Final Results

St. James's Place Capital PLC 24 February 2004 St. James's Place Capital Preliminary Announcement 24 February 2004 St. James's Place Capital plc today announces its annual results for the year ended 31 December 2003. The text of the announcement is attached: Enquiries: Sir Mark Weinberg, Chairman Tel: 020 7514 1909 Andrew Croft, Group Finance Director Tel: 020 7514 1909 Nitya Bolam, Brunswick Tel: 020 7404 5959 ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003 St James's Place Capital plc (SJPC), the wealth management group, announces its annual results for the year ended 31 December 2003. Achieved Profit highlights include: â€¢Total group profit before tax of Â£103.9 million (2002: loss before tax of Â£62.9 million) â€¢Group operating profit of Â£60.9 million (2002: Â£80.9 million) â€¢New business profits of Â£25.0 million for the year (2002: Â£33.0 million) â€¢Second half operating profit of Â£35.8 million up 43% on the first half of the year Other highlights include: â€¢New business in the second half of the year up 11% and up 24% for the final quarter (measured on an annual premium equivalent) â€¢Gross Wealth Management fees of Â£20.8 million up 78% â€¢Size of the St James's Place Partnership up 2% to 1,124 â€¢Funds under management up 34% to Â£7.9 billion Proposed final dividend of 1.5p per share making a total dividend for the year of 2.75p (2002: 2.75p). Sir Mark Weinberg, Chairman, commented: '2003 was very much a year of two halves and we are pleased with the recovery in new business and profits during the second half of the year. 'The start of 2004 has been very encouraging with new business volumes since the start of the year running substantially ahead of the same period last year.' SUPPORTING STATEMENT FINANCIAL PERFORMANCE Shareholders will be aware that we present our results on a statutory basis - the so-called Modified Statutory Solvency Basis ('MSSB'). The MSSB pre-tax result for the year is a pre-tax profit of Â£10.1 million compared with a pre-tax loss for the prior year of Â£41.2 million. The 2002 result included the costs of writing down the value of the investments in LAHC and Nascent. We also present our results on an Achieved Profit basis for both the life and unit trust business. On this basis total profits were Â£103.9 million (2002: pre-tax loss of Â£62.9 million), reflecting the comparative stock market levels at the end of each of the two years. Within this figure, operating profit for the year fell to Â£60.9 million (2002: Â£80.9 million) as a result of the difficult trading conditions in the first half of the year. Thanks to the sharp recovery in sales in the last four months of the year, the operating profits for the second half of the year were Â£35.8 million compared with Â£25.1 million for the first half. Full details of the results on both measures are provided in the Financial Commentary. FINAL DIVIDEND Subject to the approval of shareholders at the Annual General Meeting, a final dividend of 1.5p per share will be paid to shareholders on the register on 19 March 2004, making a total of 2.75p for the full year. The proposed dividend payment date is 17 May 2004. We believe that shareholders have invested in the Company's shares for growth rather than income, yet dividends at the current level involve paying out some Â£11.8 million a year. With this in mind the Board will be proposing, for approval at the Annual General Meeting, that shareholders should be given the alternative of a scrip dividend. Further details of this will be contained in a circular to shareholders distributed with the Annual Report in early April. NEW BUSINESS 2003 was very much a year of two halves, with new business from long-term savings (measured on the industry measure of annual premiums plus one tenth single premiums), down 17% for the first half of the year and up 11% for the second half of the year. The first signs of a recovery in new business were noted in September 2003 and this recovery continued throughout the final months of the year. New business for the final quarter was up 24% on the corresponding period of 2002 and particularly pleasing within this growth was a 44% increase in investment business. Wealth management services continued to expand healthily, with gross fees generated for the full year of Â£20.8 million, up 78% over 2002. A highlight was total new mortgage advances for the year up 44% to over Â£3.1 billion. While the net fees from these services are making an increasingly useful contribution to profits, the major benefit of these services is in helping Partners acquire new clients and securing new business from existing clients. They are also an important factor in attracting further high quality advisers to the Partnership. INVESTMENT MANAGEMENT 2003 was a year of extremes for investors, with stock markets hitting 8 year lows in March, before sentiment improved. The markets rebounded strongly, with the FTSE All-Share Index posting a gain of 20% over the year. Against this backdrop, it is pleasing to note that most of our investors have once again benefited from the St. James's Place Approach to Investment Management, under which we contract out management of our funds to carefully selected and monitored external managers. The Russell/Mellon CAPS survey of pension funds ranked two of our five pension managed funds (GAM Managed and THSP Managed) in 2nd and 5th place for the year out of 76 funds covered by the survey and 1st and 3rd over three years out of 71 funds. Investors who spread their money evenly across our core pension managed funds have enjoyed top quartile returns over 1, 3 and 5 years. During 2003, the St. James's Place Recovery Fund, managed by Andrew Green of GAM, was the top-performing fund in the Bloomberg Top 100 Funds survey out of 2,644 unit trust/OEIC funds with at least a three year track record. Equally impressive was the fact that four other Group funds were placed within the top 100, demonstrating the breadth of our offering. This favourable performance of our funds, combined with the low rates of withdrawal by our investors and the increasing inflow of new money as the year went by, was reflected in the 34% increase, to Â£7.9 billion, in our funds under management. We have recently announced the addition of a commercial property fund to our UK range of life and pension funds, which we believe will significantly enhance the attraction of our choice of investments. THE ST. JAMES'S PLACE PARTNERSHIP In my half-year statement I said that we were determined to maintain our standards by retaining only Partners who were profitable to the Group in the medium term and were anticipating the departure of a number of lower-producing members in the context of the difficult conditions of recent years. This was indeed the case with more than double the number of leavers in the second half of the year, compared with the first six months. At the same time, however, recruitment of new Partners in the second half of the year was stronger than anticipated, with 147 appointments (up 71% over the first half of the year), giving a total of 233 appointments in the year. Of these appointments, 44% have come from the independent financial adviser sector. While I had in my half-year statement indicated that a fall in the size of the Partnership was quite likely for the year, the net effect of these factors was that the membership of the Partnership grew by 2% for the year to 1,124. We have for some time believed, and continue to believe, that St. James's Place will be one of the chief beneficiaries of decisions by experienced independent financial advisers to change their status in the run up to the phasing out of polarisation. The sharp rise in appointments from the independent financial adviser sector supports this belief. LAHC As reported at the half year, Derek Netherton and I resigned from the LAHC Board and SJPC entered into an irrevocable deed to restrict its voting interest in LAHC to 19.9%. Following these changes, the St. James's Place Board reviewed the accounting treatment for its holding in LAHC, which has been treated as an investment with effect from 25 July 2003. The Group's pre tax share of LAHC's earnings up to 25 July 2003 was Â£3.4 million (full year 2002 a loss of Â£27.7 million). Although we no longer include our share of LAHC's results in our figures, it is pleasing to note that LAHC has had a good second half of the year, benefiting from the improved investment conditions, as well as the successful completion of a restructuring of its cost base. PARTNERS AND STAFF I am once again delighted, on behalf of the Directors and shareholders, to thank the members of the Partnership and the staff of the Group. The year saw the continuation of the challenging business environment experienced in 2002 and both Partners and staff have once more shown enthusiasm and dedication, which has been reflected in the significant improvement in our affairs over the closing months of the year. SUCCESSION PLANNING AND BOARD CHANGES We announced during 2003 that Mark Lund, aged 46, was to join the Group as deputy Chief Executive and Chief Executive designate. Mark joined the Board on 5 January 2004 and is spending his first few months familiarising himself with the workings of the Group. It is intended that he will become Chief Executive no later than December 2004, when Mike Wilson will become the full-time Chairman. At the same time, I will step down from the Board, but will continue to be closely involved with the Group as an active President, remaining Chairman of the Investment Committee, as well as playing a role in strategic planning. The Board is of the view that it is strongly in the interests of the Company for Mike Wilson to become Chairman on handing over the role of Chief Executive to Mark Lund, in view of Mike's close involvement in building up the Partnership. Andrew Croft, aged 39, who was appointed as Group Finance Director in June, has settled in well in his new post and is making a