Preliminary Results - Part 2

11th Mar 2008 07:02

Friends Provident PLC11 March 2008 Notes to the IFRS accounts 1. Basis of preparation The financial information included in this announcement has been extracted fromthe Group's financial statements prepared in accordance with InternationalFinancial Reporting Standards as adopted by the European Union (EU). The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2007 or 2006. The financialinformation for 2006 is derived from the statutory accounts for 2006 which havebeen delivered to the registrar of companies. The auditors have reported on the2006 accounts; their report was (i) unqualified, (ii) did not include areference to any matters to which the auditors drew attention by way of emphasiswithout qualifying their report and (iii) did not contain a statement undersection 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2007will be finalised on the basis of the financial information presented by thedirectors in this preliminary announcement and will be delivered to theregistrar of companies in due course. The Group's 2007 Report and Accounts will be available from 17 April 2008. TheGroups 2006 Report and Accounts has been filed with the Registrar of Companies. 2. Segmental information (a) Summary Segment information is presented in respect of the Group's business andgeographical segments. The primary reporting format, based on the Group'smanagement and internal reporting structure, is business segments. Inter-segment pricing is determined on an arm's length basis. Segment results,assets, and liabilities, include items directly attributable to a segment, aswell as those that can be allocated on a reasonable basis. Segment capitalexpenditure includes purchases of property and equipment, investment propertiesand intangible assets. Business segments (primary segment) The Group comprises the following main business segments: • UK Life & Pensions (including corporate items) • International Life & Pensions • Asset Management (including F&C's Managed Pension Fund business) Geographical segments (secondary segment) In presenting information on the basis of geographic segments, segment revenueis based on the geographical location of customers. Segment assets are based onthe geographical location of the assets. The Group has defined threegeographical areas: • UK • Europe • Rest of the world (b) Business segment information (primary segment information) (i) Revenue and expenses Year ended 31 December 2007 Elimination UK Life International of inter- & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £mGross earned premiums oninsurance and investment contracts 3,955 2,802 97 - 6,854Less investment contracts premiums (i) (2,974) (2,789) (97) - (5,860)Gross earned premiums 981 13 - - 994Less premiums ceded to (1,779) (1) - - (1,780)reinsurersNet earned premiums (798) 12 - - (786) Fee and commission income andincome from service activities 311 180 276 (48) 719 Investment income 1,755 754 64 - 2,573Total revenue 1,268 946 340 (48) 2,506 Other income 49 - - - 49 Net claims and benefits paid 1,406 1 - - 1,407 Movement in insurance andinvestment contracts liabilities (1,156) 748 42 - (366) Transfer to fund for future appropriations 42 - - - 42 Movement in net assetsattributable to unit holders 42 - - - 42 Acquisition expenses 732 77 13 - 822 Administrative and other 270 117 242 (48) 581expenses Finance costs 119 4 18 - 141 Total claims, benefits and expenses 1,455 947 315 (48) 2,669 Share of profits of associatesand joint venture - - 1 - 1 Profit before tax from continuing operations (138) (1) 26 - (113) Policyholder tax (22) - (1) - (23) Shareholder tax 69 3 (6) - 66 Segmental result after tax (91) 2 19 - (70) Inter segment revenue/(expense) (48) - 48 - - (i) Accounted for as deposits under IFRS Year ended 31 December 2006 Elimination UK Life International of inter- & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £mGross earned premiums oninsurance and investment contracts 3,709 2,769 199 - 6,677Less investment contracts premiums (2,741) (2,757) (199) - (5,697)Gross earned premiums 968 12 - - 980Less premiums ceded to (82) (2) - - (84)reinsurersNet earned premiums 886 10 - - 896 Fee and commission income and income from service 148 198 258 (39) 565activitiesInvestment income 2,934 640 123 - 3,697Total revenue 3,968 848 381 (39) 5,158 Other income - - - - - Net claims and benefits paid 1,542 2 - - 1,544 Movement in insurance andinvestment contracts liabilities 1,176 641 101 - 1,918 Transfer to fund for future appropriations 19 - - - 19 Movement in net assetsattributable to unit holders 131 - - - 131 Acquisition expenses 329 72 11 - 412 Administrative and other 240 68 287 (39) 556expenses Finance costs 72 15 1 - 88 Total claims, benefits and expenses 3,509 798 400 (39) 4,668 Share of profits of associatesand joint venture 1 - - - 1 Profit before tax from continuing operations 460 50 (19) - 491 Policyholder tax (124) - - - (124) Shareholder tax 45 1 8 - 54 Segmental result after tax 381 51 (11) - 421 Inter segment revenue/(expense) (39) - 39 - - (ii) Underlying profit Year ended 31 December 2007 UK Life International & Life & Asset Pensions Pensions Management Total £m £m £m £m(Loss)/Profit before tax from continuing operations (138) (1) 26 (113)Policyholder tax (22) - (1) (23)Returns on Group-controlled funds attributable to third parties 23 - - 23(Loss)/Profit before tax excluding profit generated within policyholder funds (137) (1) 25 (113)Non-recurring items (i) (49) - 11 (38)Amortisation of Asset Management acquired intangible assets - - 42 42Amortisation of acquired present value of in-force business 9 17 - 26Amortisation of Life & Pensions acquired intangible assets 3 8 - 11Interest payable on STICS (52) - - (52)Short-term fluctuations in investment return 81 (3) - 78Underlying (loss)/profit before (145) 21 78 (46)tax Tax on underlying profit 39Minority interest in underlying (24)profitUnderlying (loss) after taxattributable to ordinary shareholders of the parent (31)Earnings per share Underlying (loss) per share (1.4)(pence) (i) Non-recurring items Life & Pensions items include a net charge of £34m (2006: £nil) beingcompensation received (less related costs) relating to the terminated mergerwith Resolution plc, a credit of £15m (2006: credit of £3m) in respect of thecost to shareholders of mortgage endowment complaints and historic businessreviews, £nil (2006: credit of £1m) in respect of the review conducted intopension transfers and opt-outs and £nil (2006: charge of £2m) arising from theclosure of the Appointed Representative sales channel. Asset Management items include costs of £nil (2006: £10m) incurred integrating,rationalising and reorganising the Asset Management business following theacquisition of F&C Group (Holdings) Limited, a charge of £7m (2006: £12m) inrespect of issuing shares to employees under the 2004 Reinvestment Plan, £nil(2006: £3m) compensation received on loss of an investment management contractand a charge of £4m (2006: £nil) in respect of a provision for VAT repayable toinvestment trusts. Year ended 31 December 2006 UK Life International & Life & Asset Pensions Pensions Management Total £m £m £m £mProfit/(loss) before tax from continuing operations 460 50 (19) 491Intersegment loan interest 12 - (12) -Policyholder tax (124) - - (124)Returns on Group-controlledfunds attributable to third (104) - - (104)partiesProfit/(loss) before tax excluding profit generated within policyholder funds 244 50 (31) 263Non-recurring items (2) - 19 17Amortisation of Asset Management acquired intangible assets - - 43 43Amortisation of acquired present value of in-force business 9 16 - 25Amortisation of Life & Pensions acquired intangible assets - 7 - 7Impairment of Asset Management acquired intangible assets - - 58 58Interest payable on STICS (52) - - (52)Short-term fluctuations in investment return 41 (2) - 39Underlying profit before tax 240 71 89 400 Tax on underlying profit 6Minority interest in underlying (29)profitUnderlying profit after tax attributable to ordinary shareholders of the parent 377Earnings per share Underlying earnings per share (pence) 17.9 (iii) Assets and liabilities Year ended 31 December 2007 Elimination UK Life International of inter- & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £mSegment assets 42,738 15,487 2,038 (76) 60,187Investment in associates and joint venture 14 - - - 14Total assets 42,752 15,487 2,038 (76) 60,201 Total liabilities 39,457 14,927 1,569 (76) 55,877Other segment information:Capital expenditure 195 6 3 - 204Depreciation 5 1 4 - 10Amortisation 26 26 43 - 95Impairment losses (i) 17 3 - - 20 Year ended 31 December 2006 Elimination UK Life International of inter- & Life & Asset segment Pensions Pensions Management amounts Total £m £m £m £m £mSegment assets 40,182 12,243 2,126 (77) 54,474Investment in associates and joint venture 15 - - - 15Total assets 40,197 12,243 2,126 (77) 54,489 Total liabilities 36,991 11,730 1,680 (77) 50,324Other segment information:Capital expenditure 313 4 5 - 322Depreciation 7 - 3 - 10Amortisation 24 24 44 - 92Impairment losses (i) - - 58 - 58 (i) Comprises impairment losses on acquired intangible assets £nil (2006: £58m)and impairment losses on internally generated intangible assets £20m (2006:£nil). (c) Geographical segmental information (secondary segment information) Year ended 31 December 2007 Rest of the UK Europe world Total £m £m £m £mGross earned premiums 981 13 - 994 Fee and commission income andincome from service activities 485 177 57 719 Revenue from external customers 1,466 190 57 1,713 Investment income 2,573 Less premiums ceded to reinsurers (1,780) Total revenue 2,506 Total assets 44,351 10,983 4,867 60,201 Capital expenditure 196 7 1 204 Year ended 31 December 2006 Rest of the UK Europe world Total £m £m £m £mGross earned premiums 968 12 - 980 Fee and commission income andincome from service activities 274 215 76 565 Revenue from external customers 1,242 227 76 1,545 Investment income 3,697 Less premiums ceded to reinsurers (84) Total revenue 5,158 Total assets 43,238 7,361 3,890 54,489 Capital expenditure 316 6 - 322 3. Staff pension schemes (a) Introduction The Group operates several defined benefit schemes: the Friends ProvidentPension Scheme (FPPS), to which the majority of the Group's UK Life & Pensionsemployees belong, and various schemes operated by F&C. In addition, definedcontribution schemes are operated by FP (see note 3(c)), F&C, Friends ProvidentInternational Limited (FPIL), Pantheon Financial Limited and Sesame GroupLimited. Lombard does not operate a pension scheme. (b) Total pension asset/(liability) Under IAS 19 Employee Benefits, the pension liability is recognised on thebalance sheet, gross of deferred tax. 2007 2006 £m £m Surplus in FPPS 5 - Group pension surpluses included in insuranceand other receivables 5 - Deferred tax (1) - Net pension surplus 4 - Deficit in FPPS - (31) Deficit in the F&C schemes (27) (46)Group pension deficits included in provisions (27) (77) Deferred tax 8 23Net pension deficits (19) (54) Analysis of net pension asset/(liability) FPPS 4 (22)F&C schemes (19) (32) (15) (54)Amounts recognised in the income statement FPPS (17) (14)F&C schemes (5) (4) (22) (18)Amounts recognised in the statement of recognised income and expenseFPPS 32 (12)F&C schemes 11 2Deferred tax (13) 3 30 (7) (c) Friends Provident Pension Scheme The FPPS is a UK defined benefit scheme to which the majority of the Group's UKLife & Pensions employees belong. In July 2007 the FPPS scheme was closed to newentrants and a defined contribution plan introduced for new employees. Principal assumptions used by the Scheme Actuary 2007 2006 % % Inflation assumption 3.53 3.02 Rate of increase in salaries* 3.50 3.50Rate of increase in pensions in payment 3.40 3.02 Discount rate 5.51 5.02 *Plus allowance for salary scale increases Mortality assumptions Mortality assumptions for pensioners are based on the appropriate 2000 seriesmortality tables (2006: 1992) published by the Continuous MortalityInvestigations (CMI) in 2006. In addition, allowance is made for futureimprovements in mortality according to each individual's year of birth throughthe use of the 'medium cohort' projections (with certain amendments) publishedby the CMI in 2002. The amendments are to introduce a minimum annual rate ofimprovement in future mortality - for males this is assumed to be 1% pa and forfemales 0.75% pa. The mortality assumptions provide the following average life expectancies ofmembers retiring at the age of 60: 2007 2006Expected age at death of future male pensioner 89 88Expected age at death of future female pensioner 90 90Expected age at death of current male pensioner 87 87Expected age at death of current female pensioner 89 90 (d) F&C Asset Management plc pension schemes F&C operates a defined benefit scheme in the United Kingdom, one in TheNetherlands, one in Ireland, and participates in one in Portugal. The UK schemeis closed to new entrants. All new UK employees are eligible to benefit fromdefined contribution arrangements, which provide greater certainty over thefuture cost to F&C. On 31 March 2007 the F&C Management Pension Plan was merged into the ISIS AssetManagement plc Pension Fund as part of a rationalisation of UK employmentarrangements. The new scheme was renamed the F&C Asset Management Pension Plan. Principal assumptions used by the Schemes' Actuary 2007 2006 % % Inflation assumption 2.00-3.30 1.75-3.00 Rate of increase in salaries 2.50-4.55 2.50-4.25 Rate of increase in pensions in payment 2.50-4.25 2.75-4.00Discount rate 5.50-5.60 4.60-5.00 Mortality assumptions Mortality assumptions for pensioners are based on the appropriate 1992 seriesmortality tables (2006: 1992) published by the CMI. In addition, allowance ismade for