis is also down, due tothe same factors. DIVIDEND The Board is recommending a final dividend for 2007 of 5.30 pence per share inline with our current dividend policy. This would bring the total 2007 dividendto 8.00 pence per share, a 2% increase over 2006. After payment of the final dividend for 2007, we will reduce the overall cost ofthe dividend to a level that reflects the dividend paying capacity of the Life &Pensions business, expected to be around £90m to £100m, and adopt a policy ofgrowing the dividend in line with operating cash flow in future. The Boardbelieves that this offers the prospect of dividend growth in real terms in theyears to come. The Board will determine the appropriate dividend per share indue course. In reaching this decision, the Board will have regard not only tothe dividend paying capacity of the business but also to any capital returned toshareholders as a result of releases from businesses which do not fit thestrategy. OUTLOOK Our new strategy plays to our strengths. Our systems, service and efficiencyenable us to compete in this challenging marketplace. In protection, we willseek to at least maintain market share and to continue to enter new segments.Overall volumes of new pensions business will fall as a consequence of our moreselective approach, but the quality of new business written will increase. The outlook for International Life & Pensions business remains strong. FPI willbenefit from its growing presence in key markets and continued strong demand forits products. We have established firm footholds in a number of territories fromwhich to generate future sales, further supported by our new operations inSingapore, Germany and United Arab Emirates. International markets will remaincompetitive but developing FPI is a priority of the new strategy and we areconfident that the outlook for this business remains positive. CONCLUSION Our core propositions are already strong and continue to be recognised byindustry awards. Our belief in, and commitment to, the intermediary communityremains at the heart of our strategy and we look forward to deepening ouralready strong relationships. The international markets will become the keydrivers of profitable growth. Quality customer service and our ability toharness technology imaginatively provide competitive advantage. The outcome ofthe strategic review has repositioned Friends Provident positively and our focusis now firmly on growing the business both transparently and profitably, to thebenefit of all key stakeholders. BUSINESS REVIEW New Business - Annual Premium Equivalent (APE): +-----------------------------------------------------+--------+-----------+-------+| | Change| 2007| 2006|+-----------------------------------------------------+--------+-----------+-------+| | %| £m| £m|+-----------------------------------------------------+--------+-----------+-------+|Protection | (5)| 68| 72|+-----------------------------------------------------+--------+-----------+-------+|Pensions | | | |+-----------------------------------------------------+--------+-----------+-------+|- Group pensions | 23 | 526| 429|+-----------------------------------------------------+--------+-----------+-------+|- Individual pensions | 50 | 65| 43|+-----------------------------------------------------+--------+-----------+-------+|- DWP rebates | (9)| 14| 15|+-----------------------------------------------------+--------+-----------+-------+|Total pensions | 24 | 605| 487|+-----------------------------------------------------+--------+-----------+-------+|Annuities | 7 | 27| 26|+-----------------------------------------------------+--------+-----------+-------+|Savings & Investments | (27)| 51| 69|+-----------------------------------------------------+--------+-----------+-------+|Total UK Life & Pensions | 15 | 751| 654|+-----------------------------------------------------+--------+-----------+-------+| | | | |+-----------------------------------------------------+--------+-----------+-------+|FPI | 60 | 186| 117|+-----------------------------------------------------+--------+-----------+-------+|Lombard | (5)| 199| 209|+-----------------------------------------------------+--------+-----------+-------+|Total International Life & Pensions | 18 | 385| 326|+-----------------------------------------------------+--------+-----------+-------+| | | | |+-----------------------------------------------------+--------+-----------+-------+|Total | 16 | 1,136| 980|+-----------------------------------------------------+--------+-----------+-------+ Total new business on an APE basis was up 16%. In the UK, new business was up15% with strong performance in pensions and annuities offsetting declines inprotection and savings & investments. In International, new business was up 18%with a good performance in FPI outweighing a 5% decline in Lombard. Present Value of New Business Premiums (PVNBP)/ Contribution from new business: +------------------------+-----------------------------+----------------------------+| | 2007 | 2006 |+------------------------+--------+------------+-------+-------+------------+-------+| | PVNBP|Contribution| Margin| PVNBP|Contribution| Margin|+------------------------+--------+------------+-------+-------+------------+-------+| | £m| £m| %| £m| £m| %|+------------------------+--------+------------+-------+-------+------------+-------+|Protection | 413| 31| 7.5| 432| 32| 7.4|+------------------------+--------+------------+-------+-------+------------+-------+|Pensions | | | | | | |+------------------------+--------+------------+-------+-------+------------+-------+|- Group pensions | 2,611| 32| 1.2| 2,298| 38| 1.6|+------------------------+--------+------------+-------+-------+------------+-------+|- Individual pensions | 504| 7| 1.4| 336| 5| 1.5|+------------------------+--------+------------+-------+-------+------------+-------+|- DWP rebates | 140| 12| 8.6| 154| 10| 6.5|+------------------------+--------+------------+-------+-------+------------+-------+|Total pensions | 3,255| 51| 1.6| 2,788| 53| 1.9|+------------------------+--------+------------+-------+-------+------------+-------+|Annuities | 273| 13| 5.0| 255| 13| 5.3|+------------------------+--------+------------+-------+-------+------------+-------+|Savings & Investments | 501| 1| 0.2| 687| 10| 1.5|+------------------------+--------+------------+-------+-------+------------+-------+|Total UK Life & Pensions| 4,442| 96| 2.2| 4,162| 108| 2.6|+------------------------+--------+------------+-------+-------+------------+-------+| | | | | | | |+------------------------+--------+------------+-------+-------+------------+-------+|FPI | 1,235| 39| 3.2| 823| 26| 3.1|+------------------------+--------+------------+-------+-------+------------+-------+|Lombard | 1,985| 71| 3.6| 2,089| 70| 3.4|+------------------------+--------+------------+-------+-------+------------+-------+|Total International | | | | | | |+------------------------+--------+------------+-------+-------+------------+-------+|Life & Pensions | 3,220| 110| 3.4| 2,912| 96| 3.4|+------------------------+--------+------------+-------+-------+------------+-------+| | | | | | | |+------------------------+--------+------------+-------+-------+------------+-------+|Total | 7,662| 206| 2.7| 7,074| 204| 2.9|+------------------------+--------+------------+-------+-------+------------+-------+ New business on a PVNBP basis was £7,662m, up 8% (2006: £7,074m) as the increasein sales volume was offset by higher lapse assumptions in pensions. Total contribution from new business was £206m, an increase of 1% (2006: £204m).In the UK contribution was £96m, down 11% on 2006 (£108m) with slower sales inprotection and savings & investments, and adverse lapse experience reflected inassumptions in group pensions and savings & investments. Internationalcontribution increased 15% to £110m (2006: £96m) with a fall in sales fromLombard more than offset by increased margin. Overall margin was 2.7%, down on the 2.9% recorded in 2006. In the UK, margindeclined from 2.6% to 2.2%. Margin was maintained in protection but adverselyaffected by lapse assumptions in pensions and savings & investments.International margin was unchanged at 3.4%. Internal Rate of Return (IRR) and cash payback of new business: +---------------------------------------+--------+----------+------------+---------+| | 2007 | 2007 | 2006 | 2006|+---------------------------------------+--------+----------+------------+---------+| | % p.a. | Years | % p.a. | Years|+---------------------------------------+--------+----------+------------+---------+|Protection | 13.2 | 8 | 9.3 | 9|+---------------------------------------+--------+----------+------------+---------+|Group pensions | 8.8 | 18 | 8.5 | 17|+---------------------------------------+--------+----------+------------+---------+|Savings & Investments | 7.8 | 24 | 8.2 | 16|+---------------------------------------+--------+----------+------------+---------+|Total UK Life & Pensions | 11.7 | 12 | 10.3 | 12|+---------------------------------------+--------+----------+------------+---------+| | | | | |+---------------------------------------+--------+----------+------------+---------+|FPI | 17.8 | 6 | 20.1 | 6|+---------------------------------------+--------+----------+------------+---------+|Lombard | 29.2 | 4 | 29.4 | 4|+---------------------------------------+--------+----------+------------+---------+|Total International Life & Pensions | 23.0 | 4 | 25.7 | 4|+---------------------------------------+--------+----------+------------+---------+| | | | | |+---------------------------------------+--------+----------+------------+---------+|Total Life & Pensions | 14.4 | 9 | 12.7 | 9|+---------------------------------------+--------+----------+------------+---------+ The IRR on new business was 14.4% up from 12.7% in 2006. In the UK, IRRincreased to 11.7% as a result of favourable regulatory reserve changesfollowing completion of the implementation of PS06/14, which was particularlyhelpful for protection. FPI IRR was down to 17.8% as a result of the mix ofproducts sold in Hong Kong. The total IRR benefited from International newbusiness growing more quickly than in the UK. Overall cash payback was unchanged at 9 years. UK payback and Internationalpayback were also unchanged at 12 years and 4 years respectively. Protectionpayback fell to 8 years as a result of lower reserving requirements but savings& investments increased to 24 years as a result of increased lapse assumptions.The main savings & investments product was replaced in October. Capitalisation of development costs as maintenance and effect of moving to endperiod economic assumptions: In reporting on the outcome of our strategic review we announced our intentionto categorise around £20m of costs, previously shown as development costs, asmaintenance. The impact of this change on key new business metrics is shown inthe following tables. These will act as a reference point for 2008 andsubsequent reporting and are therefore shown on end of period economicassumptions. +--------------------------------------+---------------+-------------+| | 2007| |+--------------------------------------+---------------+-------------+| | Contribution| |+--------------------------------------+---------------+-------------+| | after| |+--------------------------------------+---------------+-------------+| | expense| |+--------------------------------------+---------------+-------------+| | capitalisation| |+--------------------------------------+---------------+-------------+| | and move to| |+--------------------------------------+---------------+-------------+| | end of period| 2007|+--------------------------------------+---------------+-------------+| | economic| Contribution|+--------------------------------------+---------------+-------------+| | assumptions| as reported|+--------------------------------------+---------------+-------------+| | £m| £m|+--------------------------------------+---------------+-------------+|Protection | 25| 31|+--------------------------------------+---------------+-------------+|Pensions | | |+--------------------------------------+---------------+-------------+|- Group pensions | 23| 32|+--------------------------------------+---------------+-------------+|- Individual pensions | 6| 7|+--------------------------------------+---------------+-------------+|- DWP rebates | 12| 12|+--------------------------------------+---------------+-------------+|Total pensions | 41| 51|+--------------------------------------+---------------+-------------+|Annuities | 12| 13|+--------------------------------------+---------------+-------------+|Savings & Investments | 1| 1|+--------------------------------------+---------------+-------------+|Total UK Life & Pensions | 79| 96|+--------------------------------------+---------------+-------------+| | | |+--------------------------------------+---------------+-------------+|FPI | 39| 39|+--------------------------------------+---------------+-------------+|Lombard | 71| 71|+--------------------------------------+---------------+-------------+|Total International Life & Pensions | 110| 110|+--------------------------------------+---------------+-------------+| | | |+--------------------------------------+---------------+-------------+|Total Life & Pensions | 189| 206|+--------------------------------------+---------------+-------------+ The 2007 contribution from new business as reported above has been calculatedbefore taking account of the change in categorisation of £20m of developmentcosts as maintenance costs. After allowing for this change and moving to end ofperiod economic assumptions, the contribution in the UK would have been £79m. Ofthe reduction of £17m, £16m relates to the change in treatment of developmentcosts. International contribution would have been unchanged. +-------------------------+---------------+----------------+--------------------+----------------+| | | | 2007 Cash| |+-------------------------+---------------+----------------+--------------------+----------------+| | 2007 IRR| | payback| |+-------------------------+---------------+----------------+--------------------+----------------+| | after| | after| |+-------------------------+---------------+----------------+--------------------+----------------+| | expense| | expense| |+-------------------------+---------------+----------------+--------------------+----------------+| | capitalisation| | capitalisation| |+-------------------------+---------------+----------------+--------------------+----------------+| | and move to| | and move to| |+-------------------------+---------------+----------------+--------------------+----------------+| | end of period| | end of period| 2007 Cash|+-------------------------+---------------+----------------+--------------------+----------------+| | economic| 2007 IRR| economic| payback|+-------------------------+---------------+----------------+--------------------+----------------+| | assumptions| as reported| assumptions| as reported|+-------------------------+---------------+----------------+--------------------+----------------+| | % p.a.| % p.a.