considerable contribution to the financial management of the Group. INVESTMENT IN IT SYSTEMS In previous statements I have made reference to investment in our IT infrastructure, which we had placed on hold while uncertainty remained on the details of the proposed depolarisation regime. With clarity now emerging, the Board believes strongly that SJPC will be one of the major beneficiaries in this area. Therefore in the second half of 2003 work was re-commenced on our plans to improve back office efficiencies through our new Service Delivery Infrastructure programme. This is a substantial investment in a strategic technology platform, which is focused on delivering significant benefits to both the Partnership and the Company in terms of service and efficiency. The investment for this step-change in our infrastructure is expected to be in the order of Â£12 million spread over three years, of which Â£3.4 million was expensed in 2003. We will start transacting business on the new platform during 2004, with cost efficiencies starting to emerge in 2005 from savings primarily in the area of streamlined new business processes. The level of saving will depend on factors such as the amount of new business, but we are expecting to realise quantifiable benefits of at least Â£2 million per annum, compared with our position today. We also expect other important benefits in the form of improved productivity and Partner and client satisfaction. FUTURE OPPORTUNITIES As stated in my Interim Chairman's statement, the Board believes that our business model - marketing a wide range of products and services through our own team of high quality advisers - is as sound as ever. The Board believes that a number of proposed changes will play even more directly to the strength of our distribution. Depolarisation The FSA has recently announced that firms will be able to take advantage of depolarisation by the fourth quarter of 2004. As noted earlier in this Statement we have already received a significant volume of recruits from the IFA sector during 2003 and, with the announcement of a firm date for depolarisation, we expect this trend to continue. A second advantage of depolarisation will be the ability of SJPC to improve and broaden the range of products we can offer through the Partnership by 'contracting in' products from other manufacturers. We will continue to manufacture and offer through the Partnership a diversified and specialised range of our own investment products, laying emphasis on our distinctive approach to buying-in superior investment skills. New pension tax rules We believe the impact of the proposed simplification of the pension tax rules will be particularly favourable to our business model. These changes will result in a demand for high quality advice on pension planning. Leading up to the April 2005 deadline, we expect a considerable demand from individuals for advice on how to organise their pension arrangements to take advantage of the important transitional provisions. For the longer term, the new regime will significantly move the emphasis amongst higher earning people from final salary pension schemes towards individual pension 'pots', along the lines of the United States 'section 401k' funds. This will focus individual investors on how well their own pension pots are progressing, both before and throughout their retirement years. There will be many in our target market wanting access to a trusted adviser, a high quality process for selecting and monitoring investment managers and asset allocation advice. COMPLIANCE Shareholders will be aware that during the year the Group was fined Â£250,000 by the Financial Services Authority ('FSA') relating to the standard of record keeping in connection with replacement sales. As soon as the Board became aware of the FSA's concerns in December 2001 it carried out a thorough review of the procedures in this area and has implemented the necessary changes to prevent similar issues occurring in the future. The fine did not relate in any way to the suitability of advice provided to clients nor were any clients disadvantaged. OUTLOOK Throughout the last two years of falling new business, we have remained confident in our business model and have believed it was a matter of when, rather than if, growth in new business would resume. With improvement in investor sentiment, we have seen our business growing on an increasing trend in the last four months of 2003. The start of 2004 has been very encouraging with new business volumes since the start of the year running substantially ahead of the same period last year. We firmly believe that, in the absence of external shocks, we can once again set our sights on achieving an annual growth in new business over the longer-term of 15 to 20 per cent. Sir Mark Weinberg 23 February 2004 FINANCIAL COMMENTARY The Financial commentary is divided into two sections; a section providing a commentary on the results for the year and a second section covering operational matters of interest to shareholders and investors. SECTION 1: COMMENTARY ON THE RESULTS FOR THE YEAR We have presented our results on a Modified Statutory Solvency Basis (MSSB) within this announcement. The MSSB basis is the current primary reporting method and reflects the current year cash flows. We have also provided Supplementary Information on the Achieved Profit Basis for the life companies and Additional Financial Information on the Achieved Profit Basis for the unit trust business. The Achieved Profit basis is accepted as a more realistic method of recognising the performance of the shareholders' interest in the long-term business. This commentary covers the results for the year on both bases. TOTAL GROUP PROFITS MSSB The total pre-tax profit for the Group was Â£10.1 million compared with a pre-tax loss for 2002 of Â£41.2 million. ACHIEVED PROFIT The total pre-tax profit for both the life and unit trust business on an Achieved Profit Basis was Â£103.9 million compared with a prior year pre-tax loss of Â£62.9 million. The pre-tax operating profit (before any exceptional items) on this basis was Â£60.9 million (2002: Â£80.9 million). The operating profits for the second half of the year, of Â£35.8 million, were up 43% on the first six months. LIFE AND PENSION BUSINESS MSSB The MSSB result for the year was a small pre-tax profit of Â£1.6 million (2002: Â£0.1 million pre-tax profit). The higher stock markets and the increased volumes of new business experienced in the second half of the year resulted in an improved MSSB result, which at the half year had showed a pre-tax loss of Â£10.3 million. ACHIEVED PROFIT The total pre-tax achieved profit for the year was Â£68.4 million (2002: pre-tax loss of Â£11.5 million). The operating profit (before investment variance and one off items) for the year was Â£44.0 million (2002: Â£59.3 million). The fall in profits reflects the lower new business together with a negative non-investment experience variance in the current year. The combined non-investment experience variance and operating assumption changes contributed a negative pre-tax Â£4.1 million to the result for the year. This adverse movement reflects a Â£7.1 million pre-tax negative for tax variances and a positive Â£3.0 million from other variances. As noted in the Interim Statement, the UK life company is currently not obtaining tax relief for its expenses within the assumed timescales. More detail is provided on the tax position of the UK life company in section 2 of this commentary. The prior year positive variance of Â£5.7 million pre-tax included a release of certain provisions in respect of pension contracts. There are two one off items impacting the result for the year. Firstly as a result of a 2003 budget announcement there has been an increase in the proportion of the Group's tax charge which is met by the shareholder and this change reduces the value of the in force business by Â£7.6 million pre-tax. Secondly, as a result of changes in the solvency requirements for unit-linked and PHI business being introduced during 2004, the amount of solvency capital required by the UK life company will increase. As the cost of holding solvency capital is deducted from the value of in force business the additional capital has a one-off pre-tax cost of Â£3.6 million. There is a positive pre-tax investment variance during the year of Â£36.8 million (2002: Â£73.3 million pre-tax loss), which arises due to the actual investment return being different to the return assumed in the achieved profit calculation. The average increase in our fund prices during the year was 23%, some 18% above the achieved profit assumption. This compares favourably with 2002 where the fund prices fell on average by 17%, some 22% below the achieved profit assumption. There is a small pre-tax loss of Â£1.2 million (2002: Â£2.5 million pre-tax profit) arising from the changes to the economic assumptions required under the 'active achieved profit basis' that we adopt. The two numbers reflect the comparative gilt yield movement over the two years. UNIT TRUST BUSINESS MSSB The MSSB result for the year was a profit before tax of Â£11.0 million (2002: Â£10.3 million). Whilst there was a slight fall in the income received from the funds under management, this was more than offset by a reduction of expenses, which were Â£1 million lower than in 2002 (which had included costs incurred in changing the 'back office' administrator). ACHIEVED PROFIT The Achieved Profit result was a total pre-tax achieved profit for the year of Â£38.0 million (2002: pre-tax profit of Â£0.2 million). The operating profit (before investment variance), fell from Â£26.1 million pre-tax for 2002 to Â£19.4 million pre-tax for the current year. The fall reflects the lower new business levels, a lower positive experience variance and lower earnings on the value of unit trust business in force. The latter point comes about as the value of unit trust business at the start of 2003 was lower than the start