Final Results

St. James's Place Capital PLC 01 March 2005 PRESS RELEASE St. James's Place Capital Preliminary Announcement 1 March 2005 St. James's Place Capital plc today announces its annual results for the year ended 31 December 2004. The text of the announcement is attached: Enquiries: Mike Wilson, Chairman Tel: 020 7514 1907 Andrew Croft, Group Finance Director Tel: 020 7514 1907 Nitya Bolam, Brunswick Tel: 020 7404 5959 Announcement of Annual Results for the year ended 31 December 2004 PRE-TAX PROFIT of Â£142.3 MILLION UP 37% St James's Place Capital plc (SJPC), the wealth management group, announces its annual results for the year ended 31 December 2004. Achieved Profit highlights include: â€¢Total Group profit before tax of Â£142.3 million up 37% (including Â£28.0 million from sale of LAHC) (2003: profit before tax of Â£103.9 million) â€¢Group operating profit up 43% at Â£82.2 million (2003: Â£57.5 million) â€¢New business profits of Â£38.0 million for the year (2003: Â£25.0 million) up 52% Other highlights include: â€¢New business for the year up 19% (measured on an annual premium equivalent) â€¢New business per Partner up 18% â€¢New single premiums of Â£1.2 billion â€¢Funds under management up 20% to Â£9.5 billion Proposed final dividend of 1.6p per share making a total dividend for the year of 2.85p (2003: 2.75p) an increase of 3.6% for the full year. Mike Wilson, Chairman, commented: 'We are delighted that the strong new business growth has translated into a substantial 37% growth in pre-tax profit. The 20% increase in funds under management to Â£9.5 billion is also particularly pleasing. We are confident that our long established model of having our own dedicated distribution of experienced advisers, the St. James's Place Partnership, will give us an even greater competitive advantage in the future world of depolarisation.' SUPPORTING STATEMENT CHAIRMAN'S STATEMENT This is my first statement since assuming the role of Chairman on 1 September 2004. This announcement also includes the Chief Executive's Statement and a Financial Commentary. Financial performance It is pleasing to report a strong performance in 2004, with the recovery in new business first seen in September 2003 continuing throughout 2004. New business from long-term savings and investment (measured on the industry basis of annual premiums plus one tenth of single premiums) was up 19% over the year. The pre-tax profits for the full year on the Modified Statutory Solvency Basis ('MSSB') were Â£38.8 million (2003: Â£10.1 million). Shareholders will recall that the MSSB result reflects the underlying current year cash flows of the business. Therefore, due to the long-term nature of life assurance business, we also present our results on the Achieved Profit Basis which takes into account future expected cash flows from the in-force business. The Board remains of the view that this basis provides a more meaningful measure of the Company's performance. The pre-tax Achieved Profit result for the year at Â£142.3 million was up 37% over the 2003 pre-tax profit of Â£103.9 million, whilst the operating profit for the year, was Â£82.2 million (2003: Â£57.5 million), an increase of 43%. Within both the MSSB and the Achieved Profit result for the year is the profit of Â£28 million from the disposal of our holding in LAHC announced on 1 July 2004. The Financial Commentary provides further details on the results for the year and the disposal of LAHC. Final dividend & outlook Subject to the approval of shareholders at the Annual General Meeting, a final dividend of 1.6 pence per share will be paid to shareholders on the register on 11 March 2005, making a total of 2.85 pence for the full year, up from 2.75 pence in 2003. The proposed dividend payment date is 18 May 2005. This 3.6% increase in the 2004 full year dividend reflects the Board's belief that the Group is now in a position to be able to continue to grow dividends in the future. Partners and staff 2004 has been an exceptionally busy period for the Group and probably the busiest year in our history. Despite the challenges, detailed in Mark Lund's Chief Executive's Statement, once again both members of the Partnership and our staff have continued to show their enthusiasm and commitment. On behalf of the Directors and shareholders I would therefore like to thank all members of the St. James's Place community for their contribution to our 19% growth in new business last year. Foundation The St. James's Place Foundation, the Group's Charitable Trust, is an integral part of the day to day life of the St. James's Place community. Over 85% of our community give to the Foundation on a monthly basis by Gift Aid and throughout the year there are many fund raising social events held. The money raised from Gift Aid, social events and sponsorship for individual challenges is matched by the Group. Including this matching, a record Â£1.5 million was raised for the Foundation in 2004. Succession and Board changes During the second half of 2004 we completed the final part of the previously announced succession plan. On 1 September 2004 Mark Lund was appointed Chief Executive and I took over as full time Chairman from Sir Mark Weinberg, who continues to be closely involved with the Group as an active President. In addition, on 1 September 2004 Andrew Croft, whose appointment as Group Finance Director was announced in June 2003, joined the Board and Sarah Bates was appointed as an independent non-executive director. I am delighted to announce an additional Board appointment with effect from the Annual General Meeting on 12 May 2005. Subject to shareholder approval, Simon Gulliford will join the Board as an independent non-executive director. Simon has a wealth of marketing experience, most recently as Group Marketing Director of Barclays plc. Lord Weir and Anthony Loehnis will be resigning from the Board with effect from the AGM on 12 May 2005. Both William and Anthony have played an important role in overseeing the development of the Company and I would like to thank them both on behalf of the Board and shareholders for their immense contribution, support