| years| years|+-------------------------+---------------+----------------+--------------------+----------------+|Protection | 10.2| 13.2| 10| 8|+-------------------------+---------------+----------------+--------------------+----------------+|Group pensions | 8.4| 8.8| 20| 18|+-------------------------+---------------+----------------+--------------------+----------------+|Savings & Investments | 7.6| 7.8| 29| 24|+-------------------------+---------------+----------------+--------------------+----------------+|Total UK Life & Pensions | 10.9| 11.7| 14| 12|+-------------------------+---------------+----------------+--------------------+----------------+| | | | | |+-------------------------+---------------+----------------+--------------------+----------------+|FPI | 17.5| 17.8| 6| 6|+-------------------------+---------------+----------------+--------------------+----------------+|Lombard | 29.8| 29.2| 4| 4|+-------------------------+---------------+----------------+--------------------+----------------+|Total International | | | | |+-------------------------+---------------+----------------+--------------------+----------------+|Life & Pensions | 23.2| 23.0| 5| 4|+-------------------------+---------------+----------------+--------------------+----------------+| | | | | |+-------------------------+---------------+----------------+--------------------+----------------+|Total Life & Pensions | 13.8| 14.4| 10| 9|+-------------------------+---------------+----------------+--------------------+----------------+ Capitalisation of £20m of development costs as maintenance costs lowered the UKIRR by 0.8% to 10.9%. Moving to end of period economic assumptions was broadlyneutral for the UK and for FPI but an increase of 0.6% in the Euro risk-freerate over the year led to an 0.6% increase in the IRR for Lombard. Capitalisation of development costs increased payback to 14 years in the UK and10 years overall. Protection +----------------------------------+------------+-----------+-----------+| | Change % | 2007| 2006 |+----------------------------------+------------+-----------+-----------+|New business (APE) | (5)| £68m| £72m |+----------------------------------+------------+-----------+-----------+|Market share | (5)| 6.1%| 6.4% |+----------------------------------+------------+-----------+-----------+|Contribution from new business | (3)| £31m| £32m |+----------------------------------+------------+-----------+-----------+|VNB Margin (PVNBP) | - | 7.5%| 7.4% |+----------------------------------+------------+-----------+-----------+|IRR | 42 | 13.2%| 9.3% |+----------------------------------+------------+-----------+-----------+|New business strain | (69)| £40m| £129m |+----------------------------------+------------+-----------+-----------+|Cash payback | 11 | 8 years| 9 years |+----------------------------------+------------+-----------+-----------+|Cash generation/(outflow) | - | £4m| £(27)m|+----------------------------------+------------+-----------+-----------+|IFRS underlying profit | (84)| £5m| £31m |+----------------------------------+------------+-----------+-----------+|In-force premiums | 8 | £311m| £288m|+----------------------------------+------------+-----------+-----------+ New business APE was £68m down 5% (2006: £72m). Life sales were down 9% andIncome Protection sales were up 5%. Market share fell to 6.1% in a flat overallmarket. Group Income Protection market share rose from 2.6% to 3.0% but groundwas given up in both independent and tied individual protection sales withmarket share falling from 7.8% to 7.3% amid tough price competition. Margin rosefrom 7.4% to 7.5% and as a result the contribution from new business was downonly £1m at £31m. The benefit of reserving changes (PS06/14) was offset by pricereductions in the market. IRR increased to 13.2% reflecting the reduction inreserving requirements. This also reduced new business strain to £40m and cashpayback to eight years. The reduction in new business strain, and a corresponding change to in-forcesurplus, led to cash generation in the year being £4m. IFRS underlying profitwas £5m, a reduction from £31m in 2006. The 2006 result benefited from thedeferral of acquisition costs. Following completion of the implementation ofPS06/14, acquisition costs for protection business are now amortised over ashorter period. As a result the IFRS profit in 2007 was largely the same as thecash generated in the year and influenced by the extent to which in-forcesurplus is able to fund new business strain. This will be the position goingforwards. The amount of new premiums written exceeded those lapsing. As a consequence, thetotal in-force premiums rose 8% to £311m. Pensions +--------------------------------------+-----------+----------+----------+| | Change %| 2007| 2006|+--------------------------------------+-----------+----------+----------+|Group pensions: | | | |+--------------------------------------+-----------+----------+----------+|New business (APE) | 23 | £526m | £429m |+--------------------------------------+-----------+----------+----------+|Contribution from new business | (16)| £32m | £38m |+--------------------------------------+-----------+----------+----------+|VNB Margin (PVNBP) | (25)| 1.2% | 1.6% |+--------------------------------------+-----------+----------+----------+|Cash Payback | (6)| 18 years | 17 years |+--------------------------------------+-----------+----------+----------+|IRR | 4 | 8.8 % | 8.5 % |+--------------------------------------+-----------+----------+----------+| | | | |+--------------------------------------+-----------+----------+----------+|Individual pensions: | | | |+--------------------------------------+-----------+----------+----------+|New business (APE) | 50 | £65m | £43m |+--------------------------------------+-----------+----------+----------+|Contribution from new business | 40 | £7m | £5m |+--------------------------------------+-----------+----------+----------+| | | | |+--------------------------------------+-----------+----------+----------+|DWP rebates: | | | |+--------------------------------------+-----------+----------+----------+|New business (APE) | (9)| £14m | £15m |+--------------------------------------+-----------+----------+----------+|Contribution from new business | 20 | £12m | £10m |+--------------------------------------+-----------+----------+----------+| | | | |+--------------------------------------+-----------+----------+----------+|New business strain | 16 | £145m | £126m |+--------------------------------------+-----------+----------+----------+|Cash outflow | (4)| £(109)m| £(105)m|+--------------------------------------+-----------+----------+----------+|IFRS underlying loss | 5 | £(40)m| £(42)m|+--------------------------------------+-----------+----------+----------+|In-force annual premiums | 37 | £1,241m | £907m |+--------------------------------------+-----------+----------+----------+ +------------------------------------------------------------+----------+| | £m |+------------------------------------------------------------+----------+|Pensions assets under management - 1 Jan 2007 | 5,488 |+------------------------------------------------------------+----------+|Regular contributions | 1,006 |+------------------------------------------------------------+----------+|Transfers in and lump sum contributions | 1,177 |+------------------------------------------------------------+----------+|Transfers out and retirements | (474)|+------------------------------------------------------------+----------+|Investment return | 398 |+------------------------------------------------------------+----------+|Pensions assets under management - 31 Dec 2007 | 7,595 |+------------------------------------------------------------+----------+ In group pensions, new business was £526m, up 23% (2006: £429m). During theyear, 1,153 new schemes were signed-up bringing the total number of schemesbeing managed to 11,084. A Group SIPP option was added late in the year enablingus to continue to compete effectively for these schemes. The contribution from new business was £32m, a decrease of 16% on 2006. Marginwas 1.2%, down from 1.6% in 2006 as a result of changed assumptions for lapsesand paid up policies which also resulted in cash payback increasing to 18 years.IRR increased to 8.8% with the adverse impact of persistency assumptions beingmore than offset by reserving changes (PS06/14). Of the regular premium newbusiness APE, 27% arose from new initial commission schemes which will notfeature in the revised strategy. Individual pension new business was up 50% at £65m. Contribution was £7m, anincrease of 40%. The Department of Work and Pensions (DWP) rebates added £14m tonew business and £12m to contribution. This is a fall from 2006 in line with theexpected decline as this arrangement is phased out. A total of £73m commission was paid and this, together with acquisition costs,resulted in a new business strain of £145m. This was a 16% increase on 2006owing to increased new business sales. Increased income on higher assets undermanagement offset the higher new business strain and cash outflow was £109m.Underlying losses on an IFRS basis were £2m lower at £40m. The growth in annual premiums in force from new members and increments inexisting schemes together with the annual premiums from new schemes exceededpremiums ceasing from paid up members, transfers and retirements. As a result,annual premiums in force at 31 December 2007 were £1,241m, an increase of 37% inthe year. The total number of pension scheme members is 682,000, an increase of23% in the year. Assets under management for pensions business increased by 38% to £7,595m.Regular contributions were £1,006m. The amount of transfers in and lump sumcontributions exceeded transfers out and retirements, adding a net £703m.Investment returns added a further £398m. Annuities +-------------------------------------+-----------+----------+----------+| | Change %| 2007| 2006|+-------------------------------------+-----------+----------+----------+|New business (APE) | 7 | £27m| £26m|+-------------------------------------+-----------+----------+----------+|Contribution from new business | - | £13m| £13m|+-------------------------------------+-----------+----------+----------+|VNB Margin (PVNBP) | (6)| 5.0%| 5.3%|+-------------------------------------+-----------+----------+----------+|Cash generation | (12)| £15m| £17m|+-------------------------------------+-----------+----------+----------+|IFRS underlying profit | (43)| £12m| £21m|+-------------------------------------+-----------+----------+----------+|Amount of annuities in payment p.a. | 16 | £150m| £129m|+-------------------------------------+-----------+----------+----------+ New annuities APE written in 2007 were £27m, an increase of 7% in the year andrepresenting over 40% of the value of vesting pension funds in the year.Contribution from new business was £13m. Margins were lower at 5.0% as assumedimprovements to longevity were not fully compensated by pricing. Cash generation was slightly lower at £15m with the reduction in in-forcesurplus of £16m from reinsuring the in-force annuity business being largelyoffset by sharply lower new business strain from yield curve movements betweenthe pricing and liability valuation bases. These factors led to IFRS underlyingprofit falling 43% to £12m in 2007. Looking forward, the in-force surplus willgrow as net new annuities are added and new business strain will continue to besensitive to changes in the yield curve. IFRS underlying profits will thereforefollow a growing trend with some volatility from period to period. The new annuities sold exceeded those ceasing and hence the amount of annuitiesin payment increased by 16% to £150m p.a. Savings & Investments +--------------------------------------+-----------+----------+----------+| | Change % | 2007 | 2006 |+--------------------------------------+-----------+----------+----------+|New business (APE) | (27)| £51m | £69m |+--------------------------------------+-----------+----------+----------+|Contribution from new business | (90)| £1m | £10m |+--------------------------------------+-----------+----------+----------+|VNB Margin (PVNBP) | (87)| 0.2% | 1.5% |+--------------------------------------+-----------+----------+----------+|IRR p.a. | (5)| 7.8% | 8.2% |+--------------------------------------+-----------+----------+----------+|New business strain | - | £36m | £36m |+--------------------------------------+-----------+----------+----------+|Cash payback | (50)| 24 years | 16 years |+--------------------------------------+-----------+----------+----------+|Cash outflow | 24 | £(22)m| £(29)m|+--------------------------------------+-----------+----------+----------+|IFRS underlying loss | (69)| £(4)m| £(13)m|+--------------------------------------+-----------+----------+----------+|Assets under management | 5 | £3,208m | £3,061m |+--------------------------------------+-----------+----------+----------+ New business sales were down 27% at £51m as a result of extremely competitivemarkets and the closure of our Investment Portfolio Bond in October which wasnot sufficiently profitable. A replacement product, the Wealth Solutions Bondwas launched in the second half of the year but is yet to achieve comparablelevels of sales. The market for insurance bonds has also been affected byuncertainty around their tax treatment owing to proposed changes to capitalgains tax. This also contributed to slower sales in the second half. IRR fell to 7.8% and contribution fell to £1m as a result of margins beingadversely affected by higher lapse assumptions and competitive pricing in themarket. New business strain was unchanged at £36m but the lower expected incomefollowing the lapse assumption change increased cash payback to 24 years. Cash outflow fell to £22m as a result of higher in-force surplus from thegrowing portfolio. This also led to losses falling to £4m. The amount of new monies acquired, together with investment returns, exceededthe amount repaid in the year and, as a result, the value of assets undermanagement increased by 5% to £3,208m. FPI +-------------------------------------+-----------+----------+----------+| | Change % | 2007 | 2006|+-------------------------------------+-----------+----------+----------+|New business (APE): | | | |+-------------------------------------+-----------+----------+----------+|Asia | 77 | £100m | £57m|+-------------------------------------+-----------+----------+----------+|UK | (18)| £16m | £19m|+-------------------------------------+-----------+----------+----------+|Middle East | 57 | £22m | £14m|+-------------------------------------+-----------+----------+----------+|Europe (excluding UK) | 72 | £27m | £16m|+-------------------------------------+-----------+----------+----------+|Rest of the World | 92 | £21m | £11m|+-------------------------------------+-----------+----------+----------+|Total | 60 | £186m | £117m|+-------------------------------------+-----------+----------+----------+|Contribution from new business | 50 | £39m | £26m|+-------------------------------------+-----------+----------+----------+|VNB Margin (PVNBP) | 3 | 3.2% | 3.1%|+-------------------------------------+-----------+----------+----------+|IRR p.a. | (11)| 17.8% | 20.1%|+-------------------------------------+-----------+----------+----------+|New business strain | 176 | £69m | £25m|+-------------------------------------+-----------+----------+----------+|Cash payback | - | 6 years | 6 years|+-------------------------------------+-----------+----------+----------+|Cash (outflow)/generation | - | £(25)m| £36m|+-------------------------------------+-----------+----------+----------+|IFRS underlying profit | (88)| £3m | £25m|+-------------------------------------+-----------+----------+----------+|Assets under management | 29 | £5,022m | £3,882m|+-------------------------------------+-----------+----------+----------+ FPI new business was up 60% year-on-year. Increased regular premium savingsbusiness in Asia and the Middle East was the principal driver of this result,supported by pensions in Germany, which accounted for £8m of APE in the year.FPI's UK insurance bond sales slowed in the latter part of the year because ofuncertainty surrounding capital gains tax. In the year, new licences wereobtained in UAE and Singapore. Contribution from new business increased 50% to £39m as margin was broadlyunchanged at 3.2%. IRR was 17.8%, down on 2006 as it was affected by mix ofproducts sold. New business strain was £69m driven by the sales increase. Cashpayback was maintained at 6 years. Net cash outflow at £25m was affected by thehigher new business strain and reduced in-force surplus, as 2006 included anexceptionally high release of £15m resulting from a misclassification in theanalysis. IFRS underlying profit fell to £3m reflecting the same factors. Fundsunder management grew 29% to £5,022m as new business sales exceeded maturitiesand lapses. Lombard +-------------------------------------+-----------+-----------+----------+| | Change %| 2007| 2006 |+-------------------------------------+-----------+-----------+----------+|New business (APE): | | | |+-------------------------------------+-----------+-----------+----------+|UK and Nordic | (11)| £28m| £32m |+-------------------------------------+-----------+-----------+----------+|Northern Europe | 1 | £58m| £58m |+-------------------------------------+-----------+-----------+----------+|Southern Europe | 33 | £98m| £73m |+-------------------------------------+-----------+-----------+----------+|Rest of the World | (69)| £15m| £46m |+-------------------------------------+-----------+-----------+----------+|Total including large cases | (5)| £199m| £209m |+-------------------------------------+-----------+-----------+----------+|Of which, large cases (greater than | (14)| £79m| £91m ||€10m) | | | |+-------------------------------------+-----------+-----------+----------+|Total excluding large cases | 2 | £120m| £118m |+-------------------------------------+-----------+-----------+----------+|Contribution from new business | 1 | £71m| £70m |+-------------------------------------+-----------+-----------+----------+|VNB Margin (PVNBP) | 6 | 3.6%| 3.4% |+-------------------------------------+-----------+-----------+----------+|IRR p.a. | (1)| 29.2%| 29.4% |+-------------------------------------+-----------+-----------+----------+|New business strain | 3 | £41m| £40m|+-------------------------------------+-----------+-----------+----------+|Cash payback | - | 4 years| 4 years|+-------------------------------------+-----------+-----------+----------+|Cash generation/(outflow) | - | £1m| £(2)m|+-------------------------------------+-----------+-----------+----------+|IFRS underlying profit | (8)| £12m| £13m |+-------------------------------------+-----------+-----------+----------+|Assets under management | 30 | £10,060m| £7,760m |+-------------------------------------+-----------+-----------+----------+ Lombard full year sales were 5% down on 2006. Some £30m of 2006 sales, mainlylarge cases, were in the Mexican market, where the outcome of tax changesannounced late in 2006 was to close the opportunity. Southern Europeanterritories performed strongly. UK sales were lower, mainly due to an especiallystrong 2006 result, and in part reflecting uncertainty caused by potentialchanges to tax rules. The value of large cases written in the year was 14% lowerin 2007 at £79m (2006: £91m). Results in any period will continue to be subjectto variation from timing of large cases. Lombard has increased sales at acompound annual growth rate of 15% across the last three years. Contribution was in line with 2006 as the mix of territories and case sizesincreased margin to 3.6%. IRR was 29.2% and new business strain was £41m. Cashpayback was maintained at four years. Cash generation was £1m and IFRSunderlying profit was £12m. Funds under management at the end of 2007 were £10.1 billion, an increase of30%. Over the past three years funds under management have grown at a compoundannual rate of 32%. Lombard is an excellent business and has very strong prospects for profitablegrowth from both existing markets and planned developments, including theongoing development of Swiss private banking relationships. Itsprivatbancassurance business is built around first class distribution partners,innovative solutions, exceptional service and a strong management team. Asset Management+--------------------------------------------------+----------+----------+| | 2007 | 2006 |+--------------------------------------------------+----------+----------+| | £m | £m |+--------------------------------------------------+----------+----------+|Net revenue | 265 | 248 |+--------------------------------------------------+----------+----------+|Operating expenses | (184)| (159)|+--------------------------------------------------+----------+----------+|Other | 1 | 2 |+--------------------------------------------------+----------+----------+| | 82 | 91 |+--------------------------------------------------+----------+----------+|Operating margin | 30.9%| 36.5%|+--------------------------------------------------+----------+----------+|Other expenses (net) | (4)| (2)|+--------------------------------------------------+----------+----------+|Asset Management underlying profit | 78 | 89 |+--------------------------------------------------+----------+----------+ F&C Asset Management plc funds under management decreased marginally from£104.1bn to £103.6bn. Net fund outflows were £(9.0)bn, offset by £8.5bn positivemovements due to the impact of rising markets and positive exchange variances.The net outflows included £(5.1)bn insurance, £(2.9)bn institutional, £(1.3)bnsub-advisory, offset by retail inflows. Net revenue has increased by 7%, mainly due to performance fees, which more thandoubled to £21m. Revenue margin, measured as management fee income divided byaverage funds under management has increased from 22 basis points in 2006 to 23basis points in 2007. In part this reflects the loss of low fee mandates, butalso reflects progress towards generating new business in higher margin areas. Operating expenses, excluding certain share scheme costs, amortisation andimpairment of intangible assets and restructuring costs increased by 16%. Duringthe year headcount rose by 138, with 81 arising from the transfer of staff ontermination of the Mellon outsourcing agreement, and the remainder representingan investment in the business to support the enhanced product range anddistribution plans. IT and operational costs also increased as a result ofsignificant project costs associated with changes to the operating platform,both through the reintegration of the Mellon back office and the introduction ofnew front office Decision, Risk and Dealing systems. As a consequence operating margin has fallen from 36.5% to 30.9%, and underlyingprofit has decreased by 12%. F&C launched its three year plan last year, focused on targeting specialistareas and higher margin products to foster profitable organic growth. Goodoverall progress has been made in executing the first year of the plan. Thefocus of 2008 will be distribution, with a number of initiatives in place toextend its reach into new territories in Europe and beyond. IFA businesses +------------------------------------------------+----------+----------+| | 2007| 2006|+------------------------------------------------+----------+----------+| | £m| £m|+------------------------------------------------+----------+----------+|Sesame IFRS underlying profit | 12| -|+------------------------------------------------+----------+----------+|Pantheon Financial IFRS underlying profit | 2| -|+------------------------------------------------+----------+----------+ The Sesame and Pantheon Financial businesses were acquired during the year andhave performed in line with expectations. The above results reflect the sevenmonths trading since the dates of acquisition. FINANCIAL REVIEW PROFITABILITY ON THE IFRS BASIS Our financial results are presented on two reporting bases: InternationalFinancial Reporting Standards as adopted by the EU (IFRS) and European EmbeddedValue (EEV). IFRS is the primary accounting basis. It includes the cash surplusearned during the period but differs from the EEV basis in that, with limitedexceptions, it does not recognise future cash flows in profit. The exceptionsare: negative reserves on savings & investments business and on protectionbusiness, which are now permitted under PS06/14 Prudential Changes for Insurers,and the deferral of some acquisition costs. We have made the following improvements in disclosure: • Life & Pensions underlying profit has been analysed into Life & Pensions result, return on shareholder funds and principal reserving changes and one-off items, with the 2006 analysis restated accordingly. • We also provide analyses of new business strain and in-force surplus by product on both cash and IFRS bases. Further details are given in appendix 4. IFRS profit summary+-----------------------------------------+--------+-----------+---------+| | Change| 2007 | 2006 |+-----------------------------------------+--------+-----------+---------+| | %| £m | £m |+-----------------------------------------+--------+-----------+---------+|UK Life & Pensions | | (71)| 46 |+-----------------------------------------+--------+-----------+---------+|International Life & Pensions | -63| 26 | 70 |+-----------------------------------------+--------+-----------+---------+|Return on Life & Pensions shareholder | +34| 71 | 53 ||funds | | | |+-----------------------------------------+--------+-----------+---------+|Other UK Life & Pensions net income | -| - | - |+-----------------------------------------+--------+-----------+---------+|Asset Management | -12| 78 | 89 |+-----------------------------------------+--------+-----------+---------+|Corporate items | -7| (15)| (14)|+-----------------------------------------+--------+-----------+---------+|Underlying profit before principal | | | ||reserving | | | |+-----------------------------------------+--------+-----------+---------+|charges and one-off items | -64| 89 | 244 |+-----------------------------------------+--------+-----------+---------+|Principal reserving changes and one-off | | (135)| 156 ||items | | | |+-----------------------------------------+--------+-----------+---------+|IFRS underlying (loss) / profit before | | (46)| 400 ||tax | | | |+-----------------------------------------+--------+-----------+---------+|Other items | | (67)| 91 |+-----------------------------------------+--------+-----------+---------+|IFRS (loss)/profit before tax from | | | |+-----------------------------------------+--------+-----------+---------+|continuing operations | | (113)| 491 |+-----------------------------------------+--------+-----------+---------+|IFRS underlying (loss)/earnings per share| | (1.4)p| 17.9p|+-----------------------------------------+--------+-----------+---------+|IFRS basic (loss)/earnings per share | | (5.0)p| 13.1p|+-----------------------------------------+--------+-----------+---------+|Dividend per share | +2| 8.00p| 7.85p|+-----------------------------------------+--------+-----------+---------+|Dividend cover on an underlying basis | |(0.2) times|2.3 times|+-----------------------------------------+--------+-----------+---------+ The IFRS underlying loss of £(46)m has arisen due to: • The UK Life & Pensions loss of £(71)m (2006: £46m profit) was impacted negatively by widening of corporate bond spreads and other one-off items; • The International Life & Pensions profit of £26m (2006: £70m) was down from last year primarily because 2006 included one-off credits that were not repeated; • The return on shareholder funds has increased to £71m (2006: £53m) due to an increase in the value of funds under management and a 0.75% increase in assumed longer-term rates of return; • Income from the IFA businesses acquired during the year was offset by costs relating to the development of the Wrap platform which has now been terminated; • Asset Management underlying profit of £78m (2006: £89m) has fallen due to higher F&C operating expenses; • Principal reserving changes and one-off items are £(135)m negative, contrasting with the large positives in 2006. The 2007 items are principally due to expense assumption changes and a review of the estimated amortisation profile of deferred acquisition costs following implementation of PS06/14 reserving changes. In comparison 2006 reserving changes were due to the basis and reserving changes for morbidity on protection business and PS06/14 changes. The IFRS loss before tax from continuing operations is £(113)m compared with aprofit of £491m in 2006. This measure takes into account actual investmentreturns achieved during the year, the impacts of non-recurring items andamortisation relating to acquisitions. It is also shown gross of policyholdertax and minority interests. The total dividend for 2007 of 8.0 pence per share represents a 2% increase over2006. This is covered more than four times by distributable reserves in thecompany and in FPLP. UK Life & Pensions +-------------------------+---------------------------+-------------------------+| | 2007 | 2006 |+-------------------------+----------+-------+--------+---------+-------+-------+| | New| In-|Profit/ | New| In-|Profit/|| | | | | | | |+-------------------------+----------+-------+--------+---------+-------+-------+| | business| force| (loss)| business| force| (loss)|+-------------------------+----------+-------+--------+---------+-------+-------+| | £m | £m| £m | £m | £m| £m |+-------------------------+----------+-------+--------+---------+-------+-------+|Protection | (40)| 45| 5 | (27)| 58| 31 |+-------------------------+----------+-------+--------+---------+-------+-------+|Pensions | (75)| 34| (41)| (59)| 17| (42)|+-------------------------+----------+-------+--------+---------+-------+-------+|Annuities | 10 | 2| 12 | - | 21| 21 |+-------------------------+----------+-------+--------+---------+-------+-------+|Savings & Investments | (20)| 16| (4)| (16)| 3| (13)|+-------------------------+----------+-------+--------+---------+-------+-------+|With Profits fund | - | 87| 87 | - | 82| 82 |+-------------------------+----------+-------+--------+---------+-------+-------+|UK Life & Pensions result| | | | | | |+-------------------------+----------+-------+--------+---------+-------+-------+|before one-off items | (125)| 184| 59 | (102)| 181| 79 |+-------------------------+----------+-------+--------+---------+-------+-------+|Widening of corporate | | | | | | ||bond | | | | | | |+-------------------------+----------+-------+--------+---------+-------+-------+|spreads | | | (90)| | | - |+-------------------------+----------+-------+--------+---------+-------+-------+|One-off items | | | (40)| | | (33)|+-------------------------+----------+-------+--------+---------+-------+-------+|UK Life & Pensions result| | | (71)| | | 46 |+-------------------------+----------+-------+--------+---------+-------+-------+ The UK Life & Pensions result before one-off items has decreased by 25% from£79m to £59m, primarily due to a decrease in profit arising from protectionbusiness. This is a consequence of a review of our DAC amortisation forprotection business following PS06/14 reserving changes. We have accelerated theamortisation of this DAC because of the earlier recognition of margins. As aresult of this, together with higher pensions sales, new business strain hasincreased from £(102)m to £(125)m. In-force surplus has increased slightly to£184m. The widening of corporate bond spreads on assets primarily backing annuities hashad an adverse £90m impact on IFRS profit. This arises because prudent valuationrules prevent the annuity liabilities from being valued in line with thecurrently high yields on the matching assets. The matching assets are marked tomarket. These assets are generally held to maturity and this adverse impact willbe recovered over time unless there are asset defaults. In addition one-off items of £(40)m includes an injection of £22m intopolicyholder funds, which arises from a review of unit-linked fund charges onfirst adoption of the ABI best practice guide. In 2006 one-off items of £(33)mincluded a reduction in the value of DAC. New business strain on the IFRS basis comprises the following principalelements: • The cash strain, which takes account of acquisition expenses and commissions paid and reserves established in respect of the business written; • IFRS adjustments, including the deferral of income, actuarial funding and other adjustments, mainly in order to spread front-ended fees across the lifetime of the product; • A deduction made for the deferral of acquisition costs, to the extent allowed for by IFRS and subject to a recoverability test, in order to spread costs against the emergence of margins on the product. In-force surplus on the IFRS basis comprises of the following elements: • The cash surplus arising during the year, which for investment business takes account of the annual management charges received less maintenance expenses incurred; • The reversal of IFRS reserving adjustments such as deferred income reserve and actuarial funding; • The amortisation of DAC. These items are analysed below. All figures are stated before tax and one-offitems. +--------------------+------------------------------+----------------------------+| | 