of 2002, reflecting the dramatic fall in the stock markets during 2002. Consequently the earnings were correspondingly lower in 2003. The non-investment experience variance and operating assumption changes for the year of Â£0.5 million pre-tax were Â£3.4 million lower than 2002, however, the 2002 figure included a Â£4 million pre-tax benefit from the removal of VAT on investment management fees. As with the life achieved profit result the actual investment return was significantly higher than the return assumed in the achieved profit calculation, which has resulted in a positive pre-tax investment variance of Â£18.5 million (2002: pre-tax loss of Â£25.7 million). There was a Â£0.1 pre-tax profit from economic basis changes. OTHER 'Other' earnings represent the income and expenses of the Group which are incurred outside the life and unit trust businesses. The amount is the same on both an MSSB and Achieved Profit basis. For the year there was a pre-tax loss of Â£2.5 million (2002: pre-tax loss of Â£4.5 million), shown in note 4 of this announcement. This amount includes a provision established for the closure costs and expected future rental costs of one of the Group's London premises. The closure of this office is expected to result in savings of around Â£1 million per annum. SYSTEM DEVELOPMENT COSTS The costs incurred for the year on the strategic system development covered in the Chairman's Statement were Â£3.4 million pre-tax (2002: Â£nil). LAHC As noted in the Chairman's Statement, as a result of a number of developments the accounting treatment of LAHC was reviewed at the half year and has been treated as an investment with effect from 25 July 2003. The result for the year was a small pre-tax profit of Â£3.4 million (2002: Â£27.7 million pre-tax loss), which reflects SJPC's share of LAHC's profit as an associated undertaking before 25 July 2003. There will be no further contribution from LAHC until SJPC either disposes of its investment or LAHC commences the payment of dividends. LAHC has had a very positive second half of the year, benefiting from the recovery in the stock markets and the successful completion of an operational restructuring of its costs. SECTION 2: OPERATIONAL MATTERS Noted below are a number of operational issues about the Group that are of interest to shareholders. (I) GROUP EXPENSES This section of the commentary provides a recap on the categories and nature of the expenditure incurred by the Group's life business and expands the previous explanation provided in the Interim Statement to cover the expense contributions received from the sale of third party products. Shareholders will be aware that the Group has for a number of years been selling third party wealth management services and that we have previously commented that the net fees retained (after payment of the Partner share) were relatively small. As a result of the 78% increase in gross wealth management fees generated and the introduction of the Protection Panel during the year, there has been a substantial increase in the level of fees being received from the sale of third party products and services. These fees now represent a healthy contribution to expenses and are shown in the table below. Table of expenditure incurred by the Group's long-term business: 2003 2002 Category Â£' Million Â£' Million ---------- -------- -------- Commission 70.0 71.0 Investment expenses 16.1 15.5 Third party administration 16.5 16.9 -------- -------- 102.6 103.4 Other production related costs 13.8 13.4 Establishment expenses 64.7 68.6 Contribution from third party product sales (13.5) (4.6) -------- -------- 167.6 180.8 -------- -------- 'Commission, investment expenses and third party administration costs' are met from corresponding policy margins and any variation in these costs flowing from changes in the volumes of new business or the level of the stock markets, do not directly impact the profitability of the company. The 'other production related costs', such as sales force incentivisation, are met by the Company and vary with the levels of production - determined by our internal measure. As production rises or falls these costs will move in the same direction. 'Establishment costs' are the running costs of the Group's infrastructure and are relatively fixed in nature in the short term. Consequently as new business volumes fall, the Group continues to bear broadly the same level of these costs: by the same token, as new business volumes rise, these expenses do not rise in line with new business growth. Excluding some one-off costs in 2002, the 2003 expenses were at the same level and the Board have targeted a 0% increase in these establishment costs for 2004. The 'contribution from third party product sales' reflects the net income received from wealth management sales, Â£5.3 million (2002: Â£3.0 million), sales of stakeholder products, Â£1.5 million (2002: Â£1.6 million) and sales through the protection panel, Â£6.7 million (Â£nil). (II) TAX POSITION The Group's UK life company currently receives tax relief for its expenses principally by offset against the income and capital gains arising in the unit-linked life funds. Following the fall in the world stock markets over the last couple of years the unit-linked funds have cumulative realised losses and consequently the UK life company is not currently obtaining tax relief of some Â£6 -10 million per annum for its expenses. At 31 December 2003 there are approximately Â£80 million of excess un-relieved expenses, representing tax of some Â£16 million, which are being carried forward. Once the unit-linked funds have reversed the current cumulative capital losses - management have estimated this will occur at around a FTSE 100 level of 4,800 (9% higher than the closing value of the FTSE on 16 February 2004) - then future capital gains as they arise will provide immediate tax relief. After the carried forward expenses have been relieved the annual additional tax relief available will be in the order of the current shortfall of Â£6-10 million noted above. (III) OPERATIONAL RISKS The fall in the world stock markets experienced in 2001/02 and the early part of 2003 together with the general economic environment has exposed a number of vulnerabilities in the life assurance sector. The relative simplicity of the SJPC Group and the Board's decision to avoid certain 'flavour of the year' products has shielded SJPC from many of these issues. The business of SJPC's life companies is essentially unit-linked and they do not sell with-profits plans. As a matter of policy they do not sell products including onerous guarantees and consequently have no exposure to the so-called 'precipice bonds' or guaranteed annuity options. Nor does the Group have any exposure to the split-capital investment problems, having never launched a split-capital trust or indeed any technology fund. The Group does not have a defined benefit pension scheme with any active members and therefore has no pension deficit. The Group's life companies are required to maintain a long-term technical provision and the assumptions used for calculating these provisions, together with their sensitivities, are detailed in note 12 to this announcement. As a result of the long-term business of the Group being predominantly unit-linked and the use of reassurance, the total long-term technical provision (net of reassurance) of Â£39.6 million (2002: Â£41.5 million) is relatively small compared with the total assets of Â£6,652 million (2002: Â£5,067 million). It is the Group's policy, wherever possible, to match the technical provision to appropriate assets so as to minimise the shareholder exposure to changes in these assumptions. The investment strategy for shareholder assets set by the Board is conservative, with the aim of minimising investment and credit risk. All shareholder assets are invested in government gilts, a minimum of AA rated corporate bonds, AAA rated money market funds and bank deposits. There are no investments in equities, the Group does not have any foreign exchange exposure and the assets held are liquid. Unlike the case of with-profits life companies, rising new business in SJPC's life companies will not need significant additional capital and, in the absence of unforeseen circumstances the Board do not foresee any requirement to raise additional capital in the financial markets (IV) BANK FACILITY To ensure that the Group has the necessary financial flexibility for the foreseeable future, the Board has agreed terms with its bankers to increase its current bank facility by a further Â£40 million. (V) INTERNATIONAL FINANCIAL REPORTING STANDARDS Shareholders will be aware that listed companies are required to prepare their 2005 Financial Statements using accounting standards issued by the International Accounting Standards Board (IASB). The IASB has issued Phase 1 interim guidance for accounting for insurance contracts, which will result in a number of contracts sold by SJPC being classified as investment contracts rather than insurance contracts. Consequently these contracts fall within the scope of IAS 32 and IAS 39 covering the accounting for financial instruments. As there is now more clarity over the accounting for insurance contracts, we have been able to advance our implementation plans and do not anticipate any delays in meeting the required timescales. SJPC intends to continue to publish Achieved Profit results as supplementary information and believe this will be the approach adopted by other listed life companies. ACCOUNTS ON A MODIFIED STATUTORY SOLVENCY BASIS CONSOLIDATED PROFIT AND LOSS ACCOUNT LONG-TERM BUSINESS TECHNICAL ACCOUNT Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Notes Â£' Million Â£' Million Earned premiums, net of reinsurance Gross premiums written 4 990.2 1,038.8 Outwards reinsurance premiums 4 (27.9) (26.8) --------- --------- 962.3 1,012.0 Investment income 74.3 31.4 Unrealised gains on investments 1,014.0 - Other technical income 0.1 - --------- --------- 2,050.7 1,043.4 --------- --------- Claims incurred, net of reinsurance Claims paid - Gross amount (360.5) (285.7) - Reinsurers' share 21.0 20.9 -------- --------- (339.5) (264.8) Change in the provision for claims - Gross amount (4.6) (2.4) - Reinsurers' share (1.4) 4.0 -------- --------- (6.0) 1.6 -------- --------- (345.5) (263.2) -------- --------- Changes in other technical provisions, net of reinsurance Long-term business provision - Gross amount (8.0) 6.2 - Reinsurers' share 20.2 9.7 --------- --------- 12.2 15.9 Technical provisions for linked liabilities (1,538.2) 165.0 Net operating expenses (155.5) (163.7) Investment expenses and charges (16.1) (15.5) Unrealised losses on investments - (780.4) Other technical charges (2.5) (6.8) Tax attributable to the long-term business (3.4) 6.4 --------- --------- (2,049.0) (1,042.3) --------- --------- Balance on the long-term business technical account 1.7 1.1 ========= ========= CONSOLIDATED PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Notes Â£' Million Â£' Million Balance on the long-term business technical account 1.7 1.1 Tax credit attributable to balance on long-term business technical account (0.1) (1.0) --------- --------- Shareholders' profit from long-term business 1.6 0.1 Investment income Income from associated undertaking 7 3.4 (27.7) Income from other investments 3.9 (15.8) Investment expenses and charges (2.1) (0.3) Other income Income from unit trust operations 11.0 10.3 Other income 3.5 4.3 Other charges (11.2) (12.1) --------- --------- Operating profit/(loss), being profit/(loss) on ordinary activities before tax 10.1 (41.2) Tax on profit/(loss) on ordinary activities 4 (3.5) (3.2) --------- --------- Profit/(loss) on ordinary activities after tax, being profit/(loss) for the financial year 6.6 (44.4) Dividends 5 (11.8) (11.8) --------- --------- Retained loss for the financial year (5.2) (56.2) ========= ========= Pence Pence Dividend per share 5 2.75 2.75 Basic and diluted earnings per share 6 1.5 (10.4) Basic and diluted adjusted earnings per share 6 1.5 (5.9) In arriving at operating profit, unless otherwise stated, all amounts are in respect of continuing operations, in both the current and previous year. In accordance with the amendment to FRS3 published in June 1999, no note of historical cost profits has been prepared as the Group's only material gains and losses on assets relate to the holding and disposal of investments. The Group has no other recognised gains and losses during the current and previous year and therefore a separate statement of total recognised gains and losses has not been presented. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Year Ended Year Ended 31 December 31 December 2003 2002 --------- -------- Â£' Million Â£' Million Opening shareholders' funds 192.0 246.8 Adoption of UITF 38* (6.0) (0.4) --------- --------- Opening shareholders' funds restated 186.0 246.4 Profit/(loss) for the financial period 6.6 (44.4) Dividends (11.8) (11.8) --------- --------- Retained loss for the period (5.2) (56.2) P&L reserve credit in respect of share option charges 0.8 0.4 Consideration paid for own shares (2.5) (6.0) Issue of share capital 0.5 1.4 --------- --------- Net decrease to shareholders' funds (6.4) (60.4) --------- --------- Closing shareholders' funds 179.6 186.0 ========= ========= *See note 1 to this announcement. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER Restated* 2003 2002 ---------- ---------- Notes Â£' Million Â£' Million Assets Investments Land and buildings 1.3 1.3 Investments in associated undertakings 7 - 29.2 Other financial investments Shares and other variable yield 8 31.6 - securities Debt securities and other fixed 52.8 46.0 income securities Deposits with credit institutions 69.7 64.0 ------ ------ 154.1 110.0 ---------- -------- 155.4 140.5 Acquired value of long-term business in force 51.6 54.0 Assets held to cover linked liabilities 6,195.8 4,631.6 Reinsurers' share of technical provisions Long-term business provision 73.3 59.8 Claims outstanding 5.8 7.2 ---------- --------- 79.1 67.0 Debtors Debtors arising out of direct insurance operations - due from policyholders 4.5 3.5 Other debtors 52.5 67.6 ---------- ---------- 57.0 71.1 Other assets Tangible assets 5.8 7.2 Cash at bank and in hand 48.4 32.7 ---------- ---------- 54.2 39.9 Prepayments and accrued income Deferred acquisition costs 53.5 57.9 Other prepayments and accrued income 5.1 5.3 ---------- ---------- 58.6 63.2 ---------- --------- Total assets 6,651.7 5,067.3 ========== ========== *Restated for adoption of UITF 38. CONSOLIDATED BALANCE SHEET AT 31 DECEMBER Restated* 2003 2002 --------- -------- Notes Â£' Million Â£' Million Liabilities Capital and reserves Called up share capital 9 64.8 64.6 Share premium account 11 5.1 4.6 Shares to be issued 11 0.2 0.4 Other reserves 11 2.2 2.2 Profit and loss account 11 117.4 121.8 --------- -------- 189.7 193.6 Own shares reserve 11 (10.1) (7.6) --------- --------- Equity shareholders' funds 179.6 186.0 Technical provisions Long-term business provisions 12 112.9 101.3 Claims outstanding 20.4 15.8 --------- --------- 133.3 117.1 Technical provisions for linked liabilities 6,195.8 4,631.6 Provisions for other risks and charges 13 16.1 16.2 Creditors Creditors arising out of direct insurance operations 9.4 9.8 Amounts owed to credit institutions 14 53.6 45.0 Amounts due to reinsurers 12 11.6 18.3 Other creditors including taxation and social security 5.2 16.4 Proposed dividends 5 6.4 6.4 --------- --------- 96.2 95.9 Accruals and deferred income 30.7 20.5 --------- --------- Total liabilities 6,651.7 5,067.3 ========= ========= *Restated for adoption of UITF 38. CONSOLIDATED CASH FLOW STATEMENT (EXCLUDING POLICYHOLDER FUNDS) --------- --------- Year Ended Restated* 31 December Year Ended 2003 31 December 2002 --------- --------- Notes Â£' Million Â£' Million Shareholders' net cash outflow to long-term business - (20.0) Other operating cash flows attributable to shareholders 13.9 (0.2) --------- --------- Net cash inflow/(outflow) from operating activities 15 13.9 (20.2) Interest Interest received 3.7 3.5 Interest paid (2.1) (0.3) --------- --------- 1.6 3.2 Taxation Corporation tax (paid)/recovered (3.5) 0.1 Capital expenditure and financial investment Purchase of tangible fixed assets (1.7) (3.0) Sale of fixed assets 0.4 0.9 Consideration paid for own shares (2.5) (6.0) --------- --------- (3.8) (8.1) Acquisitions and disposals Investment in shares and variable yield securities - (3.8) Equity dividends paid (11.8) (11.8) --------- --------- Net cash outflow before financing (3.6) (40.6) Financing Draw down of loan 8.6 45.0 Issue of ordinary share capital 0.5 1.4 --------- --------- 9.1 46.4 --------- --------- Net cash inflow in the year 5.5 5.8 ========= ========= Net cash inflow was applied as follows: Increase in cash holdings 7.2 8.1 Net portfolio investments Withdrawals from credit institutions (1.7) (2.3) --------- --------- Net investment of cash flows 5.5 5.8 ========= ========= *Restated for adoption of UITF 38. NOTES TO THE ANNOUNCEMENT 1. BASIS OF PREPARATION The consolidated financial statements of the Company and its wholly owned life insurance and non insurance subsidiary undertakings, have been prepared in accordance with the provisions of section 255A of, and the special provisions relating to insurance groups of Schedule 9A to, the Companies Act 1985. The financial statements are prepared in accordance with applicable accounting standards, which have been applied consistently except as noted below, and with the Association of British Insurers' Statement of Recommended Practice on Accounting for Insurance Business ('ABI SORP') dated December 2003. There has been no material impact on the financial statements as a result of adopting the revised ABI SORP. The Company has adopted UITF38 'Accounting for ESOP trusts' in these financial statements. Further information is provided in the accounting policy for share options, shown below. The adoption of UITF38 does not have a material impact on the profit and loss account for either year. A reclassification of Â£1.6 million has been made between the profit and loss reserve and the own shares reserve in 2002, relating to amounts charged in respect of the scheme for earlier years. In addition, Â£2.6 million has been reclassified between other debtors and own shares reserve in 2002. Share options A charge is recognised on options granted to subscribe for new shares in SJPC, or options over shares held by the SJPC Employee Share Trust, based on the difference between the market value of SJPC shares at the date of the award, and the exercise price. Where appropriate, this charge is spread over the period that performance criteria apply. Deferred charges, to be charged in future years, will be adjusted to reflect evidence regarding whether the performance criteria will be met. The consideration paid for shares, acquired by the SJPC Employee Share Trust, that have not yet vested unconditionally to option holders, is recorded in the own shares reserve. 2. PROFIT RECOGNITION RELATING TO THE VALUE OF LONG-TERM BUSINESS IN FORCE Profits emerging on long-term assurance business in-force are determined in accordance with the Modified Statutory Solvency Basis of reporting, which is consistent with the ABI SORP. Under this method, the statutory result arising in the period, which includes the long-term business provision determined in consultation with the Appointed Actuaries following their annual investigations, is required to be adjusted under the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993 for certain items, including the deferral of acquisition costs and movements in certain reserves, which are recognised in the long-term business technical account. Long-term business provision and technical provisions The long-term business provision is calculated on actuarial principles. The calculation is in accordance with statutory reporting for solvency and uses the gross premium method. The provisions held for linked liabilities are the unit liabilities together with certain non-unit provisions. Whilst the Directors consider that the gross long-term business provision and the related reinsurance recovery is fairly stated on the basis of current experience and economic conditions, the ultimate liability will vary as a result of subsequent changes in experience and economic conditions and may result in adjustments to the amount provided in future. The provision, estimation techniques, and assumptions are periodically reviewed in the light of changes in experience and economic conditions with any changes in estimates reflected in the long-term business technical account as they occur. 