and commitment over the years. We expect a number of other changes on the Board over the next year or so in order to achieve full compliance with the new Combined Code. I would like to take this opportunity on behalf of the shareholders and the SJP community both past and present, to thank Sir Mark Weinberg for his invaluable contribution in building St. James's Place, in just 13 years, to a FTSE 250 company and one of the United Kingdom's leading wealth management groups. We look forward to Mark's continued involvement with the Group as President and Chairman of the Investment Committee, as well as playing a role in strategic planning. Mike Wilson 28 February 2005 CHIEF EXECUTIVE'S STATEMENT This is my first statement since assuming the role of Chief Executive on 1 September 2004. St. James's Place is very much a growth company and we see exciting prospects for continued growth over the longer term, which we believe will deliver superior shareholder returns. We focus all our efforts on the UK market place and our aim is to be regarded by clients as the most professional and trusted adviser on wealth management. We have, and will continue to have, an exclusive relationship with the St. James's Place Partnership for the distribution of the products and services available from St. James's Place. New business Our longer term goal is to grow new business by 15 - 20% per annum. It is therefore very pleasing to be able to report that in 2004 new business from long-term savings and investments grew by 19% (as measured on the industry measure of annual premiums, plus one tenth single premiums). There was particularly strong growth in the first two quarters of 2004 resulting in a 31% increase for the first half compared with the same period in 2003. As a consequence the quarter by quarter comparisons will become easier as 2005 progresses. All classes of business grew and we were particularly pleased to see new single premiums of Â£1.2 billion, which included a 32% increase in unit trust business and a 40% increase in single premium pensions business. Gross fees from our other wealth management services rose by 2% to Â£21.2 million (2003: Â£20.8 million). The St. James's Place Partnership Whilst membership of the St. James's Place Partnership rose by only 1% during the year to 1,131 it is pleasing to note that individual Partner productivity increased by 18% during 2004. We remain committed to attracting the highest quality advisers and to maintaining the highest standards by retaining only those Partners who are profitable to the Group. Many financial advisers have been awaiting the final depolarisation rules and, since these rules were only published in early December, have yet to make decisions about where their own futures are best served. For the financial advisers who can meet our quality standards we believe we are the right home for them. We remain confident that St. James's Place will be one of the chief beneficiaries of depolarisation as experienced Independent Financial Advisers consider their own options for the future. Investment management 2004 was a more stable year for the markets and the FTSE All-Share Index posted a gain over the year of 9.2%. Once again the overall performance of our funds has been very pleasing and more than met our goal of generating consistent and superior investment results for our investors. The Investment Committee remains at the heart of our investment approach. Two new members joined the Committee during 2004 - Sarah Bates, our recently appointed independent non-executive director and myself. We also engaged the services of Keith Goulborn as property adviser, who is a specialist commercial property consultant and former manager of Unilever plc's UK operational and corporate property portfolio. Delivering strong investment performance is the primary objective of the Investment Committee and we are naturally very pleased when this is independently recognised by the industry awards we continue to receive. Lipper/ Citywire named Andrew Green, investment manager of our GAM Managed Funds and the Recovery Unit Trust, as investment manager of the year for 2004, and placed five of our ten external investment managers in their survey naming the top 100 fund managers. Standard & Poors once again recognised our investment performance with awards for two funds in 2004, the THSP Managed and the Far East Pension Funds. In addition, the Combined Actuarial Performance Services (CAPS) survey ranks three of our five Managed Funds Pension Funds within the top 10 of all Managed Funds surveyed over the 12-month period ending 31 December 2004. Overall, a very pleasing year for St. James's Place investment performance. In April 2004 we added a commercial property fund to our UK range of life and pension funds. This fund is managed by Insight Investment and the inflows exceeded all expectations with Â£185 million under management as at 31 December 2004. Also during the year we appointed the Californian based investment firm Reed Conner & Birdwell to manage our range of North American funds. We are particularly pleased that funds under management at 31 December 2004 were Â£9.5 billion, up 20% since the start of the year. Regulation and compliance The year saw significant effort expended on the implementation of substantial regulatory change - the most substantial change many of us have experienced during our time in the industry. The key regulatory changes have been: â€¢ On 1 October 2004 mortgage regulation became effective. â€¢ On 14 January 2005 general insurance products became regulated. â€¢ The regulations for depolarisation were announced on 1 December 2004 requiring adoption by 1 June 2005. â€¢ Life companies were required to implement the FSA's new Prudential Sourcebook. The above, combined with our commitment to having the industry leading compliance standards, resulted in our employees and the St. James's Place Partnership expending considerable cost and time on making these changes. Investment in IT systems We have previously announced a major IT infrastructure project through our Service Delivery Infrastructure programme (SDI). SDI will transform our new business processing with a modern and efficient electronic system. The first phase of the software has been delivered and is in the process of being implemented in our offices throughout the UK. The total cost of the project continues to remain in line with our original Â£12 million estimate. During the year we have incurred expenditure of Â£5.6 million, bringing the total cost to date to Â£9.0 million. The remaining Â£3 million of cost is expected to be incurred this year. Partners and employees Mike Wilson in his statement has already covered the magnificent job performed during the year by the Partnership and our employees. I would just like to add my thanks to the whole St. James's Place community, including our outsource service providers, for their efforts in 2004 - they are exceptionally committed and dedicated teams. 