2007 | 2006 |+--------------------+-----------+--------+---------+----------+---------+-------+| | New | In- | Profit/ | New | In- |Profit/|| | | | | | | |+--------------------+-----------+--------+---------+----------+---------+-------+| | business | force | (loss)| business | force | (loss)|+--------------------+-----------+--------+---------+----------+---------+-------+| | £m | £m | £m | £m | £m | £m |+--------------------+-----------+--------+---------+----------+---------+-------+|UK Life & Pensions | | | | | | |+--------------------+-----------+--------+---------+----------+---------+-------+|cash movement | (211)| 186 | (25)| (295)| 233 | (62)|+--------------------+-----------+--------+---------+----------+---------+-------+|IFRS adjustments | (20)| 39 | 19 | (18)| 29 | 11 |+--------------------+-----------+--------+---------+----------+---------+-------+|DAC movement | 106 | (41)| 65 | 211 | (81)| 130 |+--------------------+-----------+--------+---------+----------+---------+-------+|UK Life & Pensions | | | | | | |+--------------------+-----------+--------+---------+----------+---------+-------+|result before | | | | | | |+--------------------+-----------+--------+---------+----------+---------+-------+|one-off items | (125)| 184 | 59 | (102)| 181 | 79 |+--------------------+-----------+--------+---------+----------+---------+-------+ UK Life & Pensions cash movement The cash impacts of new business strain and in-force surplus are analysed byproduct as follows. +-------------------+-------------------------------+----------------------------+| | 2007 | 2006 |+-------------------+------------+---------+--------+---------+---------+--------+| | New | | | New | | |+-------------------+------------+---------+--------+---------+---------+--------+| | business | In-force| |business |In-force | |+-------------------+------------+---------+--------+---------+---------+--------+| | strain | surplus| Total | strain| surplus | Total |+-------------------+------------+---------+--------+---------+---------+--------+| | £m| £m| £m | £m | £m | £m |+-------------------+------------+---------+--------+---------+---------+--------+|Protection | (40)| 44| 4 | (129)| 102| (27)|+-------------------+------------+---------+--------+---------+---------+--------+|Pensions | (145)| 36| (109)| (126)| 21| (105)|+-------------------+------------+---------+--------+---------+---------+--------+|Annuities | 10 | 5| 15 | (4)| 21| 17 |+-------------------+------------+---------+--------+---------+---------+--------+|Savings & | (36)| 14| (22)| (36)| 7| (29)||Investments | | | | | | |+-------------------+------------+---------+--------+---------+---------+--------+|With Profits Fund | - | 87| 87 | - | 82| 82 |+-------------------+------------+---------+--------+---------+---------+--------+|Total | (211)| 186| (25)| (295)| 233| (62)|+-------------------+------------+---------+--------+---------+---------+--------+ Protection sales are 5% down measured on the APE basis. Both the cash strain andthe in-force surplus have been significantly reduced by the implementation ofPS06/14 and the consequent creation of negative reserves. Pensions sales increased by 24%, which has caused the higher cash strain. Thecash in-force surplus has increased due to the impact of increases in fundvalues on management charges. The surplus grows at a greater rate than thegrowth in funds under management because of the gearing effect caused by mainlyfixed maintenance expense levels. Annuity sales increased by 7%. Cash generation was slightly lower at £15m withthe effects of reinsuring the post-demutualisation in-force annuity book beinglargely offset by lower new business strain arising from interest ratemovements. Savings & investments sales fell by 27%. The savings & investments cash strainis at a similar level to 2006 through a reduction in future cash flowsrecognised. The increase in the With Profits Fund surplus is driven by higher bonus costs,due to higher maturities, and higher management charges, more than offsettingthe run-off of the business. UK Life & Pensions IFRS adjustments +--------------------+--------------------------------+---------------------------+| | 2007 | 2006 |+--------------------+-----------+------------+-------+---------+---------+-------+| | New | | | New| | |+--------------------+-----------+------------+-------+---------+---------+-------+| | business | In-force| Total| business| In-force| Total |+--------------------+-----------+------------+-------+---------+---------+-------+| | £m | £m| £m| £m | £m| £m |+--------------------+-----------+------------+-------+---------+---------+-------+|Protection | - | 1| 1| 1 | 2| 3 |+--------------------+-----------+------------+-------+---------+---------+-------+|Pensions | (4)| 14| 10| 2 | 7| 9 |+--------------------+-----------+------------+-------+---------+---------+-------+|Annuities | - | -| -| - | -| - |+--------------------+-----------+------------+-------+---------+---------+-------+|Savings & | (16)| 24| 8| (21)| 20| (1)||Investments | | | | | | |+--------------------+-----------+------------+-------+---------+---------+-------+|With Profits Fund | - | -| -| - | -| - |+--------------------+-----------+------------+-------+---------+---------+-------+|Total | (20)| 39| 19| (18)| 29| 11 |+--------------------+-----------+------------+-------+---------+---------+-------+ UK Life & Pensions DAC movement +--------------------+-------------------------------+----------------------------+| | 2007 | 2006 |+--------------------+-----------+-----------+-------+---------+----------+-------+| | Deferred| Amortised | | Deferred|Amortised | |+--------------------+-----------+-----------+-------+---------+----------+-------+| | in year| in year | Total | in year| in year | Total|+--------------------+-----------+-----------+-------+---------+----------+-------+| | £m| £m | £m | £m| £m | £m|+--------------------+-----------+-----------+-------+---------+----------+-------+|Protection | -| - | - | 101| (46)| 55|+--------------------+-----------+-----------+-------+---------+----------+-------+|Pensions | 74| (16)| 58 | 65| (11)| 54|+--------------------+-----------+-----------+-------+---------+----------+-------+|Annuities | -| (3)| (3)| 4| - | 4|+--------------------+-----------+-----------+-------+---------+----------+-------+|Savings & | 32| (22)| 10 | 41| (24)| 17||Investments | | | | | | |+--------------------+-----------+-----------+-------+---------+----------+-------+|Total | 106| (41)| 65 | 211| (81)| 130|+--------------------+-----------+-----------+-------+---------+----------+-------+ Following implementation of PS06/14 reserving changes margins emerge such thatthere is effectively no deferral of protection acquisition costs. This changehas been reflected as from 1 January 2007. The presentation above does not showa deferral and immediate amortisation of DAC in respect of this business. Thedeferred acquisition costs for pensions and savings & investment businessreflects the relative level of new business written in the year. Theamortisation over the year is carried out on a straight-line basis forinvestment business and in line with the run-off in value of in-force businesson an EEV basis for all other categories of business. Further detailed analysis of components of new business strain and in-forcesurplus is attached in Appendix 4. International Life & Pensions +--------------------+----------------------------+----------------------------+| | 2007 | 2006 |+--------------------+---------+---------+--------+---------+---------+--------+| | New| | | New| | |+--------------------+---------+---------+--------+---------+---------+--------+| | business| In-force| Profit| business| In-force| Profit|+--------------------+---------+---------+--------+---------+---------+--------+| | £m| £m| £m| £m| £m| £m|+--------------------+---------+---------+--------+---------+---------+--------+|FPI | (19)| 22| 3| (6)| 31| 25|+--------------------+---------+---------+--------+---------+---------+--------+|Lombard | (26)| 38| 12| (22)| 35| 13|+--------------------+---------+---------+--------+---------+---------+--------+|International Life &| | | | | | |+--------------------+---------+---------+--------+---------+---------+--------+|Pensions result | | | | | | |+--------------------+---------+---------+--------+---------+---------+--------+|before one-off | | | | | | |+--------------------+---------+---------+--------+---------+---------+--------+|items | (45)| 60| 15| (28)| 66| 38|+--------------------+---------+---------+--------+---------+---------+--------+|One-off items | | | 11| | | 32|+--------------------+---------+---------+--------+---------+---------+--------+|International Life &| | | | | | |+--------------------+---------+---------+--------+---------+---------+--------+|Pensions result | | | 26| | | 70|+--------------------+---------+---------+--------+---------+---------+--------+ The International Life & Pensions result before one-off items has reduced from£38m to £15m, primarily as a result of higher new business strain and lowerin-force surplus in FPI. FPI new business strain has increased primarily due toincreased volumes and changes in the mix of new business. The FPI in-forcesurplus in 2006 included a £15m misclassification relating to PS06/14 benefit. The one-off item in 2007 represents an adjustment to remove reserves no longerrequired. The 2006 one-offs were mainly in respect of changes in actuarialfunding in FPI. The following table analyses the International Life & Pensions result beforeone-off items into the principal components: +--------------------+----------------------------+-----------------------------+| | 2007 | 2006 |+--------------------+---------+---------+--------+----------+---------+--------+| | New| | | New| | |+--------------------+---------+---------+--------+----------+---------+--------+| | business| In-force| Profit| business| In-force| Profit|+--------------------+---------+---------+--------+----------+---------+--------+| | £m| £m| £m| £m| £m| £m|+--------------------+---------+---------+--------+----------+---------+--------+|International Life &| | | | | | |+--------------------+---------+---------+--------+----------+---------+--------+|Pensions cash | | | | | | |+--------------------+---------+---------+--------+----------+---------+--------+|movement | (110)| 86 | (24)| (65)| 99 | 34 |+--------------------+---------+---------+--------+----------+---------+--------+|IFRS adjustments | (110)| 15 | (95)| (70)| 12 | (58)|+--------------------+---------+---------+--------+----------+---------+--------+|DAC movement | 175 | (41)| 134 | 107 | (45)| 62 |+--------------------+---------+---------+--------+----------+---------+--------+|International Life &| | | | | | |+--------------------+---------+---------+--------+----------+---------+--------+|Pensions result | | | | | | |+--------------------+---------+---------+--------+----------+---------+--------+|before one-off | | | | | | |+--------------------+---------+---------+--------+----------+---------+--------+|items | (45)| 60 | 15 | (28)| 66 | 38 |+--------------------+---------+---------+--------+----------+---------+--------+ International Life & Pensions cash movement The cash impacts of new business strain and in-force surplus are analysed byproduct as follows. +--------------+--------------------------------+-------------------------------+| | 2007 | 2006 |+--------------+-------------+-----------+------+------------+----------+-------+| | New| | | New| | |+--------------+-------------+-----------+------+------------+----------+-------+| | business| In-force| | business| In-force| |+--------------+-------------+-----------+------+------------+----------+-------+| | strain| surplus|Total | strain| surplus| Total |+--------------+-------------+-----------+------+------------+----------+-------+| | £m| £m| £m | £m| £m| £m |+--------------+-------------+-----------+------+------------+----------+-------+|FPI | (69)| 44| (25)| (25)| 61| 36 |+--------------+-------------+-----------+------+------------+----------+-------+|Lombard | (41)| 42| 1 | (40)| 38| (2)|+--------------+-------------+-----------+------+------------+----------+-------+|Total | (110)| 86| (24)| (65)| 99| 34 |+--------------+-------------+-----------+------+------------+----------+-------+ FPI cash strain has increased significantly due to a combination of factors.Firstly FPI sales on the APE basis have increased by 60% since 2006. Secondly, aspecial offer was launched in April 2007 on Premier, a regular premium savingsproduct, offering enhanced allocation, resulting in increased strain. Thirdly,increased commission levels reflected the success of the German pensionoffering. FPI in-force surplus has decreased because, as discussed above, the2006 comparative included a misclassification of £15m. Lombard sales have decreased by 5% but new business strain has not reducedproportionately because of fixed acquisition expenses. Lombard in-force surplushas increased in line with funds under management. International Life & Pensions IFRS adjustments +-------------+---------------------------------+--------------------------------+| | 2007 | 2006 |+-------------+-------------+-----------+-------+-------------+----------+-------+| | New| | | New| | |+-------------+-------------+-----------+-------+-------------+----------+-------+| | business| In-force| Total| business| In-force| Total|+-------------+-------------+-----------+-------+-------------+----------+-------+| | £m| £m| £m| £m| £m| £m|+-------------+-------------+-----------+-------+-------------+----------+-------+|FPI | (103)| 10| (93)| (62)| 6| (56)|+-------------+-------------+-----------+-------+-------------+----------+-------+|Lombard | (7)| 5| (2)| (8)| 6| (2)|+-------------+-------------+-----------+-------+-------------+----------+-------+|Total | (110)| 15| (95)| (70)| 12| (58)|+-------------+-------------+-----------+-------+-------------+----------+-------+ The significant increase in new regular premium business within FPI resulted ina corresponding increase in the actuarial funding adjustment. International Life & Pensions DAC movement +-------------+---------------------------------+--------------------------------+| | 2007 | 2006 |+-------------+-------------+-----------+-------+------------+-----------+-------+| | Deferred| Amortised| | Deferred| Amortised| |+-------------+-------------+-----------+-------+------------+-----------+-------+| | in year| in year| Total| in year| in year| Total|+-------------+-------------+-----------+-------+------------+-----------+-------+| | £m| £m| £m| £m| £m| £m|+-------------+-------------+-----------+-------+------------+-----------+-------+|FPI | 153| (32)| 121| 81| (36)| 45|+-------------+-------------+-----------+-------+------------+-----------+-------+|Lombard | 22| (9)| 13| 26| (9)| 17|+-------------+-------------+-----------+-------+------------+-----------+-------+|Total | 175| (41)| 134| 107| (45)| 62|+-------------+-------------+-----------+-------+------------+-----------+-------+ This increase in DAC reflects the levels of business written. FPI new businessvolumes, particularly on regular premiums business, increased substantially.Taken together, DAC and IFRS adjustments largely offset the increased cashstrain. Lombard new business volumes fell slightly compared to 2006. Further detailed analysis of components of new business strain and in-forcesurplus is attached in Appendix 4. Return on Life & Pensions shareholder funds+----------------------------------------------------+---------+-------+| | 2007| 2006|+----------------------------------------------------+---------+-------+| | £m| £m|+----------------------------------------------------+---------+-------+|UK Life & Pensions longer-term investment return | 69| 52|+----------------------------------------------------+---------+-------+|International Life & Pensions longer-term investment| 2| 1||return | | |+----------------------------------------------------+---------+-------+|Return on Life & Pensions shareholder funds | 71| 53|+----------------------------------------------------+---------+-------+ Longer-term investment return