3. OTHER ACCOUNTING POLICIES The other accounting policies used by the Group in preparing the results are also consistent with those applied in preparing statutory accounts for the year ended 31 December 2002. 4. SEGMENTAL ANALYSIS An analysis of premiums written, profit and the net assets of the Group's principal activities are set out below: Premiums written --------- --------- Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Life business Single premiums 587.5 581.8 Regular premiums 97.8 101.9 Reinsurances - Risk (13.6) (13.0) --------- --------- 671.7 670.7 --------- --------- Pension business Single premiums 168.4 207.3 Regular premiums 118.6 132.2 Reinsurances - Risk (1.3) (1.4) --------- --------- 285.7 338.1 --------- --------- Permanent health insurance Regular premiums 17.9 15.6 Reinsurances - Risk (13.0) (12.4) --------- --------- 4.9 3.2 --------- --------- 962.3 1,012.0 ========= ========= Gross premiums comprise: Individual business 890.4 904.0 Group contacts 99.8 134.8 --------- --------- 990.2 1,038.8 ========= ========= Gross new annualised premiums comprise: Life - single premiums 587.4 581.8 Life - regular premiums 11.3 14.3 Pension - single premiums 168.4 207.3 Pension - regular premiums 13.2 18.6 Permanent health 3.2 5.4 --------- --------- 783.5 827.4 ========= ========= The insurance business written by the Group relates to only direct insurance that is principally sold in the UK. The Irish life business written was Â£189.8 million (2002: Â£211.9 million). Profit/(loss) on ordinary activities --------- -------- Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Life business 1.6 0.1 Unit trust business 11.0 10.3 Other (2.5) (4.5) --------- -------- Core business profit 10.1 5.9 --------- --------- IT systems development (3.4) - LAHC/Nascent 3.4 (47.1) --------- -------- Profit/(loss) on ordinary activities before taxation 10.1 (41.2) --------- --------- Taxation Life business 0.1 1.0 Unit trust business (3.3) (3.1) Other 0.7 (1.1) LAHC (1.0) - --------- --------- (3.5) (3.2) --------- --------- Profit/(loss) on ordinary activities after taxation 6.6 (44.4) ========= ========= The life profit before tax is analysed as a loss of from the UK life business of Â£4.6 million (2002 loss: Â£5.8 million) and a profit of from the Irish life business Â£6.2 million (2002 profit: Â£5.9 million). Net assets 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million UK life business 118.7 122.8 Irish life business 33.1 27.3 LAHC 31.6 29.2 Unit trust 6.9 4.0 Other net assets (10.7) 2.7 --------- --------- 179.6 186.0 ========= ========= 5. DIVIDENDS Year Ended Year Ended Year Ended Year Ended 31 December 31 December 31 December 31 December 2003 2002 2003 2002 ---------- ---------- ---------- -------- Pence Pence Â£' Million Â£' Million Per share Per share Interim dividend paid 1.25 1.25 5.4 5.4 Final dividend proposed 1.50 1.50 6.4 6.4 ---------- ---------- ---------- -------- 2.75 2.75 11.8 11.8 ========== ========== ========== ========= The proposed dividend of 1.5 pence per share is payable on 17 May 2004 to those shareholders on the register on 19 March 2004. As mentioned in the Supporting Statement, there will be a proposal at the forthcoming Annual General Meeting for shareholders to select a scrip dividend. 6. EARNINGS PER SHARE --------- --------- Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Pence Pence Basic and diluted earnings per share 1.5 (10.4) Adjustments - Nascent impairment - 4.5 --------- --------- Basic and diluted adjusted earnings per share 1.5 (5.9) ========= ========= In accordance with FRS 14 'Earnings per Share', where a diluted loss per share is reduced, the incremental effect is ignored. The following table sets out the various profit figures and number of shares taken into account in the above calculations: --------- --------- Year Ended Year Ended 31 December 31 December 2003 2002 --------- --------- Profit/(loss) on ordinary activities after taxation Â£6.6m Â£(44.4m) Adjustments - Nascent impairment - Â£19.4m --------- --------- Adjusted profit/(loss) after tax Â£6.6m Â£(25.0m) ========= ========= Weighted average number of shares (including shares to be issued) 430.3m 428.0m ========= ======== Diluted weighted average number of shares 433.6m 445.4m ========= ========= Number of share options for which diluted effect taken account of 55.4m 55.5m ========= ========= 7. INVESTMENTS IN ASSOCIATED UNDERTAKINGS The Group holds an investment of 22.7% in the shares of Life Assurance Holding Corporation Limited ('LAHC') which carries voting rights of 19.9% (2002: 23% holding and voting rights). This investment has been dealt with in the consolidated accounts for prior years as an associated undertaking and equity accounted. Since 25 July 2003 it has been treated as an investment as noted below. As a result of a number of issues that have arisen in recent years, LAHC has carried out a review of its future strategy and its financing arrangements. This has led to the decision that the operations will concentrate on the run-off of the existing book of business in order to optimise the level of cash generation and future dividends. LAHC does not propose to undertake any significant acquisitions. This has been implemented in the form of consequential changes to the management structure and the nature and scale of LAHC's operations. SJPC has commented in previous financial statements that it regards LAHC as a non-core investment. In view of the change of strategy outlined above, SJPC has taken the opportunity to reduce significantly the amount of directors' time spent on LAHC's affairs. Accordingly, Sir Mark Weinberg resigned as Chairman of LAHC on 23 July 2003 and both he and Derek Netherton resigned from the LAHC Board on 25 July 2003. In addition, and with the agreement of LAHC's other shareholders, SJPC entered into an irrevocable deed to restrict its voting interest in LAHC to 19.9% on 25 July 2003. As a consequence of the above, the SJPC Board reviewed the accounting treatment for the holding in LAHC, which has been treated as an investment from 25 July 2003. The holding is disclosed within 'Shares and other variable yield securities' as at 31 December 2003 (see note 8). The impact of the change in accounting treatment during 2003 of the carrying value of LAHC as an associated undertaking is as follows: Â£' Million -------- Value at 1 January 2003 29.2 Share of pre-tax profit for the period to 30 June 2003 3.4 Share of tax for the period to 30 June 2003 (1.0) -------- Value at 30 June 2003 31.6 Transfer to investments (31.6) -------- Value of associated undertaking at 31 December 2003 Nil ======== 8. SHARES AND OTHER VARIABLE YIELD SECURITIES 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million LAHC (see note 7) 31.6 - ========= ========= In February 2004, SJPC was informed that LAHC had made progress in its negotiations with its banks regarding the re-scheduling of the future repayments of its outstanding debt. 9. SHARE CAPITAL Number Nominal Value --------- ----------- Authorised Â£' Million Ordinary shares at 15p each At 1 January 2003 and 31 December 2003 605,000,000 90.8 ============ ========= Number Nominal Value --------- ----------- Â£' Million Issued, Allotted and Fully Paid Ordinary shares at 15p each At 1 January 2003 430,712,254 64.6 Exercise of options 1,215,628 0.2 ----------- -------- At 31 December 2003 431,927,882 64.8 =========== ======== 1,215,628 shares were issued during the year (2002: 1,716,146) for cash consideration of Â£0.5 million (2002: Â£1.4 million). 10. SHARE OPTIONS On the acquisition of the remaining share capital of St. James's Place Wealth Management Group plc in 1997, SJPC agreed to issue further shares, up to a maximum of 25.8 million, to satisfy the exercise of options held over shares at the time of acquisition. A reserve for shares to be issued was established in recognition of the commitment and 1.7 million shares have still to be issued from this reserve. During the year options over 3 million shares have been granted at a range of prices between Â£0.72 and Â£1.581/2. Options outstanding under the various share option schemes at 31 December 2003 amount to 55.4 million shares (31 December 2002: 55.5 million). Of these, 39.3 million are under option to Partners of the St. James's Place Partnership, 12.5 million are under option to executives and senior management (including 2.8 million under option to Directors) and 3.6 million are under option through the SAYE scheme. These are exercisable on a range of future dates. The SJPC Employee Share Trust is used to acquire shares in the open market to match options granted to employees and directors. The market value of shares held in the trust at 31 December 2003, that had not vested unconditionally to option holders, is Â£10.1 million (2002: Â£7.6 million). The consideration paid for shares over which options have not yet been granted was Â£0.7 million. The total number of options, including those in the SJPC Employee Trust, together with their anticipated proceeds, are set out in the table below. Earliest date of exercise Average Number of share Anticipated exercise price options outstanding Proceeds Million Â£' Million Immediate 1.60 24.1 38.6 Jan - Jun 2004 2.56 1.6 4.1 Jul - Dec 2004 2.50 1.4 3.5 Jan - Jun 2005 2.07 1.5 3.1 Jul - Dec 2005 1.46 6.1 8.9 Jan - Jun 2006 0.92 5.2 4.8 Jul - Dec 2006 1.40 3.5 4.9 Jan - Jun 2007 1.33 1.8 2.4 Jul - Dec 2007 1.43 6.3 9.0 Jan - Jun 2008 0.92 2.6 2.4 Jul - Dec 2008 1.33 0.6 0.8 Jan - Jun 2009 1.00 0.3 0.3 Jul - Dec 2009 1.25 0.4 0.5 ---------- -------- -------- 55.4 83.3 ======== ======== 11. RESERVES -------- -------- -------- -------- -------- Share Shares to Other Profit Own Premium be Issued Reserves and Loss Shares Account Reserve* Account Reserve -------- -------- -------- -------- -------- Â£' Million Â£' Million Â£' Million Â£' Million Â£' Million At 1 January 2003 4.6 0.4 2.2 120.2 - Adoption of UITF 38 - - - 1.6 (7.6) -------- -------- -------- -------- -------- As restated 4.6 0.4 2.2 121.8 (7.6) Release of reserve on issue of shares 0.2 (0.2) - - - Movement in Own Shares - - - 0.8 (2.5) Exercise of options 0.3 - - - - Retained loss for the year - - - (5.2) - -------- -------- -------- -------- -------- At 31 December 2003 5.1 0.2 2.2 117.4 (10.1) ======== ======== ======== ======== ======== * The shares to be issued reserve was established on the acquisition of St. James's Place Wealth Management Group plc ('SJPWM') to account for the share options in SJPWM that were unexercised at the acquisition date as detailed in note 10. The movement in the reserve during the year occurred on the exercise of these options. The Other Reserves of Â£2.2 million are not distributable. 