future improvements in mortality according to each individual's year ofbirth through the use of the 'medium cohort' projections published by the CMI in2002, reduced by one year of age. In 2006 projections of future improvements inmortality were based on 'typical' year of birth of 1935 for current pensionersand 1965 for future pensioners. The mortality assumptions provide the following average life expectancies ofmembers retiring at the age of 60: 2007 2006Expected age at death of future male pensioner 89 88Expected age at death of future female pensioner 92 91Expected age at death of current male pensioner 88 86Expected age at death of current female pensioner 91 89 4. Appropriations of profit (a) Dividends paid and proposed on ordinary shares Dividends paid during the year and recognised in reserves 2007 2006 £m £m Final dividend in respect of 2006 and paid in May 2007 of 5.2p per share (in respect of 2005 and paid in May 2006 of 5.1p per share) 110 108 Interim dividend in respect of 2007 and paid in November 2007 of 2.7p per share (in respect of 2006 and paid in November 2006 of 2.65p per share) 58 56 Total dividends paid 168 164 After the balance sheet date the dividends set out below were proposed by thedirectors. In accordance with IAS 10 these have not been provided as a liabilityat the balance sheet date. 2007 2006 £m £m Final dividend in respect of 2007 payable in May 2008 of5.3p per share (in respect of 2006 and paid in May 2007 of 5.2p per share) 123 111 The 2007 final dividend is based on 2,323m shares estimated to be in issue atthe dividend payment date (excluding treasury shares). The 2006 final dividendwas based on 2,136m shares (excluding treasury shares). (b) STICS interest STICS interest paid during the year and recognised in reserves 2007 2006 £m £m Interest on 2003 STICS at 6.875% Paid in May 2007 (May 2006) 10 10 Paid in November 2007 (November 2006) 11 11 Total 2003 STICS interest paid 21 21 Interest on 2005 STICS at 6.292% Paid in June 2007 (June 2006) 31 31 Total 2005 STICS interest paid 31 31 Total STICS interest paid 52 52 5. Earnings per share (a) Basic and underlying earnings per share from continuing operations Earnings per share have been calculated based on the profit after tax and on theunderlying profit after tax, attributable to ordinary shareholders of theparent. The directors consider that the underlying earnings per share figuregives a better indication of operating performance. 2007 2007 2006 2006 Earnings Per share Earnings Per share £m pence £m pence(Loss)/Profit after tax attributable to ordinary shareholders of the parent (108) (5.0) 276 13.1 Short-term fluctuations in investment return 78 3.6 39 1.8Non-recurring items (38) (1.8) 17 0.8Amortisation and impairment of acquired intangible assets 79 3.7 133 6.3Minority interest on items excluded from underlying loss (15) (0.7) (40) (1.9)Tax credit on items excluded from underlying loss (27) (1.2) (48) (2.2)Underlying (loss)/profit after tax attributable to ordinary shareholders of the parent (31) (1.4) 377 17.9 (b) Diluted basic earnings per share from continuing operations 2007 2006 Weighted Weighted average average number number 2007 of ordinary 2007 2006 of 2006 ordinary Earnings shares Per share Earnings shares Per share £m millions pence £m millions pence(Loss)/ Profit after tax attributable to ordinary shareholders of the parent (108) 2,152 (5.0) 276 2,111 13.1Dilution (c) (1) - (0.1) 16 164 (0.3)Diluted (loss)/profit after tax attributable to ordinary shareholders of the (109) 2,152 (5.1) 292 2,275 12.8parent (c) Dilution Options over 33,784,431 shares outstanding under the Company's option schemes asat 31 December 2007 were not dilutive for the period shown because their impacton EPS would be to reduce the loss per share. Options over 16,620,550 shares outstanding under F&C's option schemes as at 31December 2007 had a dilutive impact on the Group's loss due to the potentialdecrease in share in F&C's earnings. Options over 32,816,922 shares were outstanding under the Company's optionschemes as at 31 December 2006. Of these, 24,239,504 options were not dilutivefor that period because the market price of the Company's shares was below theoption price or the performance criteria were not met. Options over 12,987,402 shares outstanding under F&C's option schemes as at 31December 2006 were non-dilutive. The calculation of diluted earnings per share for 2006 also includes anallocation of shares in respect of the final earn-out payment for the Lombardacquisition and an estimate of the impact of the conversion of the convertiblebonds in 2007. Both these items had a dilutive impact in 2006. 6. Intangible assets Investment Acquired management Goodwill PVIF contracts Other Total £m £m £m £m £mCostAt 1 January 2006 677 484 620 195 1,976Other additions 4 - - 18 22Disposals (4) - (43) - (47)Adjustment to consideration (12) - - - (12)Foreign exchange adjustments (3) (4) (4) (3) (14)At 31 December 2006 662 480 573 210 1,925Acquisition through business 37 - - 32 69combinationsOther additions 11 - - 26 37Disposals - - - (13) (13)Adjustment to consideration (i) 10 - - - 10Foreign exchange adjustments 13 19 12 12 56At 31 December 2007 733 499 585 267 2,084Amortisation and impairmentAt 1 January 2006 - 115 204 67 386Amortisation charge for year - 25 43 24 92Impairment charge - - 58 - 58Disposals - - (16) - (16)At 31 December 2006 - 140 289 91 520Amortisation charge for year - 26 42 27 95Impairment charge - - - 20 20Disposals - - - (13) (13)Foreign exchange adjustments - 3 - 3 6At 31 December 2007 - 169 331 128 628Carrying amountsAt 31 December 2006 662 340 284 119 1,405At 31 December 2007 733 330 254 139 1,456 (i) the final earn-out payments in respect of the acquisition of Lombard wassettled in April 2007 and was £10m (€15m) higher than estimated at the 2006year-end and this amount has been added to goodwill. (a) Goodwill Goodwill is the only intangible asset which has an indefinite useful life. Thegoodwill has been allocated to the following cash-generating units: 2007 2006 £m £m UK Life & Pensions 192 191 Lombard 161 138 Sesame 8 - Pantheon 28 - Friends Provident International Limited - - Asset Management 344 333 Total goodwill 733 662 In accordance with IAS 36 Impairment of Assets, goodwill is assessed forpossible impairment each year. This assessment takes place in December of eachyear and compares the carrying value of goodwill for each segment with itsrecoverable amount. The recoverable amount has been taken to be the segment'scalculated value in use. There has been no goodwill impairment charge in 2007 (2006: £nil). (b) Acquired PVIF Acquired PVIF is amortised over the lifetime of the in-force policies and isanalysed as follows: 2007 2006 Cumulative Cumulative Cost amortisation Net Cost amortisation Net £m £m £m £m £m £mUK Life & Pensions 184 109 75 184 100 84International Life & 315 60 255 296 40 256PensionsTotal acquired PVIF 499 169 330 480 140 340 In 2007 there was no indication that acquired PVIF has been impaired. (c) Investment management contracts During 2006 F&C experienced a level of fund outflows which was higher thananticipated. This level of lost business had a notable impact on revenues andwas significant enough to be considered an indicator of potential impairment ofcertain intangible assets, namely the related investment management contracts.No such indicators of impairment existed in 2007 and therefore no impairmentreview of intangible assets with finite lives has been undertaken this year. Theinformation which follows is the disclosure in relation to the comparativeperiod. The 2006 review resulted in an impairment being recognised (included withinAdministrative and other expenses in the income statement) in respect ofinvestment management contracts as follows: 2007 2006 £m £m F&C Investment Trust contracts - 22 F&C Institutional contracts - 36 Total impairment recognised in the income statement - 58 The above contracts relate to the investment trust management contracts andinstitutional fund management contracts acquired as a result of the creation ofF&C Asset Management plc following the business combination of ISIS AssetManagement plc and F&C Group (Holdings) Limited on 11 October 2004. (d) Other intangible assets Other intangible assets mainly consist of distribution channel relationships andsoftware development which are amortised over their anticipated useful lives ofbetween 3 and 15 years. The analysis for each segment is as follows: 2007 Cumulative amortisation 2006 and Cumulative Cost impairment Net Cost amortisation Net £m £m £m £m £m £mUK Life & Pensions 130 92 38 90 69 21International Life & Pensions 132 32 100 116 19 97Asset Management 5 4 1 4 3 1Total other intangible assets 267 128 139 210 91 119 Included in amortisation is £11m (2006: £7m) in respect of Life & Pensionsacquired intangible assets. At 31 December 2007 management assessed the value attributed to otherintangibles. This review has resulted in an impairment of £17m (2006: £nil)relating to UK Life & Pensions development and software intangibles. Separately a review of International Life & Pensions software intangibles hasresulted in an impairment charge of £3m (2006: £nil). 7. Capital (a) Overview The Group's Life & Pensions Business manages its capital on both economiccapital and regulatory bases: The economic capital model, discussed further in the unaudited informationincluded in the Financial Review, helps in setting our own financial riskappetite and in actively managing financial risk. The economic capital modelcompares total available FPLP capital resources, calculated on a realisticbasis, with the risk capital required to cover unexpected losses. The Group complies with all regulatory capital requirements; these include theInsurance Groups Directive (IGD) and individual company regulatory requirements. The Life & Pensions capital statement, drawn up in accordance with FRS 27,illustrates the financial strength of the Life & Pensions business and is setout in section 7(b). Total available capital resources are calculated on arealistic basis for the FPLP With-Profits Fund and on a regulatory basis for allother funds. IGD looks at capital from a Group shareholder perspective and is a prudentmeasure in that surplus capital not immediately available to shareholders, suchas surplus capital in the long-term funds, is excluded from the calculation. A reconciliation of IFRS Equity attributable to equity holders of the parent,capital resources per the Capital Statement and Life & Pensions Capital on anIGD basis is set out below. 2007 2006 Capital Capital Capital Capital resources Requirements Surplus resources Requirements Surplus £m £m £m £m £m £mIFRS 3,762 - 3,762 3,617 - 3,617Subordinated debt 4 - 4 10 - 10Fund for futureappropriations 481 - 481 439 - 439Entity resourcesexcluded fromCapital Statement (i) (451) - (451) (105) - (105)Regulatory prudence -Inadmissible assetsand valuationDifferences (ii) (1,548) - (1,548) (1,487) - (1,487)Life & Pensions CapitalStatement 2,248 690 1,558 2,474 642 1,832FPLP With-Profits Fundresources calculatedon a regulatory basis 1,741 1,404 337 1,713 1,195 518(iii)Long-term fund surplus (796) - (796) (1,039) - (1,039)(iv)Other valuation 27 - 27 (62) - (62)differencesLife & Pensions Capital onan IGD basis 3,220 2,094 1,126 3,086 1,837 1,249 Group IGD Surplus (v) Estimate £1.3bn £1.1bn (i) Corporate centre, Asset Management and IFA distribution business (ii) Largely Goodwill, intangible assets and DAC less actuarialfunding (for which credit cannot be taken for on an IFRS basis). (iii)FPLP With-Profits Fund resources are calculated on a realistic basis under IFRS and a regulatory basis under the IGD (see b(ii)). (iv) Long-term fund surplus capital over and above capital requirements is excluded from capital resources on an IGD basis. (v) Group IGD Surplus includes Corporate centre, Asset Management and IFA distribution businesses. (b) Capital statement The capital statement in respect of the Group's Life & Pensions business is setout below. This statement shows an analysis of the available capital resourcescalculated on a realistic basis for the FPLP With-Profits Fund and calculated ona regulatory basis for all other funds. It also shows the regulatory capitalrequirements and, in total, the overall surplus capital over regulatoryrequirements. In addition the statement provides an analysis of policyholders'liabilities. At 31 December 2007 UK UK Overseas Life & Total with- with- UK non- Life & Pensions Life & profits profits participating Pensions shareholders' Pensions (FPLP) (FPLA) funds funds funds business £m £m £m £m £m £mShareholders' fundsOutside fund - - - - 865 865Inside fund - - 1,044 76 - 1,120 - - 1,044 76 865 1,985Other qualifying capitalSubordinated debt - - - 4 - 4Preference shares - - - - 300 300FFA 338 143 - - - 481 338 143 1,044 80 1,165 2,770Regulatory adjustmentsAssets 2 - (571) (441) (14) (1,024)Liabilities - (2) 189 409 - 596Shareholders' share of future bonuses (94) - - - - (94)Available capital resources 246 141 662 48 1,151 2,248 Capital requirementUK realistic basis 246 - - - - 246Other regulatory bases - 20 384 40 - 444 246 20 384 40 - 690Overall surplus capitalover regulatory requirements 1,558Analysis ofpolicyholders' liabilitiesWith-profits 11,568 197 - - - 11,765Unit-linked - - 18,896 14,496 - 33,392Non-participating 2,493 42 3,179 2 - 5,716Total 14,061 239 22,075 14,498 - 50,873 At 31 December 2006 UK UK Overseas Life & Total with- with- UK non- Life & Pensions Life & profits profits participating Pensions shareholders' Pensions (FPLP) (FPLA) funds funds funds business £m £m £m £m £m £mShareholders' fundsOutside fund - - - - 1,045 1,045Inside fund - - 1,211 30 - 1,241 - - 1,211 30 1,045 2,286Other qualifying capitalSubordinated debt - - - 