has increased because of a 16% increase in theweighted average value of Life & Pensions shareholder assets during the yearfrom £1,046m in 2006 to £1,219m in 2007 and a 75 basis points increase inassumed rates of return. The investment return on the corporate shareholderassets is included in the Corporate items line below. The longer-term investment return rates assumed were: equities 8.00% (2006:7.25%), gilts 5.00% (2006: 4.25%) and other fixed interest 5.50% (2006: 4.75%).For 2008, these rates of return will be unchanged. Other Life & Pensions net income +----------------------------------------------------+---------+-------+| | 2007 | 2006|+----------------------------------------------------+---------+-------+| | £m | £m|+----------------------------------------------------+---------+-------+|Sesame | 12 | -|+----------------------------------------------------+---------+-------+|Pantheon Financial | 2 | -|+----------------------------------------------------+---------+-------+|The Asset Hub | (14)| -|+----------------------------------------------------+---------+-------+|Other Life & Pensions net income | - | -|+----------------------------------------------------+---------+-------+ The Sesame and Pantheon Financial IFA businesses were acquired during the yearand have performed in line with expectations. The above results reflect sevenmonths trading since the dates of acquisition. Sesame includes a £2m creditrelating to the release of a provision, which is not expected to be repeated inthe future. Costs incurred developing a Wraps platform are reflected in the result for TheAsset Hub. This development has now been terminated. Asset Management underlying profit This is discussed in the Business Review section above. Corporate items+-----------------------------------------------------+--------+-------+| | 2007 | 2006 |+-----------------------------------------------------+--------+-------+| | £m | £m |+-----------------------------------------------------+--------+-------+|Expected return on net pension liability | 8 | 9 |+-----------------------------------------------------+--------+-------+|Expected return on corporate net assets | (9)| (10)|+-----------------------------------------------------+--------+-------+|Corporate costs | (14)| (13)|+-----------------------------------------------------+--------+-------+|Total corporate items | (15)| (14)|+-----------------------------------------------------+--------+-------+ There are no significant changes from 2006. Principal reserving changes and one-off items +-------------------+------------------------------------+----------------------------------+| | 2007 | 2006 |+-------------------+-------+-------------+------+-------+------+------------+------+-------+| | | IFRS | | Total | | IFRS | | Total |+-------------------+-------+-------------+------+-------+------+------------+------+-------+| | Cash | adjustments | DAC | IFRS | Cash |adjustments | DAC | IFRS |+-------------------+-------+-------------+------+-------+------+------------+------+-------+| | £m | £m | £m | £m | £m | £m | £m | £m |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|Expense assumption | | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|changes | (51)| - | (61)| (112)| - | - | - | - |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|PS06/14 reserving | | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|changes | 138 | - | (172)| (34)| 151 | - | (118)| 33 |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|Reinsurance of | | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|annuity | | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|portfolio | 56 | (27)| (18)| 11 | - | - | - | - |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|Change to morbidity| | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|reserving basis for| | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|protection business| - | - | - | - | 123 | - | - | 123 |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|Principal reserving| | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|changes and | | | | | | | | |+-------------------+-------+-------------+------+-------+------+------------+------+-------+|one-off items | 143 | (27)| (251)| (135)| 274 | - | (118)| 156 |+-------------------+-------+-------------+------+-------+------+------------+------+-------+ £20m of management expenses previously categorised as development costs are nowexpected to be ongoing costs. This has a one-off £(112)m impact on IFRS profitsas a result of increasing reserves to allow for the increased future costs andacceleration of amortisation of DAC. In 2007 we implemented the second phase of PS06/14 Prudential Changes forInsurers. This lowered mathematical reserves resulting in a further one-offacceleration in the emergence of cash. However, the corresponding reduction inDAC, together with a review of the estimated amortisation profile, led to aone-off impact on IFRS profits of £(34)m. In 2008 we will reorganise ouroperations to allow recognition of further reserve reductions as a results ofPS06/14, to deliver a final one-off cash acceleration of approximately £100m.The corresponding reduction in DAC is expected to leave IFRS profits broadlyunchanged in this respect. The reinsurance of the post-demutualisation annuity portfolio, implemented inthe first half of 2007, has had a beneficial impact on cash and a positiveimpact on IFRS profits of £11m in line with expectations. The IFRS impact islower than the cash benefit as more value had been recognised in earlier yearsunder IFRS. Other items+-----------------------------------------------------------+-------+-------+| | 2007| 2006 |+-----------------------------------------------------------+-------+-------+| | £m| £m |+-----------------------------------------------------------+-------+-------+|Short-term fluctuations in investment return | (78)| (39)|+-----------------------------------------------------------+-------+-------+|Non-recurring items | 38 | (17)|+-----------------------------------------------------------+-------+-------+|Amortisation of acquired present value of in-force business| (26)| (25)|+-----------------------------------------------------------+-------+-------+|Amortisation of Life & Pensions acquired intangible assets | (11)| (7)|+-----------------------------------------------------------+-------+-------+|Amortisation of Asset Management acquired intangible assets| (42)| (43)|+-----------------------------------------------------------+-------+-------+|Impairment of Asset Management acquired intangible assets | - | (58)|+-----------------------------------------------------------+-------+-------+|Interest payable on STICS | 52 | 52 |+-----------------------------------------------------------+-------+-------+|Policyholder tax | 23 | 124 |+-----------------------------------------------------------+-------+-------+|Returns on Group controlled funds attributable to third | (23)| 104 ||parties | | |+-----------------------------------------------------------+-------+-------+|Other items | (67)| 91 |+-----------------------------------------------------------+-------+-------+ Other items reflect the differences between IFRS underlying profit and IFRSprofit before tax from continuing operations. Short-term investment fluctuations represent the differences between actual andexpected investment market returns. The charge of £(78)m reflects falls in fixedincome security values offset by increases in equity values. Non-recurring items include £34m compensation received (net of costs) in respectof the aborted merger with Resolution plc, £15m credit in respect of the releaseof provisions less £(11)m other items. There is no impairment charge required in respect of F&C's acquired intangibleassets. The charge in 2006 related to the write down in value of managementcontracts following fund outflows notified in the year. Policyholder tax is excluded from the underlying result as it is notattributable to shareholders. The decrease compared to 2006 is due to lowerproperty and equity gains. The linked property gains are £283m lower and thelinked life equity gains are £239m lower compared to 2006. Returns on Group controlled funds attributable to third parties mainly reflectsthe 47% minority interest in F&C Commercial Property Trust. Within the calculation of the underlying IFRS result, STICS is accounted for asdebt to reflect the economic reality. However, IFRS rules require that STICSshould be accounted for as equity in calculating IFRS profit before tax andconsequently STICS interest is added back and treated as an appropriation ofprofit. Management expenses The expenses of the UK and International Life & Pensions businesses (excludingLombard costs, development costs and non recurring costs) are set out below: +-------------------+-----------------------------+------------------------------+| | 2007 | 2006 |+-------------------+------+--------------+-------+-------+--------------+-------+| | UK| International| Total| UK| International| Total|| | | | | | | |+-------------------+------+--------------+-------+-------+--------------+-------+| | £m| £m| £m| £m| £m| £m|+-------------------+------+--------------+-------+-------+--------------+-------+|Acquisition | 141| 23| 164| 139| 18| 157||expenses | | | | | | |+-------------------+------+--------------+-------+-------+--------------+-------+|Maintenance | 79| 15| 94| 88| 11| 99||expenses | | | | | | |+-------------------+------+--------------+-------+-------+--------------+-------+|Total Life & | 220| 38| 258| 227| 29| 256||Pensions | | | | | | |+-------------------+------+--------------+-------+-------+--------------+-------+|Corporate costs | | | 14| | | 13|+-------------------+------+--------------+-------+-------+--------------+-------+|Total | | | 272| | | 269|| | | | | | | |+-------------------+------+--------------+-------+-------+--------------+-------+ The UK cost base has been tightly controlled in 2007, despite the overall growthin the size of the business. The International business has experienced growthin acquisition costs in particular, reflecting its significant growth in bothexisting and new markets. Taxation Although the shareholder tax credit has increased due to lower IFRS profits, theincrease is only £12m because the ability to offset losses and excess expensesagainst other income and gains has significantly reduced compared to 2006. IFRS BALANCE SHEET The IFRS balance sheet is summarised as follows:+------------------------------------+----------+-----------+-----------+| | | 2007| 2006|+------------------------------------+----------+-----------+-----------+| | | £bn| £bn|+------------------------------------+----------+-----------+-----------+|Assets: | | | |+------------------------------------+----------+-----------+-----------+|Intangible assets | | 1.5| 1.4|+------------------------------------+----------+-----------+-----------+|Investment properties | | 2.4| 2.4|+------------------------------------+----------+-----------+-----------+|Financial assets | | 47.7| 45.1|+------------------------------------+----------+-----------+-----------+|Cash | | 4.8| 3.6|+------------------------------------+----------+-----------+-----------+|Deferred acquisition costs | | 1.1| 1.1|+------------------------------------+----------+-----------+-----------+|Other assets | | 2.7| 0.8|+------------------------------------+----------+-----------+-----------+|Total assets | | 60.2| 54.4|+------------------------------------+----------+-----------+-----------+|Liabilities: | | | |+------------------------------------+----------+-----------+-----------+|Insurance and investment contract | | | |+------------------------------------+----------+-----------+-----------+|liabilities | | 50.8| 46.6|+------------------------------------+----------+-----------+-----------+|Long term debt | | 0.7| 1.1|+------------------------------------+----------+-----------+-----------+|Other liabilities | | 4.4| 2.6|+------------------------------------+----------+-----------+-----------+|Total liabilities | | 55.9| 50.3|+------------------------------------+----------+-----------+-----------+|Equity and minority interest: | | | |+------------------------------------+----------+-----------+-----------+|Shareholders' equity | | 2.9| 2.8|+------------------------------------+----------+-----------+-----------+|STICS holders' equity | | 0.8| 0.8|+------------------------------------+----------+-----------+-----------+|Minority interests | | 0.6| 0.5|+------------------------------------+----------+-----------+-----------+|Total equity and minority interest | | 4.3| 4.1|+------------------------------------+----------+-----------+-----------+ Financial assets Financial assets include:+----------------------------------------+-------+-----------+-----------+| | | 2007| 2006|+----------------------------------------+-------+-----------+-----------+| | | £bn| £bn|+----------------------------------------+-------+-----------+-----------+|Listed shares | | 23.1| 21.8|+----------------------------------------+-------+-----------+-----------+|Listed debt and other fixed income securities: | | |+----------------------------------------+-------+-----------+-----------+|- Non-linked | | 12.1| 12.6|+----------------------------------------+-------+-----------+-----------+|- Unit-linked | | 3.5| 3.5|+----------------------------------------+-------+-----------+-----------+|Unit trusts and OEICs | | 7.5| 5.3|+----------------------------------------+-------+-----------+-----------+|Unlisted shares | | 0.6| 0.8|+----------------------------------------+-------+-----------+-----------+|Deposits | | 0.6| 0.7|+----------------------------------------+-------+-----------+-----------+|Other | | 0.3| 0.4|+----------------------------------------+-------+-----------+-----------+|Total financial assets | | 47.7| 45.1|+----------------------------------------+-------+-----------+-----------+ Financial assets have increased by 6%. The shareholder investment policy was revised during the year resulting in areduction in equity exposure of £0.5bn over 2007. Exposure to Asset Backed Securities (ABS) Non-linked listed debt and other securities of £12.1bn are analysed by creditrating as follows: +------------------+---------------------------------------------------------------+| | Ratings |+------------------+-------+-------+-------+-------+-----+-------+--------+--------+|£m | AAA| AA| A| BBB| BB| Sub B| Unrated| Total|+------------------+-------+-------+-------+-------+-----+-------+--------+--------+|Non-linked debt | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+--------+|securities | 6,800| 2,959| 1,787| 395| 23| 7| 133| 12,104|+------------------+-------+-------+-------+-------+-----+-------+--------+--------+| | 56%| 25%| 15%| 3%| 0%| 0%| 1%| 100%|+------------------+-------+-------+-------+-------+-----+-------+--------+--------+ The following asset backed and monoline wrapped securities are managed by F&C onbehalf of the Group (in particular this excludes investments in ABS held bythird party managed funds in the UK and International businesses). Directly held ABS and Monoline Wrapped Securities+------------------+--------------------------------------------------------------+| | Ratings |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|£m | AAA| AA| A| BBB| BB| Sub B| Unrated| Total|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Collateralised | 19| -| -| -| -| -| -| 19||Debt | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Obligations (CDO) | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Collateralised | | | | | | | | ||Loan | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Obligations (CLO) | 4| -| -| -| -| -| -| 4|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Commercial | | | | | | | | ||Mortgage | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Backed Securities | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|(CMBS) | 101| 27| 49| 43| -| -| -| 220|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Residential | | | | | | | | ||Mortgage | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Backed Securities | | | | | | | | |+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|(RMBS) | 164| 30| -| -| -| -| -| 194|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Monoline Wrapped | 511| -| -| -| -| -| -| 511|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Other ABS | 284| 134| 202| 15| 6| 22| -| 663|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+|Total | 1,083| 191| 251| 58| 6| 22| -| 1,611|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+| | 67%| 12%| 16%| 4%| 0%| 1%| 0%| 100%|+------------------+-------+-------+-------+-------+-----+-------+--------+-------+ Of this total, the shareholder exposure amounts to £770m. The majority of thisexposure is via £424m of assets backing annuity liabilities and £187m beingwithin shareholder funds. Shareholder exposure+----------------+-----------------------------------------------------------------+| | Ratings |+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|£m | AAA| AA| A| BBB| BB| Sub B| Unrated| Total|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|CDO | 13| -| -| -| -| -| -| 13|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|CLO | 3| -| -| -| -| -| -| 3|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|CMBS | 57| 10| 26| 14| -| -| -| 107|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|RMBS | 96| 20| -| -| -| -| -| 116|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|Monoline Wrapped| 244| -| -| -| -| -| -| 244|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|Other ABS | 131| 55| 87| 3| 1| 10| -| 287|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+|Total | 544| 85| 113| 17| 1| 10| -| 770|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+| | 71%| 11%| 15%| 2%| 0%| 1%| 0%| 100%|+----------------+--------+-------+-------+-------+-----+--------+--------+--------+ The policyholder exposure through the With Profits funds amounts to £679m asfollows: Policyholder exposure through With Profits funds+----------------+------------------------------------------------------------+| | Ratings |+----------------+--------+-----+------+-------+-----+-------+--------+-------+|£m | AAA| AA| A| BBB| BB| Sub B| Unrated| Total|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|CDO | -| -| -| -| -| -| -| -|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|CLO | -| -| -| -| -| -| -| -|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|CMBS | 39| 8| 17| 20| -| -| -| 84|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|RMBS | 57| -| -| -| -| -| -| 57|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|Monoline Wrapped| 228| -| -| -| -| -| -| 228|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|Other ABS | 133| 63| 93| 7| 6| 8| -| 310|+----------------+--------+-----+------+-------+-----+-------+--------+-------+|Total | 457| 71| 110| 27| 6| 8| -| 679|+----------------+--------+-----+------+-------+-----+-------+--------+-------+| | 67%| 11%| 16%| 4%| 1%| 1%| 0%| 100%|+----------------+--------+-----+------+-------+-----+-------+--------+-------+ The policyholder exposure through Unit-Linked funds amounts to £163m as follows: Policyholder exposure through Unit-Linked funds+----------------+------------------------------------------------------------+| | Ratings |+----------------+-------+------+------+-------+-----+-------+--------+-------+|£m | AAA| AA| A| BBB| BB| Sub B| Unrated| Total|+----------------+-------+------+------+-------+-----+-------+--------+-------+|CDO | 6| -| -| -| -| -| -| 6|+----------------+-------+------+------+-------+-----+-------+--------+-------+|CLO | 1| -| -| -| -| -| -| 1|+----------------+-------+------+------+-------+-----+-------+--------+-------+|CMBS | 5| 10| 6| 9| -| -| -| 30|+----------------+-------+------+------+-------+-----+-------+--------+-------+|RMBS | 11| 10| -| -| -| -| -| 21|+----------------+-------+------+------+-------+-----+-------+--------+-------+|Monoline Wrapped| 39| -| -| -| -| -| -| 39|+----------------+-------+------+------+-------+-----+-------+--------+-------+|Other ABS | 20| 15| 22| 5| -| 4| -| 66|+----------------+-------+------+------+-------+-----+-------+--------+-------+|Total | 82| 35| 28| 14| -| 4| -| 163|+----------------+-------+------+------+-------+-----+-------+--------+-------+| | 51%| 21%| 17%| 9%| 0%| 2%| 0%| 100%|+----------------+-------+------+------+-------+-----+-------+--------+-------+ Other ABS in the tables above cover a variety of securities including creditcard receivables, Structured Investment Vehicles, whole businesssecuritisations, housing association and other asset backed securities. The total exposure to US sub-prime mortgages is less than £5m. In addition, the Friends Provident Pension Scheme (FPPS) via its investment in F&C Liability Driven Investment Pools has exposure to Asset Backed Securities.The FPPS share of the pools' ABS investment is approximately £250m. Eachinvestment in this portfolio is rated AAA and comprises approximately £225m ofRMBS, approximately £20m of Monoline Wrapped securities and approximately £5m ofother ABS. Of the FPPS investments, £15m relates to a second tranche of UKnon-conforming mortgage securities. The remainder is invested in senior tranchesor prime assets. Deferred acquisition costs Overall DAC has decreased by £18m. The amortisation of DAC has been acceleratedas discussed in the IFRS Profit section above in respect of protection contractsaffected by PS06/14 where margins emerge much earlier than was previously thecase. Other assets Other assets include £1.7bn reinsurance assets as a result of the reinsurance ofthe post-demutualisation FPP annuity book in 2007. Long-term debt Long-term debt (excluding amounts due to reinsurers) has reduced by £0.4bn dueto the conversion of the £290m convertible bonds in December 2007 and therepayment of £144m securitisation notes. £27m loan notes were issued in partsettlement of the final Lombard earnout payment. £6m of Lombard subordinatedloans were repaid in December 2007. Financial reinsurance was used by FPI tohelp finance new business strain. +-------------------------------------------------+----------------+-------+-------+| | | 2007| 2006|| | | | |+-------------------------------------------------+----------------+-------+-------+| | Coupon %| £m| £m|| | | | |+-------------------------------------------------+----------------+-------+-------+|Subordinated liabilities: | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|F&C subordinated debt | Various| 258| 258|| | | | |+-------------------------------------------------+----------------+-------+-------+|Lombard undated subordinated loans | Various| 4| 10|| | | | |+-------------------------------------------------+----------------+-------+-------+|Debenture loans: | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|Box Hill Life Finance plc securitisation notes - | 3m Libor + 0.20| 54| 198||class A-1 due 2016 | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|Box Hill Life Finance plc securitisation notes - | 3m Libor + 0.23| 100| 100||class A-2 due 2019 | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|F&C Commercial Property Trust (a policyholder | | | ||investment) | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|secured bonds due 2017 | 5.23| 229| 229|| | | | |+-------------------------------------------------+----------------+-------+-------+|Friends Provident plc loan notes due 2011 | Libor - 0.75| 18| 18|| | | | |+-------------------------------------------------+----------------+-------+-------+|Friends Provident plc loan notes due 2012 | Libor - 0.75| 26| -|| | | | |+-------------------------------------------------+----------------+-------+-------+|Financial reinsurance: | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|FPI financial reinsurance | 3m Euribor +| 11| -|| | 1.75| | || | | | |+-------------------------------------------------+----------------+-------+-------+|Lombard financial reinsurance | 3m Euribor +| 17| 24|| | 2.12| | || | | | |+-------------------------------------------------+----------------+-------+-------+|Convertible bonds: | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|£290m Friends Provident plc convertible bonds due| 5.25| -| 283||2007 | | | || | | | |+-------------------------------------------------+----------------+-------+-------+|Long-term borrowings | | 717| 1,120|| | | | |+-------------------------------------------------+----------------+-------+-------+ Step up Tier one Insurance Capital Securities (STICS) holders' equity STICS is treated as equity under IFRS, but as long-term debt under EEV. +--------------------------------------------------+--------------+--------+-------+| | | 2007| 2006|| | | | |+--------------------------------------------------+--------------+--------+-------+| | Coupon %| £m| £m|| | | | |+--------------------------------------------------+--------------+--------+-------+|£300m Friends Provident plc STICS callable 2019 | 6.875| 299| 299|| | | | |+--------------------------------------------------+--------------+--------+-------+|£500m Friends Provident plc STICS callable 2015 | 6.292| 511| 511|| | | | |+--------------------------------------------------+--------------+--------+-------+| | | 810| 810|| | | | |+--------------------------------------------------+--------------+--------+-------+ Shareholders' equity +----------------------------------------------------------------+---------+-------+| | 2007| 2006|+----------------------------------------------------------------+---------+-------+| | £m| £m|+----------------------------------------------------------------+---------+-------+|Share capital | 234| 214|+----------------------------------------------------------------+---------+-------+|Share premium | 2,372| 2,051|+----------------------------------------------------------------+---------+-------+|Other reserves | 346| 542|+----------------------------------------------------------------+---------+-------+|Total shareholders' equity | 2,952| 2,807|+----------------------------------------------------------------+---------+-------+ The Company's allotted and fully paid share capital at 31 December 2007 consistsof 2,341m ordinary shares of 10 pence each (including 18m Treasury shares). Movements during the year are as follows: +----------------------------------------------+-------------+------------+------------+| | Share| Share| Other || | | | |+----------------------------------------------+-------------+------------+------------+| | capital| premium| reserves || | | | |+----------------------------------------------+-------------+------------+------------+| | £m| £m| £m || | | | |+----------------------------------------------+-------------+------------+------------+|Shares issued in settlement of final Lombard | 3| 57| - ||earn-out | | | || | | | |+----------------------------------------------+-------------+------------+------------+|Shares issued on conversion of convertible | 17| 259| - ||bonds | | | || | | | |+----------------------------------------------+-------------+------------+------------+|Share-based payments | -| 5| 10 || | | | |+----------------------------------------------+-------------+------------+------------+|Total recognised income and expense for the | -| -| (38)||year | | | || | | | |+----------------------------------------------+-------------+------------+------------+|Dividends | -| -| (168)|| | | | |+----------------------------------------------+-------------+------------+------------+|Total movement | 20| 321| (196)|| | | | |+----------------------------------------------+-------------+------------+------------+ SHAREHOLDER CASH GENERATION Shareholder cash generation is as follows. 2007 2006 £m £mUK Life & Pensions:New business strain (211) (295)In-force surplus 186 233Taxation 49 35Other (4) -UK Life & Pensions net cash operating surplus 20 (27)International Life & Pensions:New business strain (110) (65)In-force surplus 86 99Taxation 6 (1)Other 1 -International Life & Pensions net cash operating surplus (17) 33Life & Pensions net cash operating surplus 3 6One-off items 87 274Investment return and other 64 32F&C dividend received 23 28Cash generated by the business before finance items 177 340Dividends paid (168) (164)Securitisation (22) (86)Financial reinsurance 12 (69)IFA acquisitions - intangible assets (55) -Convertible bond 276 -Other finance items (mainly issue of shares) - (76)Total movement 220 (55) UK Life & Pensions and International Life & Pensions new business strain andin-force surplus are discussed in the IFRS profitability section above. One-off items of £87m comprise the following items: 2007 2006 £m £mExpense assumption changes (51) -PS06/14 reserving changes 138 151Reinsurance of annuity portfolio 56 -Change to morbidity reserving basis for protection - 123businessTax (56) -Total 87 274 The first four items are described in the IFRS Profitability section above underprincipal reserving changes and one-offs. The tax item includes tax on the abovefour items of £(37)m and the one-off impact of increasing the FPIL tax rate to28% of £(19)m. Investment return and other mainly comprises: • The positive impact of £164m of marking to market our long-term debt • The negative impact of £(90)m of widening of bond spreads on our life book • Positive equity returns, before we reduced our shareholder equity exposure in August 2007, offset by the impact of increasing market yields on fixed interest security values. The amount to be repaid on our securitisation notes of £22m is lower thanexpected because widening corporate bond spreads have reduced the surplusgenerated by the defined book. The acquisitions of the Sesame and Pantheon Financial have reduced shareholdercash resources by the cash outgo net of tangible net assets acquired. No creditis taken for intangible assets and goodwill. The £290m convertible bond matured in December 2007. This was redeemed by theissue of shares with a value of £276m and £14m cash. Total shareholder cashresources have increased by £276m as a result, being the extinguishing of the£290m liability less the £14m cash paid. Shareholder cash resources As a result of the total increase in cash of £220m, Shareholder cash resourcesstand at £1,477m, as follows: 2007 2006 Movement £m £m £mShareholder invested net assets 1,449 1,164 285Securitisation 71 93 (22)Financial reinsurance 12 - 12IFA subsidiaries - intangible (55) - (55)assetsShareholder cash resources 1,477 1,257 220 PROFITABILITY ON THE EEV BASIS EEV profit reflects the long-term shareholder value added during the year takinginto account the future cashflows that are expected to arise from sales in theyear and the effect of updating previous assumptions with actual experience. EEV profit +---------------------------------------+------------+---------+---------+| | Change| 2007 | 2006 |+---------------------------------------+------------+---------+---------+| | %| £m | £m |+---------------------------------------+------------+---------+---------+|EEV underlying profit before tax: | | | |+---------------------------------------+------------+---------+---------+|- UK Life & Pensions | -| (95)| 315 |+---------------------------------------+------------+---------+---------+|- International Life & Pensions | -3| 116| 119 |+---------------------------------------+------------+---------+---------+|- Asset Management | -12| 78 | 89 |+---------------------------------------+------------+---------+---------+|- Corporate items | -| (83)| (14)|+---------------------------------------+------------+---------+---------+|EEV underlying profit before tax | -97| 16 | 509 |+---------------------------------------+------------+---------+---------+|Other items | -42| (64)| (111)|+---------------------------------------+------------+---------+---------+|EEV (loss) / profit before tax | -| (48)| 398 |+---------------------------------------+------------+---------+---------+| | | | |+---------------------------------------+------------+---------+---------+|Contribution from new business | +1| 206 | 204 |+---------------------------------------+------------+---------+---------+|Life & Pensions new business margin | -7| 2.7%| 2.9%|+---------------------------------------+------------+---------+---------+|EEV underlying (loss)/earnings per | -| (4.5p)| 16.4p||share | | | |+---------------------------------------+------------+---------+---------+|EEV basic (loss)/earnings per share | -| (2.7p)| 14.6p|+---------------------------------------+------------+---------+---------+ EEV loss before tax is £(48)m (2006: £398m profit). This profit measure takesinto account the impacts of investment return variances, economic assumptionchanges, non-recurring items and other charges. In total these were £(64)m lossin 2007 compared to £(111)m loss in 2006. EEV underlying profit Underlying profit before tax is £16m (2006: £509m). Within this total, basischanges and one-off items amount to £(461)m negative (2006: £26m positive), asfollows: +----------------------------------------------------+----------+----------+| | 2007| 2006 |+----------------------------------------------------+----------+----------+| | £m| £m |+----------------------------------------------------+----------+----------+|EEV underlying profit before tax | 16| 509 |+----------------------------------------------------+----------+----------+|Capitalisation of UK development and corporate | (306)| - ||expenses | | |+----------------------------------------------------+----------+----------+|UK Persistency | (158)| (53)|+----------------------------------------------------+----------+----------+|Mortality, morbidity, longevity | (9)| 27 |+----------------------------------------------------+----------+----------+|Annuity reinsurance | 12 | - |+----------------------------------------------------+----------+----------+|Total basis changes and one-off items | (461)| (26)|+----------------------------------------------------+----------+----------+|EEV underlying profit before basis changes | | |+----------------------------------------------------+----------+----------+|and one-off items | 477 | 535 |+----------------------------------------------------+----------+----------+ The underlying profit before basis changes and one-off items was £58m lower than2006. The benefits of improved contribution from new business and frominternational persistency, are offset by lower burnthrough in underlying profit,higher development and International expenses and lower Asset Managementprofits. The expenses impact of £306m has arisen due to the reallocation of £20m ofexpenses previously classified as development to maintenance, and the inclusionof additional costs within the provision for corporate costs. The impacts arisewithin UK Life & Pensions £238m, and Corporate items £68m. The UK persistency charge of £158m results from increases in assumed lapse ratesfor the Investment Bond and Pensions portfolios. The impacts arise withinoperating assumptions changes of £133m, contribution from new business £15m andexpected return £10m. UK Life & Pensions underlying profit +----------------------------------------------------+----------+----------+| | 2007 | 2006 |+----------------------------------------------------+----------+----------+| | £m | £m |+----------------------------------------------------+----------+----------+|Contribution from new business | 96 | 108 |+----------------------------------------------------+----------+----------+|Profit from existing business: | | |+----------------------------------------------------+----------+----------+|- Expected return | 149 | 173 |+----------------------------------------------------+----------+----------+|- Operating assumption changes and experience | (357)| 10 ||variances | | |+----------------------------------------------------+----------+----------+|Development costs | (41)| (26)|+----------------------------------------------------+----------+----------+|Other net expense | (5)| - |+----------------------------------------------------+----------+----------+|Expected return on shareholder net assets | 63 | 50 |+----------------------------------------------------+----------+----------+|UK Life & Pensions underlying (loss) / profit before| (95)| 315 ||tax | | |+----------------------------------------------------+----------+----------+ UK Life & Pensions contribution from new business After charging £15m for persistency, the contribution from new business hasdecreased by 11% to £96m (2006: £108m) and is discussed in the Business Reviewsection above. UK Life & Pensions expected return from existing business The expected return on the value of the in-force book decreased by 14% to £149m(2006: £173m), in part reflecting the reduction in VIF as a result of impact ofpersistency operating assumptions changes made at the start of the period. UK Life & Pensions operating assumption changes and experience variances+----------------------------------------------------+-----------+---------+| | 2007 | 2006 |+----------------------------------------------------+-----------+---------+| | £m | £m |+----------------------------------------------------+-----------+---------+|Persistency | (133)| (53)|+----------------------------------------------------+-----------+---------+|Expenses | (238)| - |+----------------------------------------------------+-----------+---------+|Mortality and morbidity | (9)| 27 |+----------------------------------------------------+-----------+---------+|Annuity reinsurance | 12 | - |+----------------------------------------------------+-----------+---------+|Burnthrough | 16 | 36 |+----------------------------------------------------+-----------+---------+|Other | (5)| - |+----------------------------------------------------+-----------+---------+|Total UK Life & Pensions operating assumption | | |+----------------------------------------------------+-----------+---------+|changes and experience variances | (357)| 10|+----------------------------------------------------+-----------+---------+ Increased lapses in the year have resulted in an assumption change of £133m.This comprises: £65m from our Investment Portfolio Bond and With Profits Bonds,£53m from Group Pensions and £15m other products. The expense assumption changes recognise there will always be a recurring levelof development costs not related to new markets or products. £20m of additionalcosts have been capitalised as maintenance costs resulting in a charge of £238m. The mortality and morbidity charge of £9m arises mainly from strengtheningassumed future annuitant mortality. The annuity reassurance treaty entered into with Swiss Re early in 2007 produceda £12m EEV profit and has significantly reduced the exposure to longevity risk. The burnthrough provision has remained largely unchanged at £48m (2006: £50m),with the underlying profit impact offset by investment return related variancesreported below underlying profit. Other net expense Includes the income from the IFA businesses since their acquisition offset bythe costs of developing the Wrap platform. UK Life & Pensions development costs Development costs increased to £(41)m (2006: £(26)m). In 2007, as in previousyears, development costs were treated as investment in the business in ordermade to improve future EEV profits. The main increase in 2007 relates to thedevelopment of a Wrap platform, The Asset Hub. In January 2008, in line with ournew strategy, we announced we would cease development of this project. We alsoannounced that, in future, development costs would only include costs related todeveloping wholly new products or entering wholly new markets. UK Life & Pensions expected return on shareholders' net assets The expected return on shareholders' net assets has increased by 26% to £63m(2006: £50m), because of a 16% increase in the weighted average value of Life &Pensions shareholder assets during the year and higher expected returns. InAugust we largely eliminated the shareholder equity exposure, the majority ofwhich took place at a FTSE level of 6,250. International Life & Pensions underlying profit +----------------------------------------------------------+--------+-------+| | 2007 | 2006|+----------------------------------------------------------+--------+-------+| | £m | £m|+----------------------------------------------------------+--------+-------+|Contribution from new business | 110 | 96|+----------------------------------------------------------+--------+-------+|Profit from existing business: | | |+----------------------------------------------------------+--------+-------+|- Expected return | 38 | 34|+----------------------------------------------------------+--------+-------+|- Operating assumption changes and experience variances | (24)| (12)|+----------------------------------------------------------+--------+-------+|Development costs | (9)| -|+----------------------------------------------------------+--------+-------+|Expected return on shareholders' net assets | 1 | 1|+----------------------------------------------------------+--------+-------+|International Life & Pensions underlying profit before tax| 116 | 119|+----------------------------------------------------------+--------+-------+ International Life & Pensions contribution from new business The contribution from new business has increased by 15% to £110m (2006: £96m).The Lombard contribution is £71m (2006:£70m) and the FPI contribution is £39m(2006: £26m). Contribution is discussed in the Business Review section above. International Life & Pensions expected return from existing business The expected return on the value of the in-force book increased by 12% to £38m(2006: £34m), reflecting the increase in the value of the in-force business. International Life & Pensions operating assumption changes and experiencevariances+--------------------------------------------------+---------+----------+| | 2007 | 2006 |+--------------------------------------------------+---------+----------+| | £m | £m |+--------------------------------------------------+---------+----------+|Expenses | (39)| -|+--------------------------------------------------+---------+----------+|Persistency | 12 | (13)|+--------------------------------------------------+---------+----------+|Other | 3 | 1|+--------------------------------------------------+---------+----------+|Total International Life & Pensions operating | | |+--------------------------------------------------+---------+----------+|assumption changes and experience | | |+--------------------------------------------------+---------+----------+|variances | (24)| (12)|+--------------------------------------------------+---------+----------+ Changes to the assumed ongoing maintenance expenses within Lombard, togetherwith the continued expense overrun for that growing business, contribute themajority of the £39m charge relating to expenses on International Life &Pensions business. Adverse persistency experience for International with profit bonds led torevised persistency assumptions. This charge was more than offset by positiveexperience variances for Lombard and other product lines within FPI. International Life & Pensions development costs Development costs within our international business increased as we haveinvested for growth. The £7m in respect of FPI represents our investment intothe German pension market and establishing capability in new markets. Asset Management underlying profit This is discussed in the Business Review section above. Corporate items +------------------------------------------------+---------+---------+| | 2007 | 2006 |+------------------------------------------------+---------+---------+| | £m | £m |+------------------------------------------------+---------+---------+|Expected return on net pension liability | 8 | 9 |+------------------------------------------------+---------+---------+|Expected return on corporate net assets | (9)| (10)|+------------------------------------------------+---------+---------+|Corporate costs | (14)| (13)|+------------------------------------------------+---------+---------+|Operating assumption changes for corporate costs| (68)| - |+------------------------------------------------+---------+---------+|Total corporate items | (83)| (14)|+------------------------------------------------+---------+---------+ The £68m operating assumption changes for corporate costs reflects our view thata substantial proportion of corporate costs are on-going and related to the Life& Pensions business. Other items +------------------------------------------------+----------+----------+| | 2007 | 2006 |+------------------------------------------------+----------+----------+| | £m | £m |+------------------------------------------------+----------+----------+|Investment return variances | (45)| (174)|+------------------------------------------------+----------+----------+|Effect of economic assumption changes | (12)| 181 |+------------------------------------------------+----------+----------+|Non-recurring items | 38 | (17)|+------------------------------------------------+----------+----------+|Amortisation of Asset Management acquired | (42)| (43)||intangibles | | |+------------------------------------------------+----------+----------+|Amortisation of Sesame/Pantheon acquired | (3)| - ||intangibles | | |+------------------------------------------------+----------+----------+|Impairment of Asset Management acquired | - | (58)||intangibles | | |+------------------------------------------------+----------+----------+|Total other items | (64)| (111)|+------------------------------------------------+----------+----------+ Other profit items excluded from underlying profit but included in profit beforetax are shown in the table above and total £64m negative (2006: £111m negative). Investment return variances and economic assumption changes include the impactof widening corporate bond spreads on life and pensions assets, partially offsetby their impact on mark-to-market of corporate debt. Non-recurring items are discussed in the IFRS Profits section above. There is no impairment charge in respect of F&C's acquired intangible assets.The charge in 2006 related to the write down in value of management contractsfollowing fund outflows notified in the year. EMBEDDED VALUE The embedded value on a pro forma basis has increased by 2% to £3,725m. Itcomprises: +------------------------------------------------+----------+----------+| | 2007 | 2006 |+------------------------------------------------+----------+----------+| | £m | £m |+------------------------------------------------+----------+----------+|Shareholders' invested net assets | 1,449 | 1,164 |+------------------------------------------------+----------+----------+|Value of in-force Life & Pensions business | 1,870 | 2,031 |+------------------------------------------------+----------+----------+|Market value of the listed Asset Management | 499 | 534 ||business | | |+------------------------------------------------+----------+----------+|Provision for future corporate costs | (97)| (47)|+------------------------------------------------+----------+----------+|Net pensions asset/(liability) | 4 | (22)|+------------------------------------------------+----------+----------+|Total pro forma embedded value | 3,725 | 3,660 |+------------------------------------------------+----------+----------+ The pro forma embedded value per share is £1.60 (2006: £1.73). The embedded value of Lombard is £342m (2006: £289m). Shareholders' invested net assets Shareholders' invested net assets have increased by £285m. Shareholders'invested net assets comprise: +----------------------------------------------+--------+--------+| | 2007 | 2006 |+----------------------------------------------+--------+--------+| | £m | £m |+----------------------------------------------+--------+--------+|Life & Pensions long-term funds | 640 | 778 |+----------------------------------------------+--------+--------+|Life & Pensions shareholder funds | 400 | 419 |+----------------------------------------------+--------+--------+|Total Life & Pensions net assets | 1,040 | 1,197 || | | |+----------------------------------------------+--------+--------+|Corporate net assets/(liabilities) | 409 | (33)|+----------------------------------------------+--------+--------+|Shareholders' invested net assets | 1,449 | 1,164 || | | |+----------------------------------------------+--------+--------+ Life & Pensions long-term funds have decreased reflecting net transfers toshareholder funds which have in turn