2005 developments Depolarisation has arrived and companies are required to adopt the new rules no later than 1 June of this year. We have made the decision to depolarise during May, once our busy first quarter and the tax year-end is complete. However, as shareholders will be aware, St. James's Place is already well down the road to being depolarised and our panels of providers for mortgages, protection and pensions already reflect this approach. We do not intend to make any significant changes to these panels but we do intend to take advantage of the opportunity to fill any gaps which depolarisation allows us to do. Recently, we enhanced our offering by adding a panel of providers for Private Medical Insurance and Group Risk, and in May we will increase the range of products we can offer to clients by adding Pension Annuities, Immediate Needs Annuities, Group Pension Plans, Section 32 Plans and Offshore Funds. Our aim is to continue to manufacture around 80% of our new business. The other significant development relates to the changes the Government will be implementing in April 2006 in respect of Pensions Simplification. We welcome this change and regard it as an important development which should give rise to significant new business opportunities as the demand from clients for trusted face to face advice grows in our target market place. With this very much in mind, we are continuing to devote significant effort to the development of our pensions offering for the post Pensions A-Day market. Outlook We are in a period of unprecedented change and this is set to continue. 2005 has already seen the introduction of general insurance regulation; by the half-year we will enter the new depolarised regulatory regime and in April 2006 the new pensions rules come into force. We believe that these changes present us with opportunities to strengthen and grow our business. In addition to this regulatory and Government driven change, we feel that over the longer term the social and economic backdrop is very much in our favour. People are living longer than ever before and as a consequence need to provide for a longer life expectancy and a longer retirement. Just as importantly, the responsibility for pension provision is continuing to transfer from the State and companies to individuals. For many there is no longer certainty upon retirement. The task of determining how much to save and invest, where to make those investments, how to monitor their performance and how to structure the retirement pot effectively, will be a challenge they will not wish to take on alone. Our proven adviser based approach to wealth management, built around experienced members of the St. James's Place Partnership, who provide trusted face to face advice to clients, places us in a uniquely strong position to capitalise on these opportunities. Mark Lund 28 February 2005 FINANCIAL COMMENTARY The Financial Commentary is presented in two sections: a section providing a commentary on the results for the year and a second section covering other matters of interest to shareholders and investors. Section 1:Commentary on the Results for the year In common with previous reports, we have presented our results on a Modified Statutory Solvency Basis (MSSB), which reflects the current year cash flow and an Achieved Profit basis, bringing into account the value of future cash flows on the in-force business. The Commentary covers the results on both bases. Modified Statutory Solvency Basis (MSSB) The table below shows the pre-tax profit of the Group on this basis. Year Ended Year Ended 31 December 31 December 2004 2003 Â£' Million Â£' Million ------------ ------------ Life business 9.0 1.6 Unit trust business 12.0 11.0 Other (4.6) (2.5) ------------ ------------ 16.4 10.1 IT systems development (5.6) (3.4) ------------ ------------ Operating profit 10.8 6.7 LAHC 28.0 3.4 ------------ ------------ Total pre-tax profit 38.8 10.1 ============ ============ The life business pre-tax profit for the year was Â£9.0 million (2003: Â£1.6 million). The result includes a pre-tax reserve of Â£4.0 million, within the long-term business provision, against an adverse outcome of a VAT case awaiting judgment from the European Court of Justice. Further details of this case and its possible implications can also be found in section 2 of this commentary. The profits for the unit trust business were Â£12.0 million pre-tax (2003: Â£11.0 million). As previously commented in the 2004 Interim Statement, there has been a minor change in the expense recharging mechanism and the current year profit is after an additional expense allocation of Â£2.2 million. The other operations of the business incurred a loss for the year of Â£4.6 million pre-tax (2003: loss of Â£2.5 million). In the Interim Report shareholders were notified of forthcoming one-off costs in the second half of the year of between Â£2 - 3 million, relating to our commitment to having leading compliance standards. The actual costs were at the top end of the range and have been included in this Â£4.6 million loss. In addition, in the second half of the year, we have provided an amount of Â£1.0 million in respect of the potential redress required on some 11,250 in-force endowment policies. As mentioned in the Chief Executive's Statement, the