12. LONG-TERM BUSINESS TECHNICAL PROVISIONS The long-term business provision is determined in consultation with the Appointed Actuaries following their annual investigations of the long-term business. The assumptions underlying the calculation of the UK long-term business provision for statutory solvency purposes have been determined in accordance with industry accepted actuarial techniques and are detailed in the returns to the Financial Services Authority. These returns are due to be submitted by 31 March 2004 and will then be available to any shareholder on request. The principal assumptions used in calculating the provisions for linked and non-linked policies are noted below together with details on the sensitivity of these assumptions. Linked policies The long-term provision consists of sterling reserves designed to cover any future cash flows without recourse to additional capital. The cash flows are projected assuming: â€¢ unit growth rates between 4.8% and 6% per annum (2002: between 4% and 6%), depending on the tax status and territory of the contract; â€¢ a projection of current expenses assuming expense inflation of between 3.5% and 4% per annum (2002: between 3% and 4%), depending on the territory of the contract; and â€¢ mortality and morbidity costs are derived from the Company's own experience, actual rates charged by reassurers and industry experience. The resulting cash flows are discounted at a rate of interest between 3.5% and 4.75% (2002: between 3% and 4.25%), depending on the tax status and territory of the contract to calculate the sterling reserve. Non-linked policies The long-term provisions are calculated using the gross premium valuation method. The assumed rate of interest is 3.25% (2002: 3.0%). Mortality rates are based on recognised mortality tables suitably adjusted to reflect actual experience. Morbidity rates are derived from the Company's own experience, published data, the rates charged by reassurers and industry experience. Sensitivities The calculation of the long-term technical provision is sensitive to the above assumptions and noted in the table below is the estimated impact on the provision, net of reassurance, to changes in these assumptions. Assumption Change Impact ---------- ------ Â£' million ------- Unit growth +1% (1.2) -1% 1.3 Interest rates +1% (4.4) -1% 6.2 Expense inflation +1% 7.0 -1% (5.1) Wherever possible it is the policy of the Group to 'match' the long-term technical provision with appropriate assets, to reduce the impact of changes in the assumptions on the financial position of the Group. For example a 1% reduction in interest rates whilst increasing the level of the provision by an estimated Â£4 million will also result in the value of the fixed interest securities 'matching' the provision increasing in value by a corresponding amount. Thus the potential impact on the shareholder from changes in the above assumptions has been reduced accordingly. Critical illness As previously reported, in 2001 the Group entered into a financial reassurance arrangement with respect to the uncertainty on its critical illness claims experience. Under the terms of this financial reassurance arrangement, the reassurer has agreed to maintain the current reassurance rates, provided it can recover experience in excess of those rates from profits on future new business written by the Group. These arrangements remain in place. The Group has included in its statutory long-term provision prior to reassurance, reserves of Â£11.6 million (2002: Â£18.3 million) as a result of the financial reassurance, although the net provision (after reassurance) remains unchanged. This financial reassurance has been accounted for in accordance with FRS 5 'Reporting the substance of transactions' and accordingly a liability of Â£11.6 million (2002: Â£18.3 million) has been established. The cash balance outstanding under the arrangement at 31 December 2003 was, however, Â£nil (2002: Â£ nil). Regulatory reviews Following the completion of the various required regulatory reviews, there are no provisions outstanding at 31 December 2003 (2002: Â£nil). 13. PROVISIONS FOR OTHER RISKS AND CHARGES Deferred Other Total Tax Provisions --------- --------- ---------- Â£' Million Â£' Million Â£' Million At 1 January 2003 15.9 0.3 16.2 (Credit)/charge to the profit and loss account (1.1) 1.2 0.1 Cash paid - (0.2) (0.2) --------- --------- ---------- At 31 December 2003 14.8 1.3 16.1 ========= ========= ========== Other provisions consist of Â£1.2 million to meet obligations arising as a result of the closure of an office and Â£0.1 million in respect of the outstanding obligations remaining from the Halifax acquisition of 60% of the share capital of SJPC plc in June 2000. The value of the Halifax related provision is dependent, amongst other things, on the current SJPC share price. The year-end deferred tax position is analysed as follows: 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Deferred acquisition costs 14.8 15.9 ========= ========= As mentioned in the Financial Commentary, SJPC has unrelieved expenses of Â£80 million. The total amount of the unprovided deferred tax asset at 31 December 2003 relating to these and other deferred expenses was Â£50 million (2002: Â£40 million). 14. AMOUNTS OWED TO CREDIT INSTITUTIONS 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Bank loan 53.6 45.0 ========= ========= Bank facility On 1st January 2003 the Group had an unsecured revolving credit facility amounting to Â£60 million expiring on 7th November 2007, arranged on a bilateral basis with the Royal Bank of Scotland plc and the Bank of Scotland plc. The amount outstanding under this facility at the start of the year was Â£45.0 million at an interest rate of 4.905% per annum. This draw down was repaid on 13 February 2003. On 17th June 2003 this revolving credit facility was amended to permit SJPC plc to grant a Fixed Sum Guarantee of Â£70 million in connection with arrangements under which Bank of Scotland will grant loans to the members of St. James's Place Partnership. Loans had previously been provided by the Group, financed by the revolving facility. At the same time it was agreed to reduce the revolving facility to Â£30.0 million on 30th November 2003. At 31st December 2003, the amount outstanding under the facility was Â£30 million repayable on 15 January 2004 at an interest rate of 4.71% per annum. The facility was then redrawn. Fixed Sum Guarantee As noted above, on 17th June 2003 the Company granted a Fixed Sum Guarantee to Bank of Scotland in connection with loans made to members of the St. James's Place Partnership by Bank of Scotland. Under the terms of the Guarantee, Bank of Scotland agreed, at the request of the Company, to provide loans ('Partner Loans') either by way of new loans or by an equitable assignment of an existing loan to the members of the St. James's Place Partnership. In the event of default on any of these Partner Loans, the Company guarantees to repay the outstanding balance of the loan. The Guarantee can be terminated at any time by the Company by giving three months notice. At 31 December 2003 the balance of Bank of Scotland loans covered by this Guarantee was Â£15 million. Under the terms of the Assignment Agreement, the Assigned Loans remain legally in the name of the Group and in accordance with FRS 5 'Reporting the substance of the transaction', the balance of these loans of Â£23.6 million is shown as an asset within other assets and a liability within amounts owed to credit institutions. 