funded dividend payments and IFAacquisitions. Corporate net assets have increased mainly as result of the conversion of theconvertible bond to equity and the positive impact of marking to marketlong-term debt. Value of in-force Life & Pensions business The decline in the period is due to the adverse experience and assumptionchanges and taxation basis changes. These amount to £405m. They have been partlyoffset by the profits from writing new business and the emergence of profits,accelerated by PS06/14. Market value of the listed Asset management business The market value of our 52% shareholding in F&C Asset Management plc reduced by6% to £499m. The share price declined from £2.11 at 31 December 2006 to £1.92 at31 December 2007. +----------------------------------------------+--------+--------+| | 2007| 2006|+----------------------------------------------+--------+--------+|Share price at year-end | £1.92| £2.11|+----------------------------------------------+--------+--------+|No. of shares held | 259m| 253m|+----------------------------------------------+--------+--------+|Percentage of shares held | 52%| 52%|+----------------------------------------------+--------+--------+|Market value of holding in F&C | £499m| £533m|+----------------------------------------------+--------+--------+ Provision for future corporate costs The provision for future corporate costs has increased by £50m. The largemajority of corporate costs are now capitalised in the calculation of embeddedvalue. Net pension asset The principal defined benefit scheme, Friends Provident Pension Scheme has asmall surplus. The improvement in the position is mainly due to the investmentperformance over the year and changes in financial conditions, in particular theincrease in interest rates used to discount future liabilities. FINANCIAL STRENGTH Economic capital We continue to use economic capital to inform business decisions. We havedeveloped a sophisticated capital model, which has helped with setting ourfinancial risk appetite and our continued drive for capital efficiency. Themodel forms the basis for discussions with the FSA to agree the individualcapital requirements for each company based on an assessment of its own riskprofile. During the year the model helped to inform decisions to reinsure longevity riskand lower exposure to equities in shareholder funds and the pension scheme. Italso informed the determination of the cash buffer needed to sustain thebusiness strategy. EEV required capital is set at the higher of regulatory capital and requirementsarising from internal capital management policies, which include economic riskcapital objectives. In aggregate, EEV required capital is higher than regulatoryrequirements by approximately £200m (2006: £200m). Life & Pensions capital The total available capital resources, calculated on a realistic basis for theFPLP With Profits Fund and on a regulatory basis for all other funds, amounts to£2.3bn (2006: £2.5bn). The regulatory capital requirement is £0.7bn (2006:£0.7bn). Therefore the excess capital resources over the capital requirementamounts to £1.6bn (2006: £1.8bn). The bulk of the Group's capital is heldoutside the with-profits funds and, consequently, can be deployed around theGroup with a relatively high degree of flexibility. Insurance Groups Directive The Insurance Groups Directive requires a very prudent measure of excess capitalresources as it excludes any surplus capital held within a long-term fund. Onthis measure, the provisional surplus Group capital resources were approximately£1.3bn at 31 December 2007 (2006: £1.0bn). The increase mainly arises from theshare capital issued as a result of the conversion of £290m FP plc convertiblebond. FPLP Realistic Solvency The assets and liabilities of the FPLP With Profits Fund are calculated on arealistic basis. Policyholder liabilities (including options and guarantees) arevalued using a market consistent stochastic model. At 31 December 2007, surplusassets amounted to £246m and the Risk Capital Margin (RCM) was £246m. At 31December 2006, surplus assets amounted to £220m and the RCM amounted to £220m.Our objective continues to be to manage the fund so that, over time, the RCMremains covered from assets within the Fund. The FPLP With Profits Fund Realistic Balance Sheet is reasonably resilient inthe event of falls or rises in investment markets. This is due in large measureto the actions taken to hedge the provisions made to cover the cost ofguarantees and options. FPLP Regulatory solvency In addition to a realistic basis, the solvency for FPLP's With Profits Fund isassessed on a regulatory basis. The two calculations are then compared and themore onerous requirement is applied. For 2007 and 2006 the more onerousrequirement for FPLP has been the realistic basis. The Free Asset Ratio is a common measure of financial strength. It is the ratioof assets less liabilities (including actuarial reserves but before the capitalrequirements), expressed as a percentage of actuarial reserves. For FPLP it hasbeen relatively stable, estimated as 22.3% at the end of 2007 (2006: 22.2%) andavailable assets to meet capital requirements are £3.7bn (2006: £3.9bn). Ratings FPLP's financial strength rating and Friends Provident plc's credit rating fromStandard and Poor's & Moody's were put on negative watch in November 2007 afterwe announced our intention to carry out a strategic review of the business. The FPLP financial strength ratings were downgraded one notch in January 2008following the announcement of our new strategy: • Standard & Poor's rating is now A (strong) with negative outlook. • Fitch's rating is A (strong) with negative outlook. • Moody's rating is A2 (strong) negative outlook. Our target is to have FPLP's financial strength rating within the broad 'A'range. The Friends Provident plc's credit ratings were also downgraded one notch inJanuary 2008: • Standard & Poor's rating is now BBB+ (good) with negative outlook. • Fitch's rating is now BBB+ (good) with negative outlook. • Moody's rating is now Baa2 (good) with negative outlook. The rating agencies have placed our ratings on negative outlook, reflectingtheir view of the risks involved in the implementation of the changes to ourstrategy. Financial risk reduction We actively manage financial risk and have taken a number of initiatives toreduce our exposures. FPP - In April 2007, FPP entered into a reinsurance treaty with Swiss Retransferring all the mortality and investment risk of FPP's pre-demutalisationin-force pension annuity book, with effect from 1 January 2007. The value of thestatutory liabilities reinsured was £1.7bn. This transaction is consistent withour attitude to longevity risk and has modestly aided the financial results. FPPhas retained the management of the policyholder relationship and policyholderswill therefore not see any change as a result of this arrangement. FPLP With Profits Fund - The overall aim remains to balance risk to shareholderswith maximising returns to policyholders whilst ensuring guarantees are met asthey fall due. Particular activities include: • Managing the proportion of equities and property backing the asset shares. At 2007 year-end this proportion was 52% (2006: 54%): 44% in equity and 8% in property. • Active management of bonuses and any market value reduction factors • Hedging strategies to mitigate equity market and interest rate risks. Other Life & Pensions Funds - Other risk mitigation activities include cash flowmatching and other inflation and interest rate hedging. FPLP Shareholder Fund - The equity exposure of shareholder net assets wasreduced from 55% to almost 0% in 2007 as equities were sold or completely hedgedwith sold futures. This has decreased the loss the Group would incur in theevent of an equity shock and releases capital to be deployed elsewhere. Pension schemes - The principal defined benefit scheme, Friends ProvidentPension Scheme, is in a healthy position. At 31 December 2007, there was a smallsurplus of £5m equivalent to 0.5% of assets (2006: deficit of £31m). Theimprovement in the position is mainly due to the investment performance over theyear and changes in financial conditions, in particular the increase in interestrates used to discount future liabilities. The Pension Scheme reduced its equity exposure from 65% to 40% over 2007, alsodecreasing its sensitivity to a subsequent equity shock. Contents IFRS resultsConsolidated income statement on an IFRS basisConsolidated underlying profit on an IFRS basisConsolidated balance sheet on an IFRS basisConsolidated statement of recognised income and expense on an IFRS basisSummary consolidated cash flow statement on an IFRS basisNotes to the IFRS results EEV resultsSummary consolidated income statement on an EEV basisConsolidated statement of recognised income and expense on an EEV basisConsolidated movement in ordinary shareholders' equity on an EEV basisConsolidated balance sheet on an EEV basisNotes to the EEV results Consolidated income statement For the year ended 31 December 2007 2007 2006 Notes £m £mRevenue Gross earned premiums 2 994 980Premiums ceded to reinsurers 2 (1,780) (84)Net earned premiums 2 (786) 896 Fee and commission income and income fromservice activities 719 565Investment income 2,573 3,697Total revenue 2,506 5,158 Other income 2 49 -Claims, benefits and expensesGross claims and benefits paid 1,582 1,587Amounts receivable from reinsurers (175) (43)Net claims and benefits paid 1,407 1,544 Change in insurance contracts liabilities (1,983) (764)Change in investment contracts 1,617 2,682liabilitiesTransfer to fund for future 42 19appropriationsMovement in net assets attributableto unit holders 42 131Movement in policyholder liabilities (282) 2,068Acquisition expenses 822 412Administrative and other expenses 581 556Finance costs 141 88Total claims, benefits and expenses 2,669 4,668Share of profit of associates and joint 1 1venture(Loss)/Profit before tax from continuingoperations (113) 491Policyholder tax (23) (124)(Loss)/Profit before shareholder tax fromcontinuing operations (136) 367Total tax credit/(charge) 43 (70)Policyholder tax 23 124Shareholder tax 66 54 (Loss)/Profit for the year (70) 421 Attributable to:Equity holders of the parent: (i)Ordinary shareholders (108) 276Other equity holders 52 52 (56) 328Minority interest (14) 93(Loss)/Profit for the year (70) 421 2007 2006Earnings per share pence penceBasic (loss)/earnings per share fromcontinuingoperations 5 (5.0) 13.1Diluted basic (loss)/ earnings per share from continuing operations (5.1) 12.8 (i) All profit attributable to equity holders of the parent is from continuingoperations Consolidated underlying profit For the year ended 31 December 2007 2007 2006 Notes £m £m(Loss)/Profit before tax from continuingoperations* (113) 491Policyholder tax (23) (124)Returns on Group-controlled fundsattributable to third parties 23 (104) (Loss)/Profit before tax excluding profitgenerated within policyholder funds (113) 263Non-recurring items 2 (38) 17Amortisation of Asset Managementacquired intangible assets 6 42 43Amortisation of acquired present valueof in-force business 6 26 25Amortisation of Life & Pensions acquiredintangible assets 6 11 7Impairment of Asset Management acquired intangible assets 6 - 58Interest payable on Step-up Tier oneInsurance Capital Securities (STICS) 4 (52) (52)Short-term fluctuations in investment 78 39returnUnderlying (loss)/profit before tax* (46) 400Tax on underlying (loss)/profit 39 6Minority interest in underlying (loss)/ (24) (29)profitUnderlying (loss)/profit after taxattributable to ordinary shareholdersof the parent (31) 377 2007 2006Earnings per share pence penceUnderlying (loss)/earnings per share 5 (1.4) 17.9 IFRS underlying profit is based on longer-term investment return and excludes:(i) policyholder tax, (ii) returns attributable to minority interests inpolicyholder funds, (iii) non-recurring items, (iv) amortisation and impairmentof acquired intangible assets and present value of acquired in-force business;and is stated after deducting interest payable on STICS. Management considerthat underlying profit better reflects the performance of the Group and focus onthis measure of profit in its internal monitoring of the Group's IFRS results. * Included in profit before tax from continuing operations, and underlyingprofit before tax, are one-off items relating to basis changes and the adoptionof FSA Policy Statement PS06/14 Prudential Changes for Insurers which havedecreased profit by £135m in 2007 (2006: increase of £156m). Consolidated balance sheet At 31 December 2007 2007 2006 Notes £m £mAssetsIntangible assets 6 1,456 1,405Property and equipment 81 80Investment properties 2,371 2,426Investments in associates and joint 14 15ventureDeferred tax assets 55 -Financial assets 47,710 45,150Deferred acquisition costs 1,093 1,111Reinsurance assets 2,015 85Current tax assets 4 30Insurance and other receivables 620 606Cash and cash equivalents 4,782 3,581Total assets 60,201 54,489LiabilitiesInsurance contracts 13,607 13,762Fund for future appropriations 481 439Financial liabilities- Investment contracts 37,266 32,821- Loans and borrowings 2,349 1,130Net asset value attributable to unit 909 941holdersProvisions 8 146 215Deferred tax liabilities 329 318Current tax liabilities 113 116Insurance payables, other payables anddeferred income 677 582Total liabilities 55,877 50,324Equity attributable to equity holdersof the parentAttributable to ordinary shareholders:Share capital 9 234 214Share premium 9 2,372 2,051Other reserves 9 346 542 2,952 2,807Attributable to other equity holders 9 810 810 3,762 3,617Minority interest 9 562 548Total equity 9 4,324 4,165Total equity and liabilities 60,201 54,489 Consolidated statement of recognised income and expense For the year ended 31 December 2007 Equity holders of Equity Total the parent holders of equity (ordinary the parent holders of Minority shares) (STICS) the parent interest Total £m £m £m £m £mActuarial gains on definedbenefit schemes net oftax 27 - 27 3 30Foreign exchangeadjustments 43 - 43 8 51Revaluation of owner occupied properties - - - - -Shadow accounting - - - - -Net income recogniseddirectly in equity 70 - 70 11 81(Loss)/Profit for the (108) 52 (56) (14) (70)yearTotal recognisedincome andexpense forthe year (38) 52 14 (3) 11 For the year ended 31 December 2006 Equity holders of Equity Total the parent holders of equity (ordinary the parent holders of Minority shares) (STICS) the parent interest Total £m £m £m £m £mActuarial (losses)/gains ondefined benefitschemes net oftax (8) - (8) 1 (7)Foreign exchangeadjustments (10) - (10) (2) (12)Revaluation of owner occupied properties 6 - 6 - 6Shadow accounting (6) - (6) - (6)Net incomerecogniseddirectly inequity (18) - (18) (1) (19)Profit for the year 276 52 328 93 421Total recognisedincome andexpense forthe year 258 52 310 92 402 Summary Consolidated cash flow statement For the year ended 31 December 2007 2007 2006 £m £m(Loss)/profit for the year (70) 421Net increase in operational assets and liabilities 1,840 991Pre-tax cash inflow from operating activities 1,770 1,412Tax received/(paid) 27 (86)Net cash inflow from operating activities 1,797 1,326 Investing activities Acquisition of subsidiaries, net of cash acquired (41) (21)Reduction in participation in subsidiaries, net of cash disposed - 49Compensation from investment mandate loss - 27Compensation from terminated merger (less related 34 -costs)Additions to internally generated intangible assets (26) (18)Purchase of property and equipment (net) (11) (11)Net cash (outflow)/inflow from investing activities (44) 26 Financing activities Finance costs (134) (81)STICS interest (52) (52)Proceeds from issue of long term debt, net of - 258expensesRepayment of long term debt (164) (312)Net movement in other borrowings, net of expenses 8 12Dividends paid to equity holders of the parent (168) (164)Dividends paid to minority interest (42) (46)Net cash outflow from financing activities (552) (385) Increase in cash and cash equivalents 1,201 967Balance at beginning of year 3,581 2,614Balance at end of year 4,782 3,581 This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW

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