costs incurred on the strategic IT systems development during the year were Â£5.6 million pre-tax (2003: Â£3.4 million pre-tax). Taking into account these factors the pre-tax operating profit was Â£10.8 million, up from Â£6.7 million in 2003. Excluding the cost of the strategic IT systems development, the pre-tax profits were Â£16.4 million (2003: Â£10.1 million). As shareholders are aware we disposed of our holding in LAHC during the year and have reported a profit on the disposal of Â£28 million which is as set out in Note 5 to this announcement. The resulting total pre-tax profits for the year were Â£38.8 million, compared with Â£10.1 million in 2003. The total net assets on the modified statutory solvency basis were Â£215.0 million (2003: Â£179.6 million) resulting in a net asset per share of 48.9 pence (2003: 41.6 pence). Achieved Profit Basis The table below summarises the pre-tax profit of the combined business. Year Ended Year Ended 31 December 31 December 2004 2003 Â£' Million Â£' Million ------------ ------------ Life business 62.9 44.0 Unit trust business 29.5 19.4 Other (4.6) (2.5) ------------ ------------ 87.8 60.9 IT systems development (5.6) (3.4) ------------ ------------ Operating profit 82.2 57.5 Investment return 30.0 55.3 Economic assumption changes 2.1 (1.1) Tax & solvency changes - (11.2) ------------ ------------ Profit from core business 114.3 100.5 LAHC 28.0 3.4 ------------ ------------ Total pre-tax profits 142.3 103.9 ============ ============ The life business operating profit for the year was Â£62.9 million (2003: Â£44 million) and a full analysis of this result is shown in the Notes to this announcement. The significant improvement is predominantly the result of higher new business profit for the year, which at Â£23.7 million (2003: Â£13.5 million) was some 76% higher than in 2003. There was a negative experience variance of Â£2.8 million (2003: negative Â£6.9 million) principally arising from the Â£4.0 million reserve in the long-term business provision previously noted. The operating profits of the unit trust business were up 52% at Â£29.5 million (2003: Â£19.4 million) with the increase resulting from higher new business profit of Â£14.3 million (2003: Â£11.5 million and a positive experience variance of Â£5.9 million (2003: positive Â£2.2 million). The growth in the new business profit reflects both the higher new business volumes and the small change to the expense recharging noted earlier. The positive experience variance reflects an improvement in the persistency of the business. A full analysis of the result is shown in the Notes to this announcement. As noted earlier in this statement, the other operations of the Group incurred a loss for the year of Â£4.6 million (2003: loss of Â£2.5 million) and the costs of the strategic IT systems development were Â£5.6 million (2003: Â£3.4 million). The resulting pre-tax operating profit for the year was Â£82.2 million (2003: Â£57.5 million) and the operating profit, excluding the IT systems development project, was up 44% from Â£60.9 million to Â£87.8 million. During the year the average after tax increase in our fund prices was some 6% above the achieved profit assumption resulting in a positive investment variance of Â£30 million (2003: Â£55.3 million). Taking into account the Â£28 million profit from the disposal of LAHC referred to earlier in this statement, plus a small profit arising from changes to the economic assumptions, the total pre-tax achieved profit for the year was Â£142.3 million (2003: Â£103.9 million). The total net assets on an achieved profit basis at 31 December 2004 were Â£633.2 million (2003: Â£527.3 million) resulting in a net asset per share of 144.1 pence (2003: 122.1 pence per share). Section 2:Other matters Noted below are a number of issues about the Group that are of interest to shareholders. (i) Expenses This section provides a reminder to shareholders of categories and nature of expenditure incurred. Shareholders will recall that 'commission, investment expenses and third party administration costs' are met from corresponding policy margins. Any variation in these costs flowing from changes in the volumes of new business or the level of the stock markets does not directly impact the profitability of the Company. The 'other new business related costs', such as sales force incentivisation vary with the level of sales - determined on our internal measure. As production rises or falls these costs will move in the corresponding direction. 'Establishment costs' are the running costs of the Group's infrastructure and are relatively fixed in nature in the short term. Consequently these costs remain broadly the same irrespective of new business volumes. The 'contribution from third party product sales' reflects the net income received from wealth management sales of Â£2.8 million (2003: Â£5.3 million), sales of stakeholder products of Â£2.1 million (2003: Â£1.5 million) and sales through the Protection Panel of Â£9.3 million (2003: Â£6.7 million). In previous commentaries we have provided a breakdown of the life company expenditure into the categories detailed above. A large number of shareholders have requested the analysis be extended to cover the combined financial services activities. The table below provides this information. Year Ended Year Ended 31 December 31 December 2004 2003 Category Â£' Million Â£' Million ------------ ------------ Paid from policy margins Commission 99.1 83.6 Investment expenses 25.2 19.5 Third party administration 20.5 18.9 ------------ ------------ 144.8 122.0 Direct expenses Other new business related costs 16.7 15.4 Establishment costs 71.7 73.8 Contribution from third party product sales (14.2) (13.5) ------------ ------------ 74.2 75.7 ------------ ------------ 219.0 197.7 ============ ============ We have undertaken a review of the capacity of our property portfolio, particularly since a growing number of recruits now have their own offices. As a result of this review the Board took the decision in early 2005 to announce the closure of one office and the contraction of a number of other locations into less