10 300 310Preference shares - - - - - -FFA 296 143 - - - 439 296 143 1,211 40 1,345 3,035Regulatory adjustmentsAssets 19 - (725) (323) - (1,029)Liabilities - (1) 237 327 - 563Shareholders' share of future bonuses (95) - - - - (95)Available capital resources 220 142 723 44 1,345 2,474 Capital requirementUK realistic basis 220 - - - - 220Other regulatory bases - 21 368 33 - 422 220 21 368 33 - 642Overall surplus capitalover regulatory requirements 1,832Analysis ofpolicyholders' liabilitiesWith-profits 12,505 217 - - - 12,722Unit-linked - - 16,954 11,323 - 28,277Non-participating 2,595 38 2,896 55 - 5,584Total 15,100 255 19,850 11,378 - 46,583 (i) Summary As can be seen from the above table, the total available capital resources ofthe Group's Life & Pensions business amounts to £2,248m (2006: £2,474m), itsregulatory capital requirements amount to £690m (2006: £642m) resulting in asurplus of available capital resources over regulatory capital of £1,558m (2006:£1,832m). Set out below are details of how the available capital resources have beencalculated, the restrictions that are in existence over the available capitalresources, the basis of calculating the regulatory capital requirements and anexplanation for the increase in the available capital. (ii) Basis of calculating capital requirements for Life & Pensions business For the FPLP With-Profits Fund, the capital requirement is the risk capitalmargin (RCM) which amounts to £246m (2006: £220m). This is calculated on adefined set of adverse scenarios prescribed by the FSA (the market riskscenarios tested are what would happen if property prices fall by 12.5%, equityprices fall by 20%, corporate bonds spreads increase by 6.45%, fixed interestyields rise 0.80% and persistency increases by 32.5%). The RCM is based on theasset mix at the year-end and takes into account hedging strategies and certainother actions management would take in the event of particular adverse marketconditions. Under the realistic capital methodology, the capital requirement is the higherof the 'twin peaks' test of the realistic peak and the regulatory peak. In FPLPWith-Profits Fund, the realistic peak applied in both 2007 and 2006. This hasresulted in a With-Profits Insurance Capital Component (WPICC) of £1,226m (2006:£961m) required to bring the regulatory peak of £1,563m (2006: £1,475m) in linewith the realistic peak of £nil (2006: £nil) as adjusted for the value of futuretransfers to shareholders to be deducted from the WPICC; this has resulted in asurplus in the FPLP With-Profits Fund, on a regulatory basis, of £337m (2006:£514m). Realistic Regulatory 2007 2006 2007 2006 £m £m £m £mAvailable capital 246 220 Surplus 1,987 1,933Risk capital margin (246) (220) Long term Insurance - - Capital (424) (458) requirementsRealistic peak - - Regulatory peak surplus 1,563 1,475surplus With Profits Insurance Capital Component (1,226) (961) - - Value of future transfers to 337 514 shareholders The capital cover to meet the regulatory solvency requirement of FPLP'sWith-Profits Fund is provided from FPLP's Non-Profit Fund and shareholders'fund, to the extent not met from the With-Profits Fund itself. For the FPLA closed With-Profits Fund, the capital requirement has beencalculated on a regulatory basis in accordance with FSA regulations at £20m(2006: £21m). For UK non-participating funds, the relevant capital requirement is the capitalresources requirement determined in accordance with FSA regulations. This, intotal, amounts to £384m (2006: £368m). For overseas business, local regulatory capital requirements are determined andthese amount to £40m (2006: £33m). This is analysed £10m (2006: £9m) for FPI and£30m (2006: £24m) for Lombard. (iii) Movement in available capital At 31 December 2007 total available capital resources had decreased by £226m to£2,248m, as shown below. UK UK Overseas Life & Total with- with- UK non- Life & Pensions Life & profits profits participating Pensions shareholders' Pensions (FPLP) (FPLA) funds funds funds business £m £m £m £m £m £mAt 1 January 2007 220 142 724 44 1,344 2,474New business strain - - (221) (85) - (306)Surplus in year (i) 26 (1) 162 71 32 290Principal assumptionchanges- PS 06/14 - - 138 - - 138- Morbidity and lapse - - (51) - - (51)basisTransfers - - (90) 18 72 -Dividend and STICS interest - - - - (297) (297)At 31 December 2007 246 141 662 48 1,151 2,248 (i) All tax items are included within Surplus in year. At 31 December 2006 total available Life & Pensions capital resources hadincreased by £7m to £2,474m, as shown below. UK UK Overseas Life & Total with- with- UK non- Life & Pensions Life & profits profits participating Pensions shareholders' Pensions (FPLP) (FPLA) funds funds funds business £m £m £m £m £m £mAt 1 January 2006 236 118 814 56 1,243 2,467New business strain - - (297) (35) - (332)Surplus in year (i) (16) 24 161 48 73 290Assumption changes- PS 06/14 - - 123 - - 123- Morbidity basis - - 123 - - 123Transfers - - (200) (25) 225 -Dividend and STICS interest - - - - (197) (197)At 31 December 2006 220 142 724 44 1,344 2,474 (i) All tax items are included within Surplus in year. 8. Provisions 2007 2006Analysis of total provisions £m £mPension deficits (note 3) 27 77Other provisions 119 138 146 215 9. Movement in capital and reserves Equity attributable to equity holders of the parent Share Share Other Minority capital premium reserves STICS Total interest Total £m £m £m £m £m £m £mAt 1 January 2007 214 2,051 542 810 3,617 548 4,165Total recognised income and expense for the year - - (38) 52 14 (3) 11Dividends on equity shares - - (168) - (168) (42) (210)Interest paid on STICS - - - (52) (52) - (52)Appropriations of profit - - (168) (52) (220) (42) (262)Share based payments - 5 10 - 15 6 21Lombard earn-out 3 57 - - 60 - 60Change in participation in subsidiary - - - - - 1 1Conversion ofconvertiblebonds 17 259 - - 276 - 276Acquisition of subsidiaries - - - - - 52 52At 31 December 2007 234 2,372 346 810 3,762 562 4,324 Equity attributable to equity holders of the parent Share Share Other Minority capital premium reserves STICS Total interest Total £m £m £m £m £m £m £mAt 1 January 2006 214 2,038 436 810 3,498 442 3,940Total recognised income and expense for the - - 258 52 310 92 402yearDividends on equity - - (164) - (164) (46) (210)sharesInterest paid on STICS - - - (52) (52) - (52)Appropriations of profit - - (164) (52) (216) (46) (262)Share based payments - 13 12 - 25 7 32Change in participation in subsidiary - - - - - 53 53At 31 December 2006 214 2,051 542 810 3,617 548 4,165 10. Business combinations (a) Pantheon Financial and Sesame acquisitions On 14 May 2007 the Group acquired 100% of the voting rights of PantheonFinancial, a non-listed group of companies, incorporated in the United Kingdom.Details of the consideration, and asset and liabilities acquired can be seen inthe table below. Pantheon Financial Book Total fair value on Fair value value on acquisition adjustments acquisition £m £m £mIntangible assets: Distribution agreements - 7 7 Customer relationships - 2 2 Brand - 1 1Net assets 2 - 2Deferred tax liability - (3) (3) 2 7 9Goodwill arising on acquisition 24Total 33Discharged by: Cash 17 Estimated further 15consideration (i) Acquisition costs 1Total consideration 33 (i) The future consideration represents three further annual payments that arelinked to Pantheon's performance. The value of £15m is based on Pantheon meeting100% of their plan numbers and is capped at a total of £58m. The impact of Pantheon on the results for 2007 has been to increase profitbefore tax by £1m. On 1 June 2007 the Group acquired 100% of the voting rights of Sesame, anon-listed group of companies, incorporated in the United Kingdom. Details ofthe consideration, and assets and liabilities acquired can be seen in the tablebelow. As part of the purchase agreement the Group financed the repayment of a £75mloan due to the vendor company. As permitted by IFRS 3 Business Combinationsthis has been treated as consideration. Sesame Group Book Total fair value on Fair value value on acquisition adjustments acquisition £m £m £mIntangible assets: Customer relationships - 20 20 Software - 1 1 Brand - 1 1Net assets 60 3 63Deferred tax liability - (7) (7) 60 18 78Goodwill arising on acquisition 8Total 86Discharged by: Cash 84 Acquisition costs 2Total consideration 86 The impact of Sesame on the results for 2007 has been to increase profit beforetax by £10m. The fair value of net assets acquired in respect of both companies shown in the2007 interim report were reported on a provisional basis due to the closeproximity of the acquisitions to the interim reporting date. Since publicationof the interim report, the fair values have been finalised. (b) F&C managed investment funds In 2007 the FPLP with-profits fund invested in two new funds, set-up and managedby F&C. The funds are consolidated despite the Group's interest being less than50%, as control is deemed to exist through the fund manager (F&C). In each case,the fair value of the assets acquired was equal to the consideration paid. F&C Event Driven Limited In June 2007, the Group invested £35m and acquired a 47% interest in theordinary share capital of F&C Event Driven Limited. This is a new investmentfund set up by F&C in June 2007 and is a closed-end investment company,domiciled in Guernsey. The fund is listed on the London Stock Exchange andinvests in a portfolio of listed and unlisted hedge funds, each of whichprimarily follows an Event Driven Strategy. F&C European Capital Partners LP In April 2007, the Group invested £9m in F&C European Capital Partners LP, a newinvestment fund set up by F&C. The fund invests in European mid-marketenterprises and primarily holds investment in funds, but also invests directlyinto private companies. The Group's percentage holding at 31 December 2007 is40%. (c) The AUB Commercial Property Company Limited (AUB) acquisition In October 2007, the Group acquired the entire share capital of The AUBCommercial Property Company Limited ('AUB') for the sum of £74m. AUB is alimited company incorporated on the Island of Guernsey and invests in aportfolio of commercial properties located throughout the United Kingdom. TheGroup's investment is held by FPLP linked funds. £1m of goodwill has beenrecognised on the acquisition. The impact of AUB on the results for 2007 has been to decrease profit before taxby £4m. (d) Quadrant Caldwell Drake Limited On 26 June 2007, the Pantheon Financial group of companies purchased the entireshare capital of Quadrant Caldwell Drake Limited (QCD), an Independent FinancialAdvisor for £5m. £4m of goodwill has been recognised on this acquisition. (e) Lombard acquisition The final earn-out payment in connection with the acquisition of Lombard wassettled in April 2007 and amounted to €126m. Of this sum €87m was settled inshares and €39m in loan notes. The final earn-out payment was €15m higher thanestimated at the 2006 year-end and has been added to goodwill. The totalconsideration in respect of Lombard amounted to €566m (£394m) as follows: Date •m £mJanuary 2005 initial consideration 265 187April 2005 first earn-out payment 90 62April 2006 second earn-out payment 85 59April 2007 final earn-out payment 126 86Total 566 394 11. Post balance sheet events The Group announced on 31 January 2008 the outcome of a significant strategicreview. The proposed strategy will see the Group focus on core segments of theUK and International life and pensions market and will no longer seek to build apresence in the UK wealth management sector, including Wraps. As a result, the Group will be devising strategies for the three businesseswhich no longer fit within the new strategy - F&C Asset Management, Lombard andPantheon Financial, and the Wraps business will be discontinued. As thesestrategies have not yet been devised it is not possible to quantify the impact. Summary consolidated income statement on an EEV basis For the year ended 31 December 2007 2007 2006 Notes £m £mLife & PensionsContribution from new business 2(b), 3(a) 206 204Contribution from existing business:Expected return 187 207Experience variances (20) 7Operating assumption changes (361) (9)Development costs (50) (26)Expected return on shareholders' net assetswithin the Life & Pensions business 64 51Other net expense (5) -Life & Pensions underlying profit 2(a) 21 434Asset Management underlying profit 78 89Expected return on net pension liability 8 9Expected return on corporate net assets (9) (10)Corporate costs (14) (13)Operating assumption changes forcorporate costs (68) -Underlying Profit before tax 16 509 Investment return variances (45) (174)Effect of economic assumption changes (12) 181Non-recurring items 4 38 (17)Amortisation of non-covered business acquiredintangible assets (45) (43)Impairment of Asset Management acquiredintangible assets - (58)(Loss)/Profit before tax (48) 398Tax 9 (101)(Loss)/Profit after tax (39) 297 Attributable to:Ordinary shareholders of the parent (59) 308Minority interest 20 (11)(Loss)/Profit after tax (39) 297 Earnings per share 2007 2006 pence pence Basic (loss)/earnings per share 5 (2.7) 14.6 Diluted basic (loss)/earnings per share 5 (2.8) 14.2 Underlying (loss)/earnings per share 5 (4.5) 16.4 EEV underlying profit is based on expected investment return and excludes: (i)amortisation and impairment of non-covered business acquired intangible assets(ii) effect of economic assumption changes (iii) non-recurring items; and isstated after deducting interest payable on STICS. Management consider thatunderlying profit better reflects the performance of the Group and focus on thismeasure of profit in its internal monitoring of the Group's EEV results. Consolidated statement of recognised income and expense on an EEV basis For the year ended 31 December 2007 2007 2006 £m £mActuarial gains/(losses) on definedbenefitplans net of tax 30 (8)Foreign exchange adjustments 42 (2)Net gain/(loss) recognised directly in equity 72 (10)(Loss)/Profit after tax (39) 297Total recognised income and expense forthe year 33 287Attributable to:Ordinary shareholders of the parent 2 300Minority interest 31 (13)Total recognised income and expense forthe year 33 287 Consolidated movement in ordinary shareholders' equity on an EEV basis For the year ended 31 December 2007 2007 2006 £m £mTotal recognised income and expense for the yearattributable to ordinary shareholders of the parent 2 300Dividends on equity shares (168) (164)Share based payments (impact on EEV reserves) 10 12Earn-out payments 2 (87)(Decrease)/Increase in EEV reserves for the year (154) 61Share capital issued on conversion of 276 -convertible bondsShare based payments(impact on share capital and share premium) 5 13Net addition to ordinary shareholders' equity 127 74At 1 January 3,520 3,446At 31 December 3,647 3,520 Consolidated balance sheet on an EEV basis At 31 December 2007 2007 2006 £m £mAssetsValue of in-force Life & Pensions business 1,870 2,031Intangible assets 684 665Property and equipment 81 80Investment properties 2,371 2,426Investment in associates and joint venture 14 15Deferred tax assets 55 -Financial assets 47,710 45,150Deferred acquisition costs 12 11Reinsurance assets 2,015 98Current tax assets 4 30Insurance and other receivables 672 647Cash and cash equivalents 4,782 3,581Total assets 60,270 54,734 LiabilitiesInsurance contracts 13,607 13,762Fund for future appropriations 464 439Financial liabilities- Investment contracts 36,823 32,451- Loans and borrowings 3,090 2,045Net asset value attributable to unit holders 909 941Provisions 243 187Deferred tax liabilities 231 166Current tax liabilities 113 116Insurance payables, other payables and deferred 571 559incomeTotal liabilities 56,051 50,666 Equity attributable to:Ordinary shareholders of the parent 3,647 3,520Minority interest 572 548Total equity 4,219 4,068 Total equity and liabilities 60,270 54,734 Notes to the EEV results 1. Methodology 1.1 Basis of preparation The EEV results presented in this document have been prepared in accordance withthe European Insurers' Chief Financial Officers Forum's EEV Principles issued inMay 2004 and the Additional Guidance issued in 2005. They provide supplementaryinformation for the year ended 31 December 2007. The EEV basis of reporting is designed to recognise profit as it is earned overthe term of the policy. The total profit recognised over the lifetime of thepolicy is the same as that recognised under the IFRS basis of reporting, but thetiming of recognition is different. The reported embedded value provides an estimate of the value of shareholders'interest in the covered business, excluding any value that may be generated fromfuture new business. This value comprises the sum of the shareholders' networth, the provision for future corporate costs and the value of existingbusiness. The shareholders' net worth is the net assets attributable toshareholders, and is represented by the sum of required capital and freesurplus. The value of existing business is the present value of the projectedstream of future distributable profits available to shareholders from theexisting business at the valuation date, on a best estimate basis allowing forrisk, adjusted for the cost of holding required capital. The supplementary information should be read in conjunction with the Group'sIFRS results. These contain information regarding the Group's financialstatements prepared in accordance with IFRS issued by the InternationalAccounting Standards Board and adopted for use in the EU. The results for covered business as reported under EEV principles are combinedwith the results for the remainder of the business reported in accordance withIFRS, except where EEV principles dictate otherwise. In particular the EEVprinciples have been applied to reflect Step-up Tier one Insurance CapitalSecurities (STICS) as debt rather than equity. In addition, a pro forma embedded value is reported showing ordinaryshareholders' funds on an EEV basis adjusted to include the F&C listedsubsidiary at market value. Shareholders' net assets on an EEV basis for the Group consist of the following: •Life & Pensions net assets; •the Group's share of its investment in the Asset Management business (including the net pension liability) on an IFRS basis; •corporate net assets; •the net pension asset of FPPS on an IAS 19 basis; •the provision for future corporate costs; •the present value of future profits attributable to shareholders from existing policies of the Life & Pensions business. The shareholders' net worth includes the corporate debt of the Group. This debtis valued at market value, consistent with the EEV guidance. EEV and other balance sheet items denominated in foreign currencies have beentranslated to sterling using the appropriate closing exchange rate. The newbusiness contribution and other income statement items have been translatedusing an average exchange rate for the relevant period. 1.2 Covered business The covered business incorporates the Life & Pensions business defined aslong-term business by UK and overseas regulators. The Asset Management business, IFA distribution business and the Asset Hub areexcluded from the definition of covered business. For the purposes ofsegmentation the IFA distribution businesses and the Asset Hub are included withUK Life & Pensions. 1.3 Allowance for risk The allowance for risk in the shareholder cash flows is a key feature of the EEVPrinciples. The EEV guidance sets out three main areas available to allow forrisk in an embedded value: •the risk discount rate; •the allowance for the cost of financial options and guarantees; •the cost of holding both prudential reserves and any additional required capital. The market-consistent approach has been used to allow for risk in all threeareas. 1.4 Deriving risk discount rates A market-consistent embedded value has been calculated for each product line byvaluing the cash flows in line with the prices of similar cash flows traded onthe open market. In principle, each cash flow is valued using the discount rate consistent withthat applied to such a cash flow in the capital markets. For example, an equitycash flow is valued using an equity risk discount rate, and a bond cash flow isvalued using a bond risk discount rate. If a higher return is assumed forequities, the equity cash flow is discounted at this higher rate. In practice, for liabilities where the payouts are either independent or movelinearly with market movements, a method known as the 'certainty equivalentapproach' has been applied whereby all assumed assets earn the risk-free rateand all cash flows are discounted using the risk-free rate. This gives the sameresult as applying the method in the previous paragraph. A market-consistent cost of financial options and guarantees and amarket-consistent cost of holding required capital have also been calculated.The cost of financial options and guarantees includes additional allowance fornon-market risk within FPLP's With-Profits Fund. An additional provision hasbeen made for operational risks. These are described in more detail below. For presentational purposes, a set of risk discount rates has been derived foreach product line, and for in-force and new business, by calculating the riskdiscount rate under a traditional embedded value approach that gives the samevalue as that from the market-consistent embedded value determined above. Thesederived risk discount rates are a function of the assumptions used (eg equityrisk premium and corporate bond spreads). However, as the market-consistentapproach is used, these assumptions do not impact the level of embedded value: ahigher equity risk premium results in an exactly compensating higher riskdiscount rate. 1.5 Financial options and guarantees The material financial options and guarantees are those in the FPLP With-ProfitsFund, in the form of the benefits guaranteed to policyholders and the guaranteedannuity rates associated with certain policies. The risk to shareholders is that the assets of the With-Profits Fund areinsufficient to meet these guarantees. While shareholders are entitled to only asmall share of profits in the With-Profits Fund (via one ninth of the cost ofbonus), they can potentially be exposed to the full cost if fund assets areinsufficient to meet policyholder guarantees. The time value cost of thisasymmetry, known as the burnthrough cost, is modelled stochastically, as it willonly occur in some adverse scenarios. The burnthrough time value cost iscalculated as the difference between the average value of shareholder cash flowsunder a number of market-consistent scenarios, and the intrinsic shareholdervalue using risk-free assumptions included within the deterministic model. The burnthrough cost has been assessed using a stochastic model derived from thecurrent Realistic Balance Sheet (RBS) model. This model has been calibrated tomarket conditions at the valuation date. Allowance has been made under thedifferent scenarios for management actions, such as altered investment strategy,consistent with the RBS model. The burnthrough cost would be markedly higherwithout the hedging activities currently undertaken. The burnthrough cost at 31 December 2007 of £48m (2006: £50m), is split between£23m (2006: £30m) market risk and £25m (2006: £20m) non-market risk. Thenon-market risks include lapses, annuitant longevity, and operational riskwithin the With-Profits Fund. The allowance for non-market risks is made byconsideration of the impact of extreme scenarios from our economic capitalmodel. Significant amounts of new with-profits business are no longer written and theguarantee levels offered are lower, hence there is no material impact of theburnthrough cost in the contribution to profits of new business. 1.6 Required capital and the cost of capital Required capital is set at the greater of regulatory capital and requirementsarising from internal capital management policies, which include economic riskcapital objectives. The economic risk capital is determined from internalmodels, based on the company's risk appetite. In aggregate, required capital is higher than regulatory requirements byapproximately £200m (2006: £200m). Capital requirements under EEV amounted to £668m (2006: £652m). The EEV includes a deduction for the cost of holding the required capital.Frictional costs, being the tangible costs of holding capital, have been allowedfor on a market-consistent basis. These consist of the total taxation andinvestment expenses incurred on locked-in shareholder capital and reflect thecost to an investor of holding an asset through investment in a life company,rather than investing in the asset directly. No adjustment has been made for any agency cost, this representing the potentialmarkdown to value that investors will apply because they do not have directcontrol over their capital. Any adjustment would be subjective and differentinvestors will have their own views of what adjustment, if any, should be made. 1.7 Non-market risk An investor can diversify away the uncertainty around the return on non-marketrisks, such as mortality and expenses. Hence in a shareholder valuation theallowance for non-market risk is made through the appropriate choice of bestestimate experience assumptions and the impact of non-market risks on the level,and hence the cost, of capital. In choosing best estimate assumptions the allowance for non-market risk has beenreviewed. However, best estimate assumptions may fail to represent the fullimpact on shareholder value where the impact of fluctuations in experience isasymmetric; that is where adverse experience has a higher impact on shareholdervalue than favourable experience. The areas identified as having suchasymmetries are the burnthrough cost and operational risk. The impact of variations in non-market risks to shareholders of meetingguarantees of the FPLP With-Profits fund have been taken into account in theburnthrough cost calculation. In addition, a provision of £87m (2006: £85m) has been set up for operationalrisks in the shareholders' funds. This provision has been calculated bycomparing the mean impact of variations in operational risk, as modelled in theeconomic capital calculations, with the existing allowance for operational riskin specific accounting provisions and embedded value projection assumptions. This provision of £87m is equivalent to a 0.4% pa (2006: 0.4% pa) increase inthe risk discount rate for UK Life & Pensions business and 0.8% pa (2006: 0.8%pa) for International Life & Pensions business. This impacts both embedded valueand the contribution from new business. 