15. RECONCILIATION OF OPERATING PROFIT TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES --------- --------- 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Operating profit/(loss) before tax 10.1 (41.2) Interest paid 2.1 0.3 Interest received (3.7) (3.5) Profit relating to long-term business (1.6) (0.1) Transfer to long-term business fund - (20.0) Profit on sale of fixed assets (0.1) (0.1) Depreciation 2.8 3.5 Share of profit/(loss) of associated undertakings (3.4) 27.7 Write down in shares and other variable yield securities - 21.3 Decrease/(increase) in debtors and prepayments 3.2 (3.9) Increase/(decrease) in creditors 10.1 (7.1) (Increase)/decrease in debtor to long-term business (5.6) 2.9 --------- --------- Net cash inflow/(outflow) from operating activities 13.9 (20.2) ========= ========= 16. MOVEMENT IN OPENING AND CLOSING PORTFOLIO INVESTMENTS, NET OF FINANCING --------- --------- 31 December 31 December 2003 2002 --------- --------- Â£' Million Â£' Million Increase in cash holdings 7.2 8.1 Draw down of loan (8.6) (45.0) Portfolio investments: deposits with credit institutions (1.7) (2.3) --------- --------- Total movement in portfolio investments, net of financing (3.1) (39.2) --------- --------- Portfolio investments, net of financing at 1 January (11.5) 27.7 --------- --------- Portfolio investments, net of financing at 31 December (14.6) (11.5) ========= ========= 17. RELATED PARTY TRANSACTIONS WITH HBOS plc SJPC has arms length arrangements with HBOS as follows: â€¢ Commission from the sale of banking services for St. James's Place Bank (a division of Halifax plc). The amounts receivable during the year were Â£4.1 million (2002: Â£4.0 million). â€¢ Commission from the sale of Stakeholder pensions for Clerical Medical. The amounts receivable during the year were Â£3.7 million (2002: Â£2.6 million). â€¢ Commission from the sale of Halifax, Bank of Scotland and Birmingham Midshires mortgages. The amounts receivable during the year were Â£4.1 million (2002: Â£1.4 million). â€¢ HBOS plc provided a guarantee to the Company's reassurers in respect of the Company's obligations in relation to the arrangements described in note 12. The guarantee, which is on normal commercial terms, continues for a maximum of ten years with an annual amount payable by the Company of Â£0.5 million. â€¢ During the year, deposits were placed with Bank of Scotland on normal commercial terms. At 31 December 2003 these deposits amounted to Â£0.2 million (2002: Â£0.6 million). â€¢ As part of a syndicate, the Bank of Scotland plc provided a 50% share of a revolving credit facility of Â£30 million (2002: Â£60 million) on normal commercial terms. â€¢ During the year, SJPC granted a Fixed Sum Guarantee for Â£70 million to Bank of Scotland in respect of certain loans made by Bank of Scotland to members of The St. James's Place Partnership. On 1 September 2003, a number of existing loans for Â£27.2 million were assigned to Bank of Scotland for cash and are covered by this guarantee. The total amount of loans covered by this guarantee at 31 December 2003 is Â£15 million. â€¢ SJPC Board Directors have been included in a directors' and officers' policy negotiated on a group basis by HBOS. 18. NON-STATUTORY ACCOUNTS The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2002 or 2003. Statutory accounts for 2002 have been delivered to the registrar of companies, and those for 2003 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. 19. ANNUAL REPORT The Company's annual report and accounts for the year ended 31 December 2003 is expected to be posted to the shareholders by 1 April 2004. Copies of both this announcement and the annual report and accounts will be available to the public at the Company's registered office at St. James's Place House, Dollar Street, Cirencester GL7 2AQ and through the Company's website at www.sjpc.co.uk. SUPPLEMENTARY INFORMATION ON AN ACHIEVED PROFIT BASIS FOR LIFE BUSINESS ONLY (UNIT TRUST ON STATUTORY BASIS) ACHIEVED PROFIT RESULT The following supplementary information shows the result for the Group adopting an achieved profit basis for reporting the results of its wholly owned life businesses. Summarised income statement Year Ended Restated 31 December Year Ended 2003 31 December 2002 --------- --------- Â£' Million Â£' Million Life business 44.0 59.3 Unit trust business 11.0 10.3 Other (2.5) (4.5) --------- --------- 52.5 65.1 IT systems development (3.4) - --------- --------- Operating profit 49.1 65.1 Investment return variances 36.8 (73.3) Economic assumption changes (1.2) 2.5 One off budget changes (7.6) - Cost of solvency capital (3.6) - --------- --------- Profit/(loss) from core business 73.5 (5.7) Profit/(loss) from other business LAHC/Nascent 3.4 (47.1) --------- -------- Achieved profit/(loss) on ordinary activities before taxation 76.9 (52.8) --------- --------- Taxation Life business (19.0) 3.7 Unit trust business (3.3) (3.1) Other 0.7 (1.1) LAHC (1.0) - --------- --------- (22.6) (0.5) Achieved profit/(loss) on ordinary activities after tax 54.3 (53.3) Dividends (11.8) (11.8) --------- --------- Retained achieved profit/(loss) for the financial year 42.5 (65.1) ========= ========= Reconciliation of the movement in the life achieved profit shareholders' funds Shareholders' funds on an achieved profit basis previously reported 405.8 469.5 Adoption of UITF 38 (6.0) (0.4) --------- --------- Opening shareholders' funds restated 399.8 469.1 Post tax profit/(loss) for the year 54.3 (53.3) Issue of share capital 0.5 1.4 Dividends (11.8) (11.8) P&L reserve credit in respect of share option charges 0.8 0.4 Consideration paid for own shares (2.5) (6.0) --------- --------- Shareholders funds on an achieved profit basis carried forward 441.1 399.8 ========= ======== CONSOLIDATED BALANCE SHEET AT 31 DECEMBER INCLUDING LIFE BUSINESS ON AN ACHIEVED PROFIT BASIS Assets 2003 Restated 2002 -------- --------- Â£' Million Â£' Million Investments Land and buildings 1.3 1.3 Investments in associated - 29.2 Other financial investments 154.1 110.0 -------- --------- 155.4 140.5 Value of in-force business - Long-term insurance 313.1 267.8 Assets held to cover linked liabilities 6,195.8 4,631.6 Reinsurers' share of technical provisions 79.1 67.0 Debtors 57.0 71.1 Other assets 54.2 39.9 Prepayments and accrued income 5.1 5.3 Deferred acquisition costs 53.5 57.9 -------- --------- 6,913.2 5,281.1 ======== ========= Liabilities Capital and reserves Called up share capital 64.8 64.6 Share premium account 5.1 4.6 Shares to be issued 0.2 0.4 Other reserves 381.1 337.8 -------- --------- 451.2 407.4 Own shares reserve (10.1) (7.6) -------- --------- Equity shareholders' funds 441.1 399.8 Technical provisions 133.3 117.1 Technical provisions for linked liabilities 6,195.8 4,631.6 Provisions for other risks and charges 16.1 16.2 Creditors 96.2 95.9 Accruals and deferred income 30.7 20.5 -------- --------- 6,913.2 5,281.1 ======== ========= NOTES TO THE ACHIEVED PROFIT RESULTS I. BASIS OF PREPARATION The supplementary information shows the Group's life results as measured on an achieved profit basis, which includes the results of the Group's long-term assurance business on a basis determined in accordance with the ABI Guidance 'Supplementary Reporting for long term assurance business (the achieved profits method)' issued in December 2001. All other transactions and balances have been determined in accordance with the MSSB accounting policies. The objective of the Achieved Profit basis is to provide shareholders with more realistic information on the financial position and performance of the Group than that provided by the modified statutory solvency basis. The Group's unit trust business is not included on an achieved profit basis within this supplementary information although it is in the unaudited financial information. The achieved profit results for long-term assurance have been determined using an unsmoothed basis for projecting future unit growth. As previously disclosed in the 2003 Interim Report, the 2002 results have been restated to an unsmoothed basis. The effect of this change to an unsmoothed basis was also disclosed in the 2002 financial statements and is summarised in note V below. II. METHODOLOGY AND ASSUMPTIONS The Achieved Profits methodology recognises as profit the discounted value of the expected future statutory surpluses arising from the contracts in force at the period end ('the value of long-term business in force'). These future surpluses are calculated by projecting future cash flows using realistic assumptions for each component of the cash flow. Actuarial assumptions for the mortality, morbidity and persistency experience of the contracts, expenses and taxation expected to be incurred are based on recent experience and are reviewed annually. The future economic and investment conditions are based on the period end conditions and are likely to change from year to year. Economic Assumptions The principal economic assumptions used within the cash flows at 31 December 2003 are set out below alongside the comparatives for 31 December 2002. Year Ended Year Ended 31 December 31 December 2003 2002 ---------- ----------- Risk discount rate (net of tax) 8.25% 8.00% Future investment returns: - Fixed Interest 4.75% 4.50% - Equities 7.25% 7.00% - Unit-linked funds: - Capital growth 3.75% 3.50% - Dividend income 3.00% 3.00% - Total 6.75% 6.50% Expense inflation 4.25% 4.25% Indexation of capital gains 1.75% 1.75% The risk discount rate is used to discount the projected future cash flows from the business in-force to a present value. The rate is set by reference to the assumed future investment returns. The assumed future pre-tax returns on fixed interest securities are set by reference to the 15 year gilt yield index. The other investment returns are set by reference to this assumption. The expense inflation and indexation of capital gains assumptions are based on the rate of inflation implicit in the current valuation of 15 year index-linked gilts (currently 2.75%). The expense inflation assumption is increased by a 1.5% loading to reflect increases in earnings and the indexation of capital gains is reduced by 1%. Experience Assumptions The principal experience assumptions were derived as follows. All experience assumptions are reviewed regularly. The persistency experience is derived where possible from the Company's own experience, or otherwise from external industry experience. Maintenance expenses have been set in line with the costs charged by the Company's third party administrators, together with an allowance for the Company's own maintenance costs. Mortality and morbidity assumptions have been set by reference to the Company's own experience, published industry data and the rates charged by the Company's reassurers. A provision of Â£12.5 million before tax has been set up within the cash flows to provide for adverse morbidity and persistency experience on critical illness plans. This is unchanged from 31 December 2002. Other