space, freeing up some 10% of our regional property capacity. If this unutilised space remains unlet then it is likely we will need to establish a provision of some Â£1.8 million in the first half of 2005 to cover the expected future rental of this space. We expect future annualised savings from these moves to be in the region of Â£0.8 million. (ii) Tax position As highlighted in previous financial commentaries, the UK life company has not been receiving full tax relief for all of its expenses, as the tax relief is principally obtained by offset against tax deductions on the income and capital gains arising in the unit linked funds. Hence if the unit linked funds do not realise sufficient capital gains, or if realised capital gains are sheltered by realised capital losses carried forward, full tax relief is not obtained. At 31 December 2004 there are approximately Â£116.0 million of excess unrelieved expenses which are being carried forward, which require fund tax deductions of some Â£23.2 million to obtain relief. In addition to the unrelieved surplus expenses, there is also a further Â£200 million of expenses, which under the life company tax regulations are deferred over a period of seven years and will fall into account in future years. The fund tax deductions ultimately required to relieve these deferred expenses would be some Â£40 million. The cash crystallisation of these tax deductions is dependentupon the level and timing of future net realised capital gains. For 2004 the fund tax deductions booked in the MSSB result are only Â£10.1 million (2003: Â£7.6 million), which is some Â£7.0 million lower than would ordinarily be expected. On an Achieved Profit basis, the impact of the shortfall of fund deductions, measured as the difference between the expected tax deductions and the net present value of deductions anticipated in future years is lower (approximately Â£3 - 4 million). At 31 December 2004, in aggregate the net realised and unrealised position of the funds was more or less neutral and the higher stock market levels have provided a greater degree of likelihood that fund deductions will be received in the near future. Consequently, at the end of the year, an MSSB deferred tax asset of Â£7.3 million (2003: Â£ nil) has been recognised in relation to those expenses expected to be relieved against these fund deductions. The total value of modelled fund deductions on the Achieved Profit basis places a value of Â£34.0 million on these expenses (2003: Â£22.6 million). (iii) European Court of Justice VAT Case On 12 January 2005 the Advocate General (AG) released his opinion in a European Court of Justice case, the Arthur Andersen (C-472/03) case. If the Court follows the AG's opinion, the VAT exemption for insurance related services may be removed, resulting in the addition of VAT to the administration charges incurred on insurance related outsourced contracts. SJPC is actively following this case and is reviewing the options available to reduce or mitigate any adverse decision from the Court. Both the MSSB and Achieved Profit result include a pre-tax cost of Â£4.0 million included in the long-term business provision, being the increase in future policy maintenance costs arising from this decision. Shareholders should be aware that in the event of an adverse decision, in addition to this impact on the existing business, there would also be an on-going impact on the Achieved Profit value of new business - in the current year this impact would, without any mitigating actions, have been between Â£1 - 2 million pre-tax. We understand the European Court of Justice is scheduled to make its decision on 3 March 2005. (iv) Operational Risks and Solvency Requirements Operational Risks The Financial Commentary in the 2003 Report and Accounts provided some detail on the operational risks of the Group. Shareholders will recall from this Commentary that St. James's Place Capital: â€¢ is a unit linked business and has no with-profit business â€¢ has never written business with onerous investment guarantees or options â€¢ has a conservative investment strategy for shareholder assets â€¢ has no defined benefit pension scheme liabilities â€¢ matches, wherever possible, its liabilities to appropriate assets to minimise exposure to fluctuating stock markets and interest rates. â€¢ has never sold 'flavour of the year' products such as high tech funds, precipice bonds and split-capital investment trusts. Solvency Requirements The required minimum solvency margin for the two life businesses is currently approximately Â£30 million. All of the insurance companies are capitalised to support their planned business without the need for further capital resources. There are no formal intra-group arrangements in place to provide capital to particular funds or business units. The FSA has recently issued Policy Statements 04/16 - Integrated Prudential Sourcebook for Insurers, which took effect from January 2005. This policy statement includes the framework for life companies to calculate their own Individual Capital Assessment (ICA). Typically this involves placing a realistic value on the assets and liabilities of the Company and making explicit allowances in the valuation for the actual business risks. We have completed the first ICA for the UK life company and we do not foresee an increase in the capital required to support the business. In calculating the Achieved Profit result, the cost of maintaining this solvency capital is deducted from the value placed on the in-force business - the total amount deducted at 31 December 2004 was approximately Â£7.2 million post tax (2003: Â£8.1 million). (v) FRS27 and Related Memorandum of Understanding FRS 27 for Life Assurance was published in December 2004 with a view to full compliance for accounting periods ending on or after 23 December 2004. In view of the tight timescales to implementation, the Accounting Standards Board (ASB) has agreed to certain modifications to the disclosure requirements for 2004. These modified requirements are set out in a Memorandum of Understanding (MOU) to which the ASB, Association of British Insurers and