1.8 Expenses The EEV guidance requires companies to actively review expense assumptions, andinclude an allowance for holding company (corporate) costs and service companycosts. (a) Corporate costs Corporate costs relate to those costs incurred at the corporate level that arenot directly attributable to the Life & Pensions or the Asset Managementbusinesses. Under EEV methodology, corporate costs are classified as either ongoing costs ordevelopment and one-off costs. For 2007, £12m (2006: £6m) of corporate costswere regular ongoing corporate costs and £2m (2006: £7m) were development orone-off costs. The ongoing corporate costs have increased to include corporatecosts in relation to group businesses, previously held outside EEV, and havebeen capitalised under EEV. The impact is a provision of £97m (2006: £47m). (b) Service costs Service company costs are included in the EEV expense assumption calculations.Included within these are the fees charged by F&C for investment managementservices to the covered Life & Pensions business. Profits of IFA subsidiaries in respect of covered Life & Pensions business arenot capitalised under the EEV methodology as those subsidiaries are separatecash generating units and run autonomously. Instead, those profits, which areimmaterial, are brought into the consolidated income statement on an IFRS basis. F&C service fee profits in respect of covered Life & Pensions business are notcapitalised under the EEV methodology, as F&C is a separate business segmentwithin the Group and the arrangement between F&C and the Life & Pensionsbusiness is on an arm's length basis. Instead, these profits, approximately £11m(2006: £11m) are brought into the consolidated income statement on an IFRSbasis, and F&C is brought into the pro forma embedded value at market value. Productivity gains have been assumed within the EEV in respect of Internationalbusiness in anticipation of future business growth. The Lombard EEV has beenreduced by £15m (2006: £13m) for a projected expense overrun for the period to2013. 1.9 New business New business within the covered business includes: • premiums from the sale of new contracts; • payments on recurring single premium contracts, including Department for Work and Pensions rebate premiums, except existing stakeholder-style pensions business where, if a regular pattern in the receipt of premiums for individuals has been established, the regular payment is treated as a renewal of an existing contract and not new business; • non-contractual increments on existing policies; and • new entrants in the group pensions business. The EEV new business definition is consistent with the quarterly New Businessdisclosure. 2. Segmental analysis (a) Life & Pensions EEV Profit Year ended 31 December 2007 2007 2006 Notes UK Inter'l Total UK Inter'l Total £m £m £m £m £m £mContribution fromnew business 2(b),3(a) 96 110 206 108 96 204Contribution fromexisting business:Expected return 149 38 187 173 34 207Experience variances (i) (20) - (20) 9 (2) 7Operating assumptionchanges (i) (337) (24) (361) 1 (10) (9)Development costs (41) (9) (50) (26) - (26)Expected return onshareholders' net assetswithin the Life & Pensionsbusiness 63 1 64 50 1 51Other net expense (5) - (5) - - - Life & Pensions EEVunderlying profitbefore tax (95) 116 21 315 119 434Investment return 3(e) (205) (6) (211) (179) (7) (186)variancesEffect of economicassumptionchanges (21) 9 (12) 187 (7) 180Non-recurring items 4 15 - 15 2 - 2Amortisation ofnon-coveredbusiness acquiredintangible assets (3) - (3) - - -Life & Pensions EEV profitbefore tax (309) 119 (190) 325 105 430Attributed tax credit/ 3(f) 129 (124) 5 (103) (18) (121)(charge)Life & Pensions EEV profitafter tax (180) (5) (185) 222 87 309 (i)The UK experience variances and operating assumption changes mainlycomprise the adverse impact of persistency assumption changes of £(133)m and £(238)m from the capitalisation of development costs (based on £20m pa). Theremaining variances include £(9)m from allowing for the strengthening ofannuitant mortality improvements, £12m from the reinsurance ofpost-demutualisation annuity business in FPP to Swiss Re, £16m burnthroughvariance and £(5)m of other variances. (b) New business margin Year ended 31 December 2007 2007 2006 Notes UK Inter'l Total UK Inter'l TotalContribution from newbusiness £96m £110m £206m £108m £96m £204mPresent Value of NewBusiness Premiums(PVNBP) £4,442m £3,220m £7,662m £4,162m £2,912m £7,074mMargin - PVNBP 2.2% 3.4% 2.7% 2.6% 3.3% 2.9% PVNBP equals new single premiums plus the expected present value of new regularpremium business. (c) Pro forma embedded value At 31 December 2007 2007 2006 £m £mOrdinary shareholders' equity on an EEV basis 3,647 3,520Adjustment to the value of the listed AssetManagement business to market value 78 140Pro forma embedded value 3,725 3,660Pro forma embedded value per share (i) £1.60 £1.73 (i) Based on the number of issued ordinary shares as disclosed in note 9 of theIFRS financial statements. (d) Summary consolidated balance sheet on an EEV basis 2007 2006 Intra- Intra- Segmental Group Segmental Group analysis debt(iv) Total analysis debt(iv) Total £m £m £m £m £m £mLife & Pensions - long-term funds 640 - 640 778 - 778Life & Pensions - shareholders' funds 400 850 1,250 419 795 1,214Life & Pensions net assets 1,040 850 1,890 1,197 795 1,992Corporate net assets 409 (850) (441) (33) (795) (828)Shareholders' investednet assets (i) 1,449 - 1,449 1,164 - 1,164Attributable net asset valueof the Asset Management businessnet of minority interest (ii),(iii) 421 - 421 394 - 394Net pension asset/(liability)of FriendsProvident Pension Scheme 4 - 4 (22) (22)Shareholders' net worth 1,874 - 1,874 1,536 - 1,536Provision for future corporatecosts (97) (47)Value of in-force Life &Pensions business 1,870 2,031Ordinary shareholders' net assetson an EEV basis 3,647 3,520Called-up share capital 234 214Share premium account 2,372 2,051EEV reserves 1,041 1,255Ordinary shareholders' equityon an EEV basis 3,647 3,520 At 31 December 2007 (i) Within shareholders' invested net assets is £36m of goodwill and £29m ofother acquired intangible assets in relation to the purchase of the Group's twoIFA distribution businesses, Sesame and Pantheon Financial. (ii) The attributable net asset value of the Asset Management business includesgoodwill of £344m at 31 December 2007 (2006:£333m) investment managementcontracts net of related tax, £93m (2006:£104m) and software £1m (2006:£1m). (iii) The attributable net asset value of the Asset Management business includesthe value of the net pension liability of that business on an IAS 19 Employeebenefits basis, and is net of related tax. The net pension asset of FriendsProvident Pension Scheme (FPPS) is also stated on an IAS 19 basis, and is net ofrelated deferred taxation. (iv) Intra-group long-term debt is analysed as follows: +--------------------------------+-----------------+--------------------+| |Debt |Interest payable |+--------------------------------+--------+--------+----------+---------+| | 2007 | 2006 | 2007 | 2006|+--------------------------------+--------+--------+----------+---------+| | £m | £m | £m | £m |+--------------------------------+--------+--------+----------+---------+|Due from FPLP to Friends | 795| 795 | 46| 46 ||Provident plc | | | | |+--------------------------------+--------+--------+----------+---------+|Due from Sesame to Friends | | | | ||Provident | | | | |+--------------------------------+--------+--------+----------+---------+|Distribution Holdings Ltd | 55| -| -| -|+--------------------------------+--------+--------+----------+---------+| | 850| 795| 46| 46|+--------------------------------+--------+--------+----------+---------+ (e) Life & Pensions net assets segmental information by business segment At 31 December 2007 2007 2006 UK Inter'l Total UK Inter'l Total £m £m £m £m £m £mLife & Pensions net 1,049 (9) 1,040 1,167 30 1,197assetsValue of in-force Life &Pensions business 1,260 610 1,870 1,491 540 2,031 2,309 601 2,910 2,658 570 3,228 3. Life & Pensions EEV profit (a) Contribution from new business The contribution from new business is calculated using economic assumptions atthe beginning of the period. The contribution from new business usingend-of-period economic and operating assumptions was £189m (2006: £196m) whichin 2007, includes the impact of capitalising £20m of development costs asmaintenance. The contribution from new business is quoted after cost of required capital andshare incentives. The table below gives the contribution before cost of capitaland share based payments. 2007 2006 £m £mContribution from new business before cost ofcapitaland share based payments 218 212Cost of share based payments (3) (2)Cost of capital (9) (6)Contribution from new business 206 204 (b) Profit from existing business - Life & Pensions Profit from existing Life & Pensions business comprises the expected return onthe value of in-force business at the start of the period plus the impact of anychanges in the assumptions regarding future operating experience, return on thereserving basis (other than economic assumption changes) and profits and lossescaused by differences between the actual experience for the period and theassumptions used to calculate the embedded value at the end of the period. The expected return on the value of in-force business is the difference betweenthe expected return on the assets backing the liabilities and the expectedreturn on in the market-consistent value of the liabilities. Effectively, thisapproach is similar to applying an unwind in the risk discount rate to the valueof the in-force business at the beginning of the year. However, the riskdiscount rate to be used is a rate appropriate over the period of return only,which is not necessarily equal to the overall in-force risk discount rateaveraged across all future durations above. (c) Development costs - Life & Pensions Development costs represent investments made to improve future EEV profits, forexample by reducing expenses or increasing future new business volumes. Inparticular, the Life & Pensions costs represent investment in developingadvanced electronic trading systems, e-commerce related activities, and newbusiness service automation and improvement. (d) Expected return on shareholders' net assets The expected return on shareholders' net assets held within the Life & Pensionsbusiness comprises the return on the shareholders' net assets held by the lifeassurance companies within that business, using the investment returnassumptions used to calculate the embedded value at the beginning of the period. The expected return on corporate net assets is the expected investment return onassets held by Friends Provident plc and its non-life subsidiaries. It excludesthe expected return on the net pension liability and the result of the F&Cbusiness, which are shown separately in the summary consolidated incomestatement. (e) Investment return variance The split of the investment return variance in the Life & Pensions EEV profit isshown in the table below: 2007 2006 £m £mIn respect of net assets at the start of year (38) (16)In respect of covered business (105) (122)Investment return variances after tax (143) (138)Investment return variances before tax (211) (186) The investment return variance of £(38)m (2006: £(16)m) after tax relates toshareholder net assets. The investment return variance in respect of coveredbusiness comprises £(59)m (2006: £(110)m) after tax, relating to assets backingpolicyholder liabilities, and £(46)m (2006: £(12)m) after tax, relating to thevalue of the in-force business. (f) Attributed tax charge EEV profits are calculated net of tax and then grossed up at the effective rateof shareholder tax. Except for the expected return on shareholders' net assetsand tax rate assumption changes, the full standard rate of UK corporation taxhas been used to gross up after tax profits on UK business and appropriate taxrates have been used for the International business. 2007 2006 £m £mContribution from new business 61 51Profit from existing business (56) 55Development costs (16) (8)Expected return on shareholders' net assetswithin theLife & Pensions business 21 16Other net expense 2 -Other non-recurring and non-underlying items 3 1Investment return variances (67) (48)Effect of economic assumption changes (2) 54International tax rate assumption change 88 -UK tax rate change (22) -Prior year tax adjustments (17) -Attributed tax charge (5) 121 4. Non-recurring items 2007 2006 £m £mTerminated merger income (less related costs) 34 -Corporate non-recurring item 34 -Closure of Appointed Representatives Sales Channel - (2)Provision for past sales 15 4Life & Pensions non-recurring items 15 2Asset Management integration costs - (7)Asset Management Reinvestment Plan cost (7) (12)Asset Management Investment Trust VAT costs (4) -Asset Management non-recurring items (11) (19)Total non-recurring items 38 (17) 5. Earnings per share Earnings per share have been calculated based on EEV underlying profit after taxand profit after tax attributable to ordinary shareholders of the parent. Thedirectors believe the underlying earnings per share figure gives a betterindication of operating performance. Basic and underlying earnings per share 2007 2006 Earnings Per share Earnings Per share £m pence £m pence(Loss)/Profit after taxattributableto ordinary shareholdersof the parent (59) (2.7) 308 14.6Investment return variances 45 2.1 174 8.2Effect of economic assumption 12 0.5 (181) (8.5)changesAmortisation and impairment ofnon-covered business acquiredintangible assets 45 2.1 101 4.7Non-recurring items (38) (1.8) 17 0.8Tax charge on items excluded fromunderlying profit (96) (4.5) (32) (1.5)Minority interest on itemsexcludedfrom underlying profit (5) (0.2) (40) (1.9)Underlying (loss)/profit aftertax attributable to ordinaryshareholders of the parent (96) (4.5) 347 16.4 2007 2006 millions millionsWeighted average number of ordinary shares 2,152 2,111 Diluted basic earnings per share 2007 2006 Weighted Weighted average average number of 2007 number of 2006 2007 ordinary Per 2006 ordinary Per earnings shares share earnings shares share £m millions pence £m millions pence(Loss)/profit after taxattributable toordinary shareholdersof the parent (59) 2,152 (2.7) 308 2,111 14.6Dilution (1) - (0.1) 16 164 (0.4)Diluted profit aftertax attributable toordinary shareholdersof the parent (60) 2,152 (2.8) 324 2,275 14.2 6. Intangible assets on an EEV basis +--------------------------+-----------+----------------+-----------+-------+| | | Investment | | |+--------------------------+-----------+----------------+-----------+-------+| | | management | | |+--------------------------+-----------+----------------+-----------+-------+| | Goodwill | contracts | Other | Total |+--------------------------+-----------+----------------+-----------+-------+|Carrying amounts | £m | £m | £m | £m |+--------------------------+-----------+----------------+-----------+-------+|At 31 December 2007 | 380| 254| 50 | 684 |+--------------------------+-----------+----------------+-----------+-------+|At 31 December 2006 | 333| 284| 48 | 665 |+--------------------------+-----------+----------------+-----------+-------+ (a) Goodwill Goodwill is the only intangible asset which has an indefinite useful life andhas been allocated as follows: +----------------------------------+--------------------------------+-------+| | 2007 | 2006 |+----------------------------------+--------------------------------+-------+| | £m | £m |+----------------------------------+--------------------------------+-------+|Asset Management | 344 | 333 |+----------------------------------+--------------------------------+-------+|Pantheon Financial | 28 | - |+----------------------------------+--------------------------------+-------+|Sesame | 8 | - |+----------------------------------+--------------------------------+-------+ At 31 December 2007, there is no indication that goodwill has been impaired. Inaccordance with IAS 36 Impairment of Assets, goodwill is assessed for possibleimpairment each year by comparing the carrying value of goodwill for eachsegment with its recoverable amount. There has been no goodwill impairment charge in 2007 (2006: £nil). (b) Other intangible assets +---------------------------------+--------------------------------+--------+| | 2007 | 2006 |+---------------------------------+--------------------------------+--------+| | £m | £m |+---------------------------------+--------------------------------+--------+|UK Life & Pensions | 38| 39 |+---------------------------------+--------------------------------+--------+|International Life & Pensions | 11| 8 |+---------------------------------+--------------------------------+--------+|Asset Management | 1| 1 |+---------------------------------+--------------------------------+--------+|Total other intangible assets | 50| 48 |+---------------------------------+--------------------------------+--------+ 7. Reconciliation of movement in pro forma embedded value Total UK Inter'l Life & Life & Life & Pensions Total Pensions Pensions EEV Other EEV £m £m £m £m £mPro forma embedded value at 31 December 2006as originally stated 2,638 590 3,228 432 3,660Adjustment (i) 20 (20) - - - 2,658 570 3,228 432 3,660Contribution from new business 96 110 206 - 206Contribution from existing business - Expected return 149 38 187 - 187 - Experience variances (20) - (20) - (20) - Operating assumption changes (337) (24) (361) - (361) - Expected transfer to net assetsDevelopment costs (41) (9) (50) - (50)Expected return on shareholders' net assets 63 1 64 - 64Other net expense (5) - (5) - (5)Operating assumption changes for corporate - - - (68) (68)costsOther underlying items - - - 63 63Underlying EEV profit before tax (95) 116 21 (5) 16Non-recurring items 15 - 15 23 38Investment return variances (205) (6) (211) 166 (45)Effect of economic assumption changes (21) 9 (12) - (12)Other non-underlying items (3) - (3) (42) (45)EEV loss before tax (309) 119 (190) 142 (48)Tax 129 (124) 5 4 9EEV loss after tax (180) (5) (185) 146 (39)Net movement recognised directly in thestatement of recognised income and expense - 28 28 44 72Minority interest - - - (31) (31)Dividends on ordinary shares (250) - (250) 82 (168)Share based payments - - - 15 15Earn-out payments - - - 2 2Conversion of convertible bond - - - 276 276Acquisitions 75 - 75 (75) -Adjustment to the value of the listed AssetManagement business to market value - - - (62) (62)Allocation of service company charges 14 - 14 (14) -Allocation of OLAB surplusto International L&P (8) 8 - - -Total movement in EEV (349) 31 (318) 383 65Pro forma embedded value at 31 December 2007 2,309 601 2,910 815 3,725 (i) Re-allocation of net assets between businesses Pro forma EEV comprises the EEV of the entire Group, incorporating the Group'sshare of F&C at market value of £497m (2006: £531m). 'Other' consists predominantly of Asset Management business and corporate items. 8. Reconciliation of net worth and value of in force business for Life &Pensions Total Value of Life & Free Required Total net in force Pensions surplus capital worth business EEV £m £m £m £m £mShareholders' capital and reserves At 1 January 2007 545 652 1,197 2,031 3,228Contribution from new business (237) 44 (193) 338 145Expected return 22 24 46 128 174Experience variances, operatingassumption changes, development costs,other expenses and non-recurring items 99 (41) 58 (359) (301)Expected profit - transfer to net worth 219 (17) 202 (202) -Investment return variances and economic assumption changes (108) 6 (102) (52) (154)Prior year tax adjustments 17 - 17 - 17Tax rate assumptions changes (21) - (21) (45) (66)Life and Pensions EEV profit after tax (9) 16 7 (192) (185) Acquisitions 75 - 75 - 75Foreign exchange adjustments (3) - (3) 31 28Transfer of assets 14 - 14 - 14Dividend (250) - (250) - (250)Shareholders' capital and reserves At 31 December 2007 372 668 1,040 1,870 2,910 All items in the table above are shown net of tax. 9. Value of in-force Life & Pensions business on an EEV basis At 31 December 2007 2007 2006 £m £mValue of in-force allowing for market risk (excludingtime value of options and guarantees) 2,057 2,215Time value cost of options and guarantees(including the impact of non-market risks) (48) (50)Cost of required capital, plus excess economiccapital requirements (52) (49)Provision for operational risks (87) (85)Value of in-force Life & Pensions business 1,870 2,031 10. Equity attributable to equity holders of the parent Ordinary shareholders' equity on an EEV basis reconciles to equity attributableto equity holders of the parent on an IFRS basis as follows: 2007 2006 £m £mOrdinary shareholders' equity on an EEV basis 3,647 3,520 Less items only included on an EEV basis:Value of in-force Life & Pensions business (1,870) (2,031)Provision for future corporate costs 97 47Adjustment of long term debt to market value (59) 105Add items only included on an IFRS basis:Goodwill 353 283Other intangible assets 69 68Acquired PVIF 249 257STICS treated as equity 810 810Deferred acquisition costs 1,081 1,100Deferred front end fees (102) (45)IFRS reserving and other IFRS adjustments (513) (497)Equity attributable to equity holders of the parenton an IFRS basis 3,762 3,617 11. Maturity profile of Value of In-force (VIF) by proposition As at 31 December 2007 Total 1-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41+UKWith Profits Fund 322 149 105 42 18 6 2 - - -Protection 242 125 82 21 10 3 1 - - -Investments 157 70 46 22 11 5 2 1 - -Pensions 456 137 127 92 56 28 11 4 1 -Annuities 7 2 2 2 1 - - - - -UK other 76 29 32 15 - - - - - -UK total 1,260 512 394 194 96 42 16 5 1 - 41% 32% 15% 8% 3% 1% 0% 0% 0%InternationalFPI 225 128 56 26 11 4 - - - -Lombard 385 148 91 58 36 22 14 8 5 3International 610 276 147 84 47 26 14 8 5 3total 45% 24% 14% 8% 4% 2% 1% 1% 1% Total VIF 1,870 788 541 278 143 68 30 13 6 3 42% 29% 15% 7% 4% 2% 1% 0% 0% As at 31 December 2006 Total 1-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41+UKWith Profits Fund 386 188 116 47 22 9 3 1 - -Protection 379 250 83 30 11 4 1 - - -Investments 188 72 59 30 15 7 3 1 1 -Pensions 436 127 116 86 56 31 14 5 1 -Annuities 29 25 2 1 1 - - - - -UK other 73 32 28 12 1 - - - - -UK total 1,491 694 404 206 106 51 21 7 2 - 47% 27% 14% 7% 4% 1% 0% 0% 0%InternationalFPI 212 116 56 26 10 3 1 - - -Lombard 328 129 76 49 30 19 11 7 4 3International 540 245 132 75 40 22 12 7 4 3total 46% 24% 14% 7% 4% 2% 1% 1% 1% Total VIF 2,031 939 536 281 146 73 33 14 6 3 46% 26% 14% 7% 4% 2% 1% 0% 0% 12. EEV assumptions (a) Principal economic assumptions - deterministic Economic assumptions are actively reviewed and are based on the market yields onrisk-free assets at the valuation date. 2007 2006UK and International (excluding Lombard): % %Risk-free rate (i) 4.6 4.6 Investment return before tax:Fixed interest 4.6-5.9 3.9-5.9Equities 7.6 7.6Properties 6.6 6.6Future expense inflation:UK business 4.5 4.3International business 4.5 4.3UK and OLAB corporation tax rate 30/28 30Isle of Man corporation tax rate (ii) 30/28 0Risk discount rate (average):In-force (UK business) 8.2 7.7In-force (International business) 6.6 6.8Risk discount rate:New business (UK business) 7.8 7.2New business (International business) 6.1 6.5 (i) For UK and FPI business the risk-free rate is set withreference to the gilt yield curve at the valuation date. For annuity business aterm-dependent rate allowing for the shape of the yield curve is used as thiscan significantly impact value. For other business, a rate based on theannualised 15-year gilt yield is used. (ii) Isle of Man corporation tax rate is 0%. It has been assumedthat all distributable profits will be repatriated as dividends and hence a fullUK rate has been applied. 2007 2006 Lombard: % %Risk-free rate 4.7 4.1Investment returns before tax:Fixed interest 4.7-5.7 4.1-5.1Equities 7.7 7.1Cash 4.1 3.7Future expense inflation 4.1 4.0Tax rate 29.6 25.2Risk discount rate (average) - in-force 7.6 7.0Risk discount rate (average) - new business 7.5 7.0 The key exchange rates used in respect of Lombard business were a closingexchange rate of 1 Euro = £0.734 (2006: 1 Euro = £0.674) and an average exchangerate over the year of 1 Euro = £0.678. Margins are added to the risk-free rates to obtain investment return assumptionsfor equity and property. For corporate fixed interest securities the investmentreturn assumptions are derived from an AA-bond yield spread, limited to theactual return on the underlying assets. As a market-consistent approach has beenfollowed, these investment return assumptions affect only the derived riskdiscount rates and not the embedded value result. Maintenance expenses for UK and International business (excluding Lombard) areassumed to increase in the future at a rate of 1% per annum in excess of theassumed long-term rate of retail price inflation. This is derived from thedifference between the risk-free rate of return and the average of the FTSEActuaries over five-year index-linked gilt yield at 5% and 0% inflation. For Lombard the risk-free rate is the average of the 10-15 year and the over 15year yields using the EuroMTS indices. The investment return assumption is theweighted average (based on an assumed asset mix) of returns on fixed interestsecurities, equities and cash. The Lombard investment return assumption is showngross of tax, but net of fund management charges. Derived risk discount rates by product type Average derived risk discount rates are shown below for the embedded value andthe contribution from new business. The average derived risk discount rate forin-force has increased over 2007, for annuities particularly, owing mainly towidening corporate bond spreads. A more detailed split of the derived riskdiscount rates is given in the following table. 31 December 2007 UK with- UK Other Average International profits business annuity UK UK Sterling EuroEmbedded value % % % % % %Risk-free rate 4.6 4.6 4.6 4.6 4.6 4.7Market risks (non-options) 3.1 15.8 2.2 2.6 1.2 2.1Options - market risks 2.4 - - 0.3 - -Options - non-market risks 2.7 - - 0.3 - -Other non-market risks 0.4 0.4 0.4 0.4 0.8 0.8Risk discount rate 13.2 20.8 7.2 8.2 6.6 7.6 31 December 2006 UK with- UK Other Average International profits annuity UK UK Sterling Euro businessEmbedded Value % % % % % %Risk-free rate 4.6 4.6 4.6 4.6 4.6 4.1Market risks (non-options) 2.7 7.6 1.6 2.2 1.4 2.1Options - market risks 2.6 - - 0.3 - -Options - non-market risks 1.8 - - 0.2 - -Other non-market risks 0.4 0.4 0.4 0.4 0.8 0.8Risk discount rate 12.1 12.6 6.6 7.7 6.8 7.0 With-profits and annuity business are subject to more investment risk than theremaining business, and so the appropriate risk discount rates are higher. 