items The value of new business has been established at the end of the reporting period. It has been calculated using actual acquisition costs. In projecting future surpluses allowance has been made for the cost of maintaining a statutory solvency margin on the business in force. Recurring single premiums are treated as if they were individual single premiums. Future taxation has been determined assuming a continuation of the current tax legislation. The achieved profits results are calculated on an after-tax basis and are grossed up to the pre-tax level for presentation in the profit and loss account. The rate of tax used was 30% except for the Irish life business, which was grossed up at 12.5%. These are unchanged from 31 December 2002. III. COMPONENTS OF LIFE ACHIEVED PROFIT The pre-tax components of the Achieved Profit result for life are shown below. The basic operating Achieved Profit is determined using the assumptions as set out above in note II. This value is subsequently adjusted to take into account items considered to be short-term variations to these longer-term assumptions to show the total achieved pre- and post-tax profit for the respective periods. Year Ended Restated 31 December Year Ended 2003 31 December 2002 --------- ---------- Â£' Million Â£' Million New business contribution 13.5 18.7 Profit from existing business Unwind of discount rate 32.1 31.8 Experience variances (6.9) 5.7 Operating assumption changes 2.8 0.5 Investment income 2.5 2.6 --------- ---------- Life operating achieved profit before tax 44.0 59.3 Investment return variances 36.8 (73.3) Economic assumption changes (1.2) 2.5 One off budget changes (7.6) - Cost of solvency capital (3.6) - --------- ---------- Life achieved profit/(loss) before tax 68.4 (11.5) Attributed tax (19.0) 3.7 --------- ---------- Life achieved profit/(loss) after tax 49.4 (7.8) ========= ========== The economic assumption changes reflect the effect of the movement in the economic bases noted in the methodology and assumptions. The operating assumption changes reflect one off changes to other assumptions used in the calculation of the achieved profit. New business contribution after tax is Â£10.3 million (2002: Â£14.0 million). IV. SENSITIVITIES The table below shows the impact of changes in economic assumptions on the reported value of new business and value of long-term business in force of changes to the risk discount rate, the assumed rate of long-term investment return and market movements. Change in new business contribution Change in the post-tax value of long-term Pre-tax Post-tax business in force Â£' Million Â£' Million Â£' Million Reported value at 31 December 2003 13.5 10.3 311.1 Risk discount rate +1% (4.6) (3.2) (19.2) rate -1% 5.0 3.5 20.4 Investment return +1% 3.9 2.8 19.2 -1% (3.6) (2.6) 21.4) Current withdrawal rate x110% (2.7) (1.9) (11.5) x90% 2.9 2.0 11.1 Unit values +10% - - 29.6 values -10% - - (26.3) V. INVESTMENT RETURN ASSUMPTIONS As discussed in note I, the investment assumptions have been changed to an unsmoothed basis and the 2002 figures have been restated accordingly. The impact of the removal of smoothing on the 2002 result was to reduce the Achieved Profit from life assurance business before tax by Â£43.9 million and reduce the Achieved Profit from life assurance business after tax by Â£31.4 million. UNAUDITED INFORMATION INCLUDING LIFE AND UNIT TRUSTS ON AN ACHIEVED PROFITS BASIS The following information shows the results for the Group of adopting a methodology similar to the achieved profit basis for reporting unit trust business. SUMMARISED INCOME STATEMENT Year Ended Restated 31 December Year Ended 2003 31 December 2002 --------- --------- Â£' Million Â£' Million Life business 44.0 59.3 Unit trust business 19.4 26.1 Other (2.5) (4.5) --------- --------- 60.9 80.9 IT systems development (3.4) - --------- --------- Operating profit 57.5 80.9 Investment return variances 55.3 (99.0) Economic assumption changes (1.1) 2.3 One off budget changes (7.6) - Cost of solvency capital (3.6) - --------- --------- Profit/(loss) from core business 100.5 (15.8) Profit/(loss) from other business LAHC/Nascent 3.4 (47.1) --------- --------- Achieved profit/(loss) on ordinary activities before taxation 103.9 (62.9) --------- --------- Taxation Life business (19.0) 3.7 Unit trust business (11.4) - Other 0.7 (1.1) LAHC (1.0) - --------- --------- (30.7) 2.6 Achieved profit/(loss) on ordinary activities after tax 73.2 (60.3) ========= ========= SUMMARISED NET ASSET STATEMENT Restated 2003 2002 --------- --------- Â£' Million Â£' Million Value of in-force - Unit trust 86.2 67.3 - Long-term insurance 313.1 267.8 Other net assets 128.0 132.0 --------- --------- Consolidated net assets under Achieved Profits basis 527.3 467.1 ========= ========= Net asset per share 122.1 108.4 NOTES TO THE UNAUDITED INFORMATION A. BASIS OF PREPARATION The enclosed information shows the Group's results as measured on an achieved profit basis, which includes the results of the Group's unit trust business on a similar basis to the ABI Guidance 'Supplementary Reporting for long term assurance business (the achieved profits method)' issued in December 2001. The assumptions used to determine the unit trust achieved profit result are consistent with those used for life business, which are disclosed within the supplementary information in the announcement. The achieved profit results for unit trust business have been determined using an unsmoothed basis for projecting future unit growth. As previously disclosed in the 2003 Interim Report, the 2002 results have been restated to an unsmoothed basis. The effect of this change to an unsmoothed basis was also disclosed in the 2002 financial statements and is summarised in note D below. B. COMPONENTS OF THE LIFE AND UNIT TRUST ACHIEVED PROFIT Unit trust business --------- ---------- Year Ended Restated 31 December Year Ended 2003 31 December 2002 --------- ---------- Â£' Million Â£' Million New business contribution 11.5 14.3 Profit from existing business Unwind of discount rate 7.4 7.9 Experience variances 2.2 3.9 Operating assumption changes (1.7) - --------- ---------- Unit trust operating achieved profit before tax 19.4 26.1 Investment return variances 18.5 (25.7) Economic assumption changes 0.1 (0.2) --------- ---------- Unit trust achieved profit before tax 38.0 0.2 Attributed tax (11.4) - --------- ---------- Unit trust achieved profit after tax 26.6 0.2 ========= ========== The economic assumption changes reflect the effect of the movement in the economic bases noted in the methodology and assumptions. The operating assumption changes reflect one off changes to other assumptions used in the calculation of the achieved profit. New business contribution after tax is Â£8.0 million (2002: Â£10.0 million). Unit trust and life business combined --------- ---------- Year Ended Restated 31 December Year Ended 2003 31 December 2002 --------- ---------- Â£' Million Â£' Million New business contribution 25.0 33.0 Profit from existing business Unwind of discount rate 39.5 39.7 Experience variances (4.7) 9.6 Operating assumption changes 1.1 0.5 Investment income 2.5 2.6 --------- ---------- Operating achieved profit before tax 63.4 85.4 Investment return variances 55.3 (99.0) Economic assumption changes (1.1) 2.3 One off budget changes (7.6) - Cost of solvency capital (3.6) - --------- ---------- Achieved profit/(loss) before tax 106.4 (11.3) Attributed tax (30.4) 3.7 --------- ---------- Achieved profit/(loss) after tax 76.0 (7.6) ========= ========== The economic assumption changes reflect the effect of the movement in the economic bases noted in the methodology and assumptions. The operating assumption changes reflect one off changes to other assumptions used in the calculation of the achieved profit. New business contribution after tax is Â£18.3 million (2002: Â£24.0 million). C. SENSITIVITIES The table below shows the impact of changes in economic assumptions on the reported value of new business and value of long-term business in force of changes to the risk discount rate, the assumed rate of long-term investment return and market movements for the combined life and unit trust business. Change in new business contribution Change in the post-tax value of long-term business in-force Pre-tax Post-tax Â£' Million Â£' Million Â£' Million ---------- ---------- ------------ Reported value at 31 December 2003 25.0 18.3 399.3 Risk discount rate +1% (5.4) (3.8) (24.3) -1% 5.8 4.1 25.7 Investment return +1% 4.9 3.5 25.0 -1% (4.5) (3.2) (27.0) Current withdrawal rate x110% (3.4) (2.4) (16.1) x90% 3.6 2.5 16.1 Unit values +10% - - 38.6 -10% - - (35.3) D. INVESTMENT RETURN ASSUMPTIONS As discussed in note A, the investment assumptions have been changed to an unsmoothed basis and the 2002 figures have been restated accordingly. The impact of the removal of smoothing on the 2002 result was to reduce the Achieved Profit from life assurance and unit trust business before tax by Â£58.2 million and reduce the Achieved Profit from life assurance business after tax by Â£41.4 million. E. RECONCILIATION OF MSSB FIGURES TO ACHIEVED PROFIT FIGURES 2003 2002 Â£' Million Â£' Million -------- -------- MSSB profit before tax 10.1 (41.2) Movement in life value of in-force 66.8 (11.6) -------- -------- Achieved profit before tax for life business 76.9 (52.8) Movement in unit trust value of in-force 27.0 (10.1) -------- -------- Achieved profit before tax for life and unit trust business 103.9 (62.9) ======== ======== MSSB net assets 179.6 186.0 Less: purchased value of in-force (51.6) (54.0) Add: life value of in-force 313.1 267.8 -------- -------- Achieved profit net assets for life business 441.1 399.8 Add: unit trust value of in-force 86.2 67.3 -------- -------- Achieved profit net assets for life and unit trust business 527.3 467.1 ======== ======== This information is provided by RNS The company news service from the London Stock Exchange

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