representatives of the life insurance industry are signatories. Accordingly we have set out below the various disclosures required by the MOU. The life assurance business of the Group, which is transacted within the long-term funds of approved insurance companies, is all non-profit business, comprising both unit linked and non-linked business. Life assurance assets attributable to shareholders have been determined by deducting the regulatory value of insurance and other liabilities from the value of assets. The capital available in respect of the life assurance business is summarised in the table below. SJP (UK) SJPI Others/Consolidation Group Total Adjustment Â£' Million Â£' Million Â£' Million Â£' Million ----------- ----------- ------------ --------- Shareholders' funds outside fund 7.0 0.0 48.3# 55.3 Shareholders' funds inside fund 70.0 40.2 49.5* 159.7 ---------- --------- ------------ --------- Total shareholders' funds 77.0 40.2 97.8 215.0 Adjustments on regulatory basis: Adjustment to (5.4) (11.9) - (17.3) assets Other (16.3) (4.5) - (20.8) adjustments -------- --------- ------------ --------- Total available capital resources 55.3 23.8 97.8 176.9 ======== ========= ============ ========= # This represents the other net assets of the Group including capital allocated for other regulated businesses. * This adjustment represents the purchased value of in-force business within the life funds. The sensitivity of the life assurance shareholders' funds to changes in market conditions are set out in Note 12 to this announcement. Regulatory capital required and the capital management policies of the Group are noted in Section (v) of this commentary. Restrictions apply to the transfer of assets from any long-term funds. At all times each long-term fund must maintain an excess of admissible assets over liabilities. Transfers of assets from the shareholders' funds are subject to normal accounting rules relating to distributable reserves. Within each business unit there are no restrictions on the use of capital. (vi) Developments in Achieved Profit Reporting On 5 May 2004 a Forum of Chief Financial Officers drawn from the major European insurance companies launched the European Embedded Value Principles (the EEV principles) and agreed to adopt these principles in calculating embedded values included as supplementary financial reporting from the end of 2005. SJPC intend to adopt the EEV principles in 2005 and will provide details of expected impact on the financial numbers at the half year. (vii) International Financial Reporting Standards As shareholders will be aware, SJPC, like other listed companies, will be reporting our 2005 Financial Statements using International Financial Reporting Standards (IFRS). The introduction of IFRS will impact the MSSB results, which will be replaced with figures prepared on the new basis. We will continue to publish Achieved Profit results as Supplementary Information. As highlighted in previous financial commentaries, the two main IFRS's that impact on the Group are IFRS2 - Share Based Payments and IFRS4 - Insurance Contracts. The major areas of impact on the Financial Statements are as follows: (i) IFRS 2 requires the fair value of share options to be expenses over the vesting period of the options. This is expected to reduce the future profitability of the Group by Â£1.5 million per annum, however there will be little change to the opening net asset position at 1st January 2005. (ii) IFRS 4 requires the pure protection contracts sold by the Group to continue to be accounted for under the UK Generally Accepted Accounting Practice existing at the end of 2004. (iii) IFRS 4 requires the investment contracts sold by the Group (e.g. life bonds, pensions and unit trust business) to be accounted for under IAS 39 Financial Instruments and IAS 18 Revenue. IAS 18 Revenue requires the initial charge arising on new business to be spread over the term of the contract, rather than being reported as income at point of sale. Similarly, the incremental costs of acquiring the business (e.g. commission) are also required to be spread over the deemed term of the contract. This spreading of income and costs will give rise to a Deferred Acquisition Cost (DAC) Asset and a Deferred Income Reserve (DIR) in the Balance Sheet. For our contracts the initial charge is generally greater than the cost of acquiring the business, and hence the DIR will be greater than the DAC. Consequently, there is a net deferral of income, although the underlying cash flows remain unaffected. Premiums received on investment contracts will be accounted for as deposits under IFRS and only the margin arising will be reported in the income statement rather than the total single premium. (iv) Where the Group's life funds invest in the Group's unit trusts, it may be necessary to consolidate these holdings. (v) There will be some significant presentational changes to both the revenue statements and balance sheet. (vi) There is a significant outstanding industry wide issue to be resolved in respect of the valuation of unit linked assets and unit linked liabilities and we are awaiting the final conclusion in respect of this issue. Taking into account the impact of the above changes and subject to the resolution of outstanding industry wide issues, we believe there will be no significant difference in reported statutory profits, but Group net assets may be reduced by up to Â£10 million. Shareholders should be aware that this financial impact is unaudited and therefore subject to change, particularly as there remains a degree of uncertainty on some key standards and interpretation. Andrew Croft 28 February 2005 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 2004 2003 --------- --------- Notes Â£' Million Â£' Million Earned premiums, net of reinsurance Gross premiums written 4 1,134.8 990.2 Outwards reinsurance premiums 4 (27.2) (27.9) --------- --------- 1,107.6 962.3 Investment income 452.5 74.3 Unrealised gains on investments 360.0 1,014.0 Other technical income 1.4 0.1 --------- --------- 1,921.5 2,050.7 --------- --------- Claims incurred, net of reinsurance Claims paid - Gross