31 December 2007 International UK Sterling EuroContribution from new business % % %Risk-free rate 4.6 4.6 4.1Market risks 2.8 0.7 2.6Non-market risks 0.4 0.8 0.8Risk discount rate 7.8 6.1 7.5 31 December 2006 International UK Sterling EuroContribution from new business % % %Risk-free rate 4.6 4.6 4.1Market risks 2.2 1.1 2.1Non-market risks 0.4 0.8 0.8Risk discount rate 7.2 6.5 7.0 (b) Principal economic assumptions - stochastic The cost of options and guarantees is determined using The Smith Model Pluseconomic scenario generator. The model is calibrated to market conditions at thevaluation date and correlations between the asset classes are derived fromhistoric data, consistent with the model used for the Realistic Balance Sheet. Risk-free rates are calibrated to the Gilt yield curve. Equity volatility iscalibrated to replicate the implied volatility of FTSE 100 put options held bythe FPLP With-Profits Fund. Property holdings are modelled as a mix of equityand gilt assets, is calibrated to 15% initial volatility and a 6.5% pa runningyield. Sample implied volatilities by asset class 31 December 2007 Term (years) 5 15 25 3515-year risk-free zero coupon bonds 7.9% 5.1% 4.6% 4.7%15-year corporate bonds 10.5% 9.9% 10.0% 10.2%Equity 25.4% 25.8% 25.8% 27.8%Property 15.4% 16.5% 17.9% 18.4% 31 December 2006 Term (years) 5 15 25 3515-year risk-free zero coupon bonds 7.1% 4.7% 4.6% 5.1%15-year corporate bonds 9.4% 8.6% 8.3% 8.8%Equity 17.1% 18.2% 19.6% 20.8%Property 15.1% 16.4% 17.9% 19.0% The volatility represents the variation of return around the average for theparticular asset class. Bonus rates are set at levels which fully utilise the assets supporting thein-force business over its lifetime and are consistent with the economicassumptions and the Group's bonus policy. (c) Other assumptions Other assumptions (for example mortality, morbidity, persistency and expenses)are a reflection of our best estimate of the likely behaviours, outcomes orcircumstances in the future. Typically the estimates are made on an annual basisfollowing experience investigations based on the data available at the time bothfrom our own book of business and externally sourced information. The aim is to set assumptions at a level that reflects recent experience, unlessthere are reliable indicators that suggest their adoption would result in asignificant variance compared to these assumptions in the future. In someinstances, there may be little or no direct experience to use in settingassumptions and the future outcome is therefore uncertain. In terms of future improvements in annuitant mortality, these have been assumedto be in accordance with the 'medium cohort' projections (with certainamendments) published by the CMI in 2002. The amendments are to use 75% of theseprojections for females and to introduce a minimum annual rate of improvement infuture mortality - for males this is assumed to be 1% pa and for females 0.75%pa. 13. EEV sensitivity analysis Year ended 31 December 2007 Change in embedded Change in new business Value (net of tax) contribution (gross of tax) UK Int Total UK Int Total Notes £m £m £m £m £m £mBase EEV/VNB 2,309 601 2,910 96 110 206 Market risk1% increase in equity and propertyexpected returns (i) n/a n/a n/a n/a n/a n/a1% increase in risk-free rates, withcorresponding change in fixed-interest asset values (180) (13) (193) (6) (3) (9)1% reduction in risk-free rates,withcorresponding change in fixed-interest asset values 174 12 186 5 2 710% increase in market values ofequity and property assets (ii) 82 33 115 n/a n/a n/a10% reduction in market values ofequity and property assets (ii) (95) (32) (127) n/a n/a n/a10% reduction in sterling/overseasexchange rate (iii) (16) (41) (57) n/a n/a n/aInsurance and other risk5% reduction in annuitant mortalityBefore reinsurance (40) - (40) (2) - (2)After reinsurance (24) - (24) (2) - (2)5% increase in annuitant mortalityBefore reinsurance 38 - 38 2 - 2After reinsurance 23 - 23 2 - 25% reduction in mortality andmorbidity(excluding annuities)Before reinsurance 21 3 24 8 1 9After reinsurance 4 3 7 3 - 35% increase in mortality and morbidity(excluding annuities)Before reinsurance (22) (3) (25) (8) (1) (9)After reinsurance (5) (3) (8) (3) (1) (4)1% increase in risk discount rates (iv) (101) (50) (151) (25) (16) (41)Reduction in capital requirementto regulatory minimum (v) n/a n/a 17 n/a n/a n/a50% increase in capital requirements n/a n/a n/a (3) (1) (4)10% increase in administrative (58) (15) (73) (6) (5) (11)expenses10% reduction in administrative 48 15 63 6 3 9expenses10% increase in lapses (30) (30) (60) (12) (8) (20)10% reduction in lapses 36 33 69 12 8 2010% increase in paid-up rates (11) (1) (12) (7) (2) (9)10% reduction in paid up rates 13 2 15 8 1 9 (i) As a market-consistent approach is used, equity and propertyexpected returns only affect the derived risk discount rates and not theembedded value or contribution to profits from new business. (ii)The movement in embedded value from a reduction in marketvalues comprises a £3m (2006: £44m) fall in the value of shareholders' investednet assets and a £124m (2006: £108m) reduction in the value of in-force Life andPensions business.Conversely, the effect of an increase in market values comprises a £3m (2006:£44m) rise in the value of shareholders' invested net assets and a £112m (2006:£114m) increase in the value of in-force Life and Pensions business. (iii) Currency risk is expressed in terms of total overseasexposure; the principal currencies the Group is exposed to are the Euro and USDollar. (iv) Although not directly relevant under a market-consistentvaluation where the risk discount rate is a derived disclosure only, this showsthe impact of a change in the average derived risk discount rate, to enableadjustments to be made to reflect differing views of risk. (v) Required capital is set at the greater of regulatory capitaland economic capital. In aggregate the group economic capital requirements arehigher than the regulatory requirement by £200m (2006: £200m). This sensitivityshows the impact on embedded value of using the lower regulatory capitalrequirements. Year ended 31 December 2006 Change in new business Change in embedded contribution Value (net of tax) (gross of tax) UK Int Total UK Int Total Notes £m £m £m £m £m £mBase EEV/VNB 2,658 570 3,228 108 96 204 Market risk1% increase in equity and propertyexpected returns (i) n/a n/a n/a n/a n/a n/a1% increase in risk-free rates,withcorresponding change in fixed-interest asset values (129) (13) (142) (7) (2) (9)1% reduction in risk-free rates,withcorresponding change in fixed-interest asset values 135 11 146 6 1 710% increase in market values ofequityand property assets (ii) 127 31 158 n/a n/a n/a10% reduction in market values ofequity and property assets (ii) (120) (32) (152) n/a n/a n/a10% reduction in sterling/overseasexchange rate (iii) (14) (38) (52) n/a n/a n/aInsurance risk and other risk5% reduction in annuitant mortalityBefore reinsurance (38) - (38) (2) - (2)After reinsurance (38) - (38) (2) - (2)5% increase in annuitant mortalityBefore reinsurance 36 - 36 2 - 2After reinsurance 36 - 36 2 - 25% reduction in mortality andmorbidity(excluding annuities)Before reinsurance 26 3 29 9 - 9After reinsurance 5 3 8 5 - 55% increase in mortality andmorbidity(excluding annuities)Before reinsurance (27) (2) (29) (7) - (7)After reinsurance (6) (2) (8) (2) - (2)1% increase in risk discount rates (iv) (125) (43) (168) (29) (8) (37)Reduction in capital requirementto regulatory minimum (v) n/a n/a 16 n/a n/a n/a50% increase in capital n/a n/a n/a (3) - (3)requirements10% increase in administrative (43) (12) (55) (7) (3) (10)expenses10% reduction in administrative 34 13 47 6 3 9expenses10% increase in lapses (29) (27) (56) (15) (6) (21)10% reduction in lapses 34 31 65 11 7 1810% increase in paid-up rates (9) (1) (10) (8) - (8)10% reduction in paid-up rates 10 1 11 4 - 4 APPENDIX 1 DEFINITIONS International Financial Reporting Standards as adopted by the EU (IFRS)underlying profit is a measure of profit which excludes profit generated withinpolicyholder funds that is not allocated to shareholders. Management considerthat underlying profit better reflects the performance of the Group and focus onthis measure of profit in its internal monitoring of the Group's IFRS results.IFRS underlying profit is based on longer-term investment return and excludes:(i) policyholder tax (ii) returns attributable to minority interests inpolicyholder funds (iii) non-recurring items (iv) amortisation and impairment ofacquired intangible assets and present value of acquired in-force business; andis stated after deducting interest payable on STICS. New business sales are reported on both the Annual Premium Equivalent (APE) andPresent Value of New Business Premiums (PVNBP) basis. The APE basis representsannualised new regular premiums plus 10% of single premiums. The PVNBP basisrepresents new single premiums plus the expected present value of new businessregular premiums. Contribution from new business is calculated using economic assumptions at thebeginning of the period, and is quoted after the cost of required capital, sharebased payments and including an apportionment of fixed acquisition expensesacross products. The Internal Rate of Return (IRR) is equivalent to the discount rate at whichthe present value of the after tax cash flows expected to be earned over thelifetime of the business written is equal to the capital invested to support thewriting of the business. All assumptions and expenses in the calculation of IRRare consistent with those used for calculating the contribution from newbusiness. The calculation explicitly takes into account the funding and releaseof regulatory capital requirements. The Cash Payback on new business is the time at which the value of the expectedcash flows, after tax, is sufficient to have recouped the capital invested tosupport the writing of the business. The cash flows are discounted at theappropriate risk-discount rate and calculated on the same assumptions andexpense basis as those used for the contribution from new business. European Embedded Value (EEV) underlying profit is a measure of profit whichexcludes profit generated within policyholder funds that is not allocated toshareholders. Management consider that underlying profit better reflects theperformance of the Group and focus on this measure of profit in its internalmonitoring of the Group's EEV results. EEV underlying profit is based onexpected investment return and excludes: (i) amortisation and impairment ofnon-covered intangible assets (ii) effect of economic assumption changes (iii)non-recurring items; and is stated after deducting interest payable on Step-upTier one Insurance Capital Securities (STICS). Pro forma embedded value is the shareholders' equity on an EEV basis, adjustedto bring the value of the holding in F&C Asset Management plc to market value. DEALING DISCLOSURE REQUIREMENTS Under the provisions of Rule 8.3 of the Takeover Code (the 'Code'), if anyperson is, or becomes, 'interested' (directly or indirectly) in 1% or more ofany class of 'relevant securities' of Friends Provident, all 'dealings' in any'relevant securities' of that company (including by means of an option inrespect of, or a derivative referenced to, any such 'relevant securities') mustbe publicly disclosed by no later than 3.30pm (London time) on the Londonbusiness day following the date of the relevant transaction. This requirement will continue until the date on which the offer becomes, or isdeclared, unconditional as to acceptances, lapses or is otherwise withdrawn oron which the 'offer period' otherwise ends. If two or more persons act togetherpursuant to an agreement or understanding, whether formal or informal, toacquire an 'interest' in 'relevant securities' of Friends Provident, they willbe deemed to be a single person for the purpose of Rule 8.3. Under the provisions of Rule 8.1 of the Code, all 'dealings' in 'relevantsecurities' of Friends Provident by an offeror or Friends Provident, or by anyof their respective 'associates', must be disclosed by no later than 12.00 noon(London time) on the London business day following the date of the relevanttransaction. A disclosure table, giving details of the companies in whose 'relevantsecurities' 'dealings' should be disclosed, and the number of such securities inissue, can be found on the Takeover Panel's website atwww.thetakeoverpanel.org.uk. 'Interests in securities' arise, in summary, when a person has long economicexposure, whether conditional or absolute, to changes in the price ofsecurities. In particular, a person will be treated as having an 'interest' byvirtue of the ownership or control of securities, or by virtue of any option inrespect of, or derivative referenced to, securities. Terms in quotation marks are defined in the Code, which can also be found on thePanel's website. If you are in any doubts as to whether or not you are requiredto disclose a 'dealing' under Rule 8, you should consult the Panel. APPENDIX 2 PRINCIPAL EEV ASSUMPTIONS AND EXPERIENCE The value of in-force business (VIF) is calculated based on our best estimate ofcash flows arising from the book of Life & Pensions business at the end of thereporting period. A significant number of assumptions are made, including: thebehaviour of customers (for example, persistency); mortality; the level ofexpenses required to maintain the book of business; tax and regulatoryenvironment and the future economic environment. The assumptions are a reflection of our best estimate of the likely behaviours,outcomes, or circumstances in the future. The estimate is made, typically, on anannual basis following experience investigations based on the data available atthe time both from our own book of business and externally sourced information. The aim is to set assumptions for this year-end at a level that reflects recentor current experience, unless there are reliable indicators that suggest theiradoption would result in a significant variance compared to these assumptions inthe future. The material assumption changes for 2007 year-end are discussed below: Group Pensions paid-up policies (PUP) A pensions policy becomes paid up when a member and his or her employer ceasesto make contributions but leaves the funds with Friends Provident to manage.Typically this occurs when an employee leaves their employer. Assumptions madeabout the length of time contributions are made are crucial in calculating theamount of funds which will be under management and hence the income which can beearned. PUP rates have been observed to be increasing in shorter duration policies. As aresult, for policy durations up to 4 years, PUP rates have been increasedbetween 1% and 3% per year to give an arithmetic average rate of around 16% overthis period with rates of 17%, 17%, 16% and 15% applying over each of the firstfour years. The PUP rate assumption for policies of duration over 5 years has beenmaintained at 12% pa. There is no significant experience beyond this durationand the ultimate PUP rate for this business therefore remains uncertain. Theintention will be to maintain the assumptions for this business in line with ourobserved experience. An increase in PUP rate assumption for policies of durationover 5 years from 12% pa to 14% pa would reduce the VIF by £7m. Group Pensions lapses A pensions policy lapses when a member removes his or her funds from ourmanagement and transfers to another provider. This typically happens when anemployee leaves his or her employer and transfers the fund to a new