amount (498.9) (360.5) - Reinsurers' share 23.3 21.0 --------- --------- (475.6) (339.5) Change in the provision for claims - Gross amount 0.5 (4.6) - Reinsurers' share (1.6) (1.4) --------- --------- (1.1) (6.0) --------- --------- (476.7) (345.5) --------- --------- Changes in other technical provisions, net of reinsurance Long-term business provision - Gross amount 8.6 (8.0) - Reinsurers' share (6.9) 20.2 --------- --------- 1.7 12.2 Technical provisions for linked liabilities (1,260.4) (1,538.2) Net operating expenses (160.6) (155.5) Investment expenses and charges (21.0) (16.1) Other technical charges (2.1) (2.5) Tax attributable to the long-term business 8.0 (3.4) --------- --------- (1,911.1) (2,049.0) --------- --------- Balance on the long-term business technical account 10.4 1.7 ========= ========= CONSOLIDATED PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Notes Â£' Million Â£' Million Balance on the long-term business technical account 10.4 1.7 Tax credit attributable to balance on long-term business technical account (1.4) (0.1) --------- --------- Shareholders' profit from long-term business 9.0 1.6 Investment income Income from associated undertaking - 3.4 Income from other investments 3.3 3.9 Investment expenses and charges (1.2) (2.1) Other income Income from unit trust operations 12.0 11.0 Other income 4.0 3.5 Other charges (16.3) (11.2) --------- --------- Operating profit 10.8 10.1 Profit on sale of investment - LAHC 5 28.0 - --------- --------- Profit on ordinary activities before tax 4 38.8 10.1 Tax on profit on ordinary activities 4 (2.0) (3.5) --------- --------- Profit on ordinary activities after tax, being profit for the financial year 36.8 6.6 Dividends 6 (12.3) (11.8) --------- --------- Retained profit/(loss) for the financial year 24.5 (5.2) ========= ========= Pence Pence Dividend per share 6 2.85 2.75 Basic earnings per share 7 8.5 1.5 Diluted earnings per share 7 8.2 1.5 Basic and diluted adjusted earnings per share 7 2.0 1.5 In arriving at operating profit, unless otherwise stated, all amounts are in respect of continuing operations, in both the current and previous year. The profit on sale of the investment in LAHC is classified as a discontinued operation. In accordance with the amendment to FRS3 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 2004 2003 --------- --------- Â£' Million Â£' Million Opening shareholders' funds 179.6 186.0 Profit for the financial period 36.8 6.6 Dividends (12.3) (11.8) --------- --------- Retained profit /(loss) for the period 24.5 (5.2) P&L reserve credit in respect of share option charges 0.5 0.8 Consideration paid for own shares (1.4) (2.5) Issue of share capital 11.8 0.5 --------- --------- Net increase /(decrease) to shareholders' funds 35.4 (6.4) --------- --------- Closing shareholders' funds 215.0 179.6 ========= ========= CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 2003 ---------- ---------- Assets Notes Â£' Million Â£' Million Investments Land and buildings 1.4 1.3 Other financial investments --------- --------- Shares and other variable yield 8 - 31.6 securities Debt securities and other fixed income 57.6 52.8 securities Deposits with credit institutions 71.8 69.7 ---------- --------- 129.4 154.1 ----------- ---------- 130.8 155.4 Acquired value of long-term business in-force 49.5 51.6 Assets held to cover linked liabilities 7,456.2 6,195.8 Reinsurers' share of technical provisions Long-term business provision 66.1 73.3 Claims outstanding 4.2 5.8 ---------- ---------- 70.3 79.1 Debtors Debtors arising out of direct insurance operations - due from policyholders 8.5 4.5 Other debtors 55.9 52.5 ---------- ---------- 64.4 57.0 Other assets Tangible assets 5.7 5.8 Cash at bank and in hand 88.0 48.4 ---------- ---------- 93.7 54.2 Prepayments and accrued income Deferred acquisition costs 44.5 53.5 Other prepayments and accrued income 4.2 5.1 ---------- ---------- 48.7 58.6 ---------- ---------- Total assets 7,913.6 6,651.7 ========== ========== CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004 2003 --------- --------- Liabilities Notes Â£' Million Â£' Million Capital and reserves Called up share capital 9 65.9 64.8 Share premium account 11 15.9 5.1 Shares to be issued 11 0.1 0.2 Other reserves 11 2.2 2.2 Profit and loss account 11 141.6 117.4 --------- --------- 225.7 189.7 Own shares reserve 11 (10.7) (10.1) --------- --------- Equity shareholders' funds 215.0 179.6 Technical provisions Long-term business provisions 12 104.3 112.9 Claims outstanding 19.9 20.4 --------- --------- 124.2 133.3 Technical provisions for linked liabilities 7,456.2 6,195.8 Provisions for other risks and charges 13 22.4 16.1 Creditors Creditors arising out of direct insurance 11.2 9.4 operations Amounts owed to credit institutions 14 22.4 53.6 Amounts due to reinsurers 12 11.3 11.6 Other creditors including taxation and social 16.5 15.2 security Proposed dividends 6 7.0 6.4 --------- --------- 68.4 96.2 Accruals and deferred income 27.4 30.7 --------- --------- Total liabilities 7,913.6 6,651.7 ========= ========= CONSOLIDATED CASH FLOW STATEMENT (EXCLUDING POLICYHOLDER FUNDS) Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Notes Â£' Million Â£' Million Shareholders' net cash outflow to long-term - - business Other operating cash flows attributable to shareholders 19.8 13.9 --------- --------- Net cash inflow from operating activities 15 19.8 13.9 Interest Interest received 3.2 3.7 Interest paid (1.2) (2.1) --------- --------- 2.0 1.6 Taxation Corporation tax paid (5.2) (3.5) Capital expenditure and financial investment Purchase of tangible fixed assets (3.1) (1.7) Sale of fixed assets 0.4 0.4 Consideration paid for own shares (1.4) (2.5) --------- --------- (4.1) (3.8) Acquisitions and disposals Net disposal proceeds from sale of investment in LAHC 64.4 - Equity dividends paid (3.8) (11.8) --------- --------- Net cash inflow/(outflow) before financing 73.1 (3.6) Financing (Repayment)/draw down of loan (31.2) 8.6 Issue of ordinary share capital 3.7 0.5 --------- --------- (27.5) 9.1 --------- --------- Net cash inflow in the year 45.6 5.5 ========= ========= Net cash inflow was applied as follows: Increase in cash holdings 48.6 7.2 Net portfolio investments Withdrawals from credit institutions (3.0) (1.7) --------- --------- Net investment of cash flows 45.6 5.5 ========= ========= 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 and in accordance with the Association of British Insurers' Statement of Recommended Practice on Accounting for Insurance Business ('ABI SORP') dated November 2003. 