employer orto a personal pension. Our most recent experience for lapses is that approximately 3% p.a. of thein-force business is lapsing at a policy duration of 6 years (i.e. after thefifth anniversary), with lower lapse rates observed in the earlier years. Beyondthis duration there is no significant experience and ultimate lapse rate forthis business remains uncertain. This experience represents a higher lapse rate than observed in our previousexperience investigation and as a result we have increased the lapse assumptionfrom 2% pa to 3% pa of the in-force business from policy year 6. The intentionwill be to maintain the assumptions on this business in line with our observedexperience. Each 1% pa change in the lapse assumption would change VIF by £30m. Bond lapse assumptions All of our key investment bond products are showing increased lapse ratesgenerally, ahead of the previous assumptions at policy durations greater than 5years. As a result we have made significant changes to our lapse assumptions atthese policy durations. The product that has most impact on our reported results is the InvestmentPortfolio Bond (both the Unit Linked and With Profits versions). Our assumptionsfor lapse rates at years 5 to 6 and 6 to 7 were established based on previousexperience of similar products at 10% and 7.5% of in-force businessrespectively. However, experience in 2007 has been for 25% of the investmentlinked products to be surrendered after 5 years and 35% of the With Profitsproducts. There is only limited experience of policy durations beyond this onwhich to base our assumptions. However, to acknowledge the trend observed, ourassumptions for 2007 have been increased for policy durations after the fifthanniversary date. The intention will be to maintain the assumptions on thisbusiness in line with our observed experience. An increase in the lapse rate forthe year after the fifth anniversary from 25% to 30% would reduce the VIF by afurther £5m. Annuitant mortality Our assumptions for pensions annuitants make allowances for improvements infuture mortality based on latest industry projections - a mortality improvementfor one year is a measure of the reduction in the probability of death betweenone year and the next for a given age. For a number of years, our regulatoryreserving bases have amended the industry projections to include an improvement'floor' - a minimum rate if annual improvement below which projections are notallowed to fall. For the 2007 year-end, we are introducing an improvement floor to our experienceassumptions of 1.0% pa for males and 0.75% pa for females. This is inconjunction with the 'medium cohort' projection (published by the CMI inDecember 2002) for males and 75% of this projection for females. If the experience improvement floor were increased by a further 0.5% pa for bothmales and females, this would reduce the VIF by £17m. APPENDIX 3 CASH RELATED BALANCE SHEET DISCLOSURES The table below provides a reconciliation of shareholder cash resources, groupsolvency excess resources over capital requirements and realisable assets. Shareholder cash resources are based on shareholder invested net assets on theEEV basis adjusted to include cash resources generated from securitisation andfinancial reinsurance less the carrying value of non-covered business acquiredintangible assets. Realisable assets represent the assets and liabilities held by Friends Providentplc and FPLP shareholders' funds (these being the funds where strategicresources are held). Assets and liabilities that we intend to hold for the longterm, primarily loans, are excluded from realisable assets. An analysis of themovement in realisable assets is provided below. Group solvency is provisional and is analysed below after the deduction of groupcapital resource requirements from resources within long-term funds. The formatprovided is intended to demonstrate the relationship between the three cashrelated balance sheet disclosures and therefore differs from the presentation inour annual IGD return. The 2006 analysis between long-term funds and shareholder funds has beenrestated to provide a more appropriate analysis. +----------------------+---------------------------------+-------------------------------+| | 2007 | 2006 |+----------------------+------------+---------+----------+-----------+--------+----------+| | Shareholder| | |Shareholder| | |+----------------------+------------+---------+----------+-----------+--------+----------+| | cash| Group|Realisable| cash| Group|Realisable|+----------------------+------------+---------+----------+-----------+--------+----------+| | resources| solvency| assets| resources|solvency| assets|+----------------------+------------+---------+----------+-----------+--------+----------+| | £m| £m| £m| £m| £m| £m|+----------------------+------------+---------+----------+-----------+--------+----------+|Life & Pensions | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|long-term funds | 640 | 12 | | 678| (62)| |+----------------------+------------+---------+----------+-----------+--------+----------+|Life & Pensions | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|shareholder funds | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|Regulatory debt | (795)| | | (795)| | |+----------------------+------------+---------+----------+-----------+--------+----------+|Other debt | 14 | 14 | | 14 | 14 | |+----------------------+------------+---------+----------+-----------+--------+----------+|Other net assets: | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|FPLP realisable assets| 843 | 843 | 843 | 942 | 939 | 942 |+----------------------+------------+---------+----------+-----------+--------+----------+|Other companies | 338 | 231 | | 358 | 358 | |+----------------------+------------+---------+----------+-----------+--------+----------+|IFA subsidiaries | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|- intangible assets | (55)| (55)| | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|Less: accrued | | | | | | ||transfers | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|from long-term funds | | | (211)| | | (308)|+----------------------+------------+---------+----------+-----------+--------+----------+| | 345 | | | 519| | |+----------------------+------------+---------+----------+-----------+--------+----------+|Corporate net assets | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|Other debt | - | | | (285)| (285)| |+----------------------+------------+---------+----------+-----------+--------+----------+|Mark to market on | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|long-term debt | 48 | | | (105)| | |+----------------------+------------+---------+----------+-----------+--------+----------+|Other net assets: | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|Friends Provident plc | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|realisable assets | 212 | 212 | 212 | 278 | 278 | 278 |+----------------------+------------+---------+----------+-----------+--------+----------+|Other | 149 | 129 | | 79 | 38 | |+----------------------+------------+---------+----------+-----------+--------+----------+| | 409 | | | (33)| | |+----------------------+------------+---------+----------+-----------+--------+----------+|Asset management, net | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|of capital resource | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|requirement | | (81)| | | (195)| |+----------------------+------------+---------+----------+-----------+--------+----------+|Securitisation and | | | | | | |+----------------------+------------+---------+----------+-----------+--------+----------+|financial reinsurance | 83 | | | 93 | | |+----------------------+------------+---------+----------+-----------+--------+----------+|Total | 1,477 | 1,305 | 844 | 1,257 | 1,085 | 912 |+----------------------+------------+---------+----------+-----------+--------+----------+ The group solvency balance of £231m for Life & Pensions shareholder funds -other in 2007 is significantly less than the amount recognised in shareholdercash resources, as group solvency is reduced by inadmissible assets and capitalrequirements relating to IFA subsidiaries. Movement in realisable assets +------------------------------------------------------+-------+--------+| | 2007| 2006|+------------------------------------------------------+-------+--------+| | £m| £m|+------------------------------------------------------+-------+--------+|Net transfers from long-term funds | 308 | 177 |+------------------------------------------------------+-------+--------+|Dividends received | 21 | 25 |+------------------------------------------------------+-------+--------+|Other operating cashflow | (54)| (14)|+------------------------------------------------------+-------+--------+|Merger termination (net of related costs) | 34 | - |+------------------------------------------------------+-------+--------+|Loan repayments received | 5 | 205 |+------------------------------------------------------+-------+--------+|Dividends paid | (168)| (164)|+------------------------------------------------------+-------+--------+|Capital outflows: | | |+------------------------------------------------------+-------+--------+|Loans and capital into life subsidiaries | (42)| (225)|+------------------------------------------------------+-------+--------+|Investment in IFA subsidiaries and The Asset Hub | (117)| - |+------------------------------------------------------+-------+--------+|Lombard earnout settlement | (26)| (59)|+------------------------------------------------------+-------+--------+|Other | (29)| 4 |+------------------------------------------------------+-------+--------+|Movement in realisable assets | (68)| (51)|+------------------------------------------------------+-------+--------+|Realisable assets as at 1 January | 912 | 963 |+------------------------------------------------------+-------+--------+|Realisable assets as at 31 December | 844 | 912 |+------------------------------------------------------+-------+--------+ APPENDIX 4 UK LIFE & PENSIONS IFRS UNDERLYING PROFIT BEFORE ONE-OFF ITEMS Year ending 31 December 2007 With Savings & Profits UK Life & Protection Pensions Annuities Investments Fund Pensions £m £m £m £m £m £mNew business strainCommission (92) (72) - (31) - (195)Acquisition expenses (72) (80) (7) (14) - (173)Other revenue and reserve movements 124 7 17 9 - 157 (40) (145) 10 (36) - (211)In-force surplusAnnual managementcharges - 63 - 25 51 139Maintenance expenses (14) (17) - (4) (19) (54)Other revenue and reserve movements 58 (10) 5 (7) 55 101 44 36 5 14 87 186Net cash generated 4 (109) 15 (22) 87 (25) Deferred acquisitioncostsDeferred in year - 74 - 32 - 106Amortised in year - (16) (3) (22) - (41) - 58 (3) 10 - 65IFRS adjustmentsNew business - (4) - (16) - (20)In-force 1 14 - 24 - 39 1 10 - 8 - 19IFRS ongoing profit before one offsIFRS new business strain (40) (75) 10 (20) - (125)IFRS in-force surplus 45 34 2 16 87 184 5 (41) 12 (4) 87 59One-off items (130)UK Life & Pensions (71) UK LIFE & PENSIONS IFRS UNDERLYING PROFIT BEFORE ONE-OFF ITEMS Year ending 31 December 2006 With Savings & Profits UK Life & Protection Pensions Annuities Investments Fund Pensions £m £m £m £m £m £mNew business strainCommission (100) (59) (1) (43) - (203)Acquisition expenses (79) (59) (9) (17) - (164)Other revenue and reserve movements 50 (8) 6 24 - 72 (129) (126) (4) (36) - (295)In-force surplusAnnual managementcharges - 53 - 21 50 124Maintenance expenses (13) (13) (1) (5) (20) (52)Other revenue and reserve movements 115 (19) 22 (9) 52 161 102 21 21 7 82 233Net cash generated (27) (105) 17 (29) 82 (62) Deferred acquisition costsDeferred in year 101 65 4 41 - 211Amortised in year (46) (11) - (24) - (81) 55 54 4 17 - 130IFRS adjustmentsNew business 1 2 - (21) - (18)In-force 2 7 - 20 - 29 3 9 - (1) - 11IFRS ongoing profit before one offsIFRS new business strain (27) (59) - (16) - (102)IFRS in-force surplus 58 17 21 3 82 181 31 (42) 21 (13) 82 79One-off items (33) UK Life & Pensions 46 INTERNATIONAL LIFE & PENSIONS IFRS UNDERLYING PROFIT BEFORE ONE-OFF ITEMS Year ending 31 December 2007 International Life & FPI Lombard Pensions £m £m £mNew business strainCommission (134) (24) (158)Acquisition expenses (20) (34) (54)Other revenue and reserve movements 85 17 102 (69) (41) (110)In-force surplusAnnual management charges 26 56 82Maintenance expenses (14) (17) (31)Other revenue and reserve movements 32 3 35 44 42 86Net cash generated (25) 1 (24) Deferred acquisition costsDeferred in year 153 22 175Amortised in year (32) (9) (41) 121 13 134IFRS adjustmentsNew business (103) (7) (110)In-force 10 5 15 (93) (2) (95)IFRS ongoing profit before one offsIFRS new business strain (19) (26) (45)IFRS in-force surplus 22 38 60 3 12 15One-off items 11 International Life & Pensions 26 INTERNATIONAL LIFE & PENSIONS IFRS UNDERLYING PROFIT BEFORE ONE-OFF ITEMS Year ending 31 December 2006 International Life & FPI Lombard Pensions £m £m £mNew business strainCommission (67) (29) (96)Acquisition expenses (11) (25) (36)Other revenue and reserve movements 53 14 67 (25) (40) (65)In-force surplusAnnual management charges 23 45 68Maintenance expenses (14) (10) (24)Other revenue and reserve movements 52 3 55 61 38 99Net cash generated 36 (2) 34 Deferred acquisition costsDeferred in year 81 26 107Amortised in year (36) (9) (45) 45 17 62IFRS adjustmentsNew business (62) (8) (70)In-force 6 6 12 (56) (2) (58)IFRS ongoing profit before one offsIFRS new business strain (6) (22) (28)IFRS in force surplus 31 35 66 25 13 38One-off items 32 International Life & Pensions 70 This information is provided by RNS The company news service from the London Stock Exchange

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