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 is required to be adjusted under Schedule 9A of the Companies Act 1985 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 2003. 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 2004 2003 --------- --------- Â£' Million Â£' Million Net premiums comprise: Life business Single premiums 675.9 587.5 Regular premiums 92.3 97.8 Reinsurances - Risk (12.8) (13.6) --------- --------- 755.4 671.7 --------- --------- Pension business Single premiums 240.1 168.4 Regular premiums 109.4 118.6 Reinsurances - Risk (1.2) (1.3) --------- --------- 348.3 285.7 --------- --------- Permanent health insurance Regular premiums 17.1 17.9 Reinsurances - Risk (13.2) (13.0) --------- --------- 3.9 4.9 --------- --------- 1,107.6 962.3 ========= ========= Gross premiums comprise: Individual business 979.3 890.4 Group contacts 155.5 99.8 --------- --------- 1,134.8 990.2 ========= ========= Gross new annualised premiums comprise: Life - single premiums 675.9 587.4 Life - regular premiums 11.1 11.3 Pension - single premiums 240.1 168.4 Pension - regular premiums 13.2 13.2 Permanent health 1.9 3.2 --------- --------- 942.2 783.5 ========= ========= 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£196.9 million (2003: Â£189.8 million). Profit on ordinary activities Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Life business 9.0 1.6 Unit trust business 12.0 11.0 Other (4.6) (2.5) IT systems development (5.6) (3.4) --------- --------- Operating profit 10.8 6.7 --------- --------- LAHC 28.0 3.4 --------- --------- Profit on ordinary activities before tax 38.8 10.1 --------- --------- Taxation Life business 1.4 0.1 Unit trust business (3.6) (3.3) Other 0.2 0.7 LAHC - (1.0) --------- --------- (2.0) (3.5) --------- --------- Profit on ordinary activities after tax 36.8 6.6 ========= ========= The life profit before tax is analysed as a loss from the UK life business of Â£2.7 million (2003 loss: Â£4.6 million) and a profit from the Irish life business of Â£11.7 million (2003 profit: Â£6.2 million). Net assets 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million UK life business 118.7 118.7 Irish life business 43.5 33.1 LAHC - 31.6 Unit trust business 3.0 6.9 Other net assets 49.8 (10.7) --------- --------- 215.0 179.6 ========= ========= 5. PROFIT ON SALE OF INVESTMENT On 24 August 2004, the investment of a holding of 22.7% of the shares of Life Assurance Holding Corporation Limited was disposed of generating the following profit: Year Ended 31 December 2004 --------- Â£' Million Consideration received 66.6 Deferred consideration 11.6 Transaction costs (2.1) Carrying value of investment (31.6) Provision for warranties (16.5) --------- 28.0 ========= The provision of Â£16.5 million relates to possible claims under the transaction warranties and indemnities for which there is a maximum potential liability of Â£22.4 million. To the extent provisions are not required, these would be released and further profit on the disposal would be reported. As at 28 February 2005 no warranties claims have been received by SJPC. The disposal qualifies for Capital Gains Tax exemption under Schedule 7AC TCGA 1992 and therefore the proceeds are non-taxable. The deferred consideration has been withheld in an interest bearing escrow account against certain indemnities. 6. DIVIDENDS Year Ended Year Ended Year Ended Year Ended 31 December 31 December 31 December 31 December 2004 2003 2004 2003 ---------- ---------- ---------- --------- Pence Pence Â£' Million Â£' Million Per share Per share Interim dividend paid 1.25 1.25 5.3 5.4 Final dividend proposed 1.60 1.50 7.0 6.4 ---------- ---------- ---------- --------- 2.85 2.75 12.3 11.8 ========== ========== ========== ========= The proposed dividend of 1.6 pence per share is payable on 18 May 2005 to those shareholders on the register on 11 March 2005. The Directors are seeking approval from shareholders at the forthcoming AGM to renew their authority to offer a scrip dividend. 7. EARNINGS PER SHARE Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Pence Pence Basic earnings per share 8.5 1.5 Adjustments - disposal of LAHC (6.5) - --------- --------- Basic adjusted earnings per share 2.0 1.5 ========= ========= Diluted earnings per share 8.2 1.5 Adjustments - disposal of LAHC (6.2) - --------- --------- Diluted adjusted earnings per share 2.0 1.5 ========= ========= 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 2004 2003 --------- --------- Profit on ordinary activities after taxation Â£36.8 m Â£6.6m Adjustments - disposal of LAHC Â£(28.0 m) - --------- --------- Adjusted profit after tax Â£8.8 m Â£6.6m ========= ========= Weighted average number of shares (including shares to be issued) 434.6 m 430.3 m ========= ========= Diluted weighted average number of shares 449.3 m 433.6 m ========= ========= Number of share options for which diluted effect taken account of 52.3 m 55.4 m ========= ========= 8. SHARES AND OTHER VARIABLE YIELD SECURITIES 31 December 31 December 2004 2003 ----------- --------- Â£' Million Â£' Million LAHC - 31.6 ========= ========= On 24 August 2004, the investment of a holding of 22.7% of the shares of LAHC was sold (see note 5). 9. SHARE CAPITAL Number Nominal Value ---------- ------------- Authorised Â£' Million Ordinary shares at 15p each At 1 January 2004 and 31 December 2004 605,000,000 90.8 =========== =========== Number Nominal Value ----------- ------------- Â£' Million Issued, Allotted and Fully Paid Ordinary shares at 15p each At 1 January 2004 431,927,882 64.8 Exercise of options 7,396,864 1.1 --------- ----------- At 31 December 2004 439,324,746 65.9 ========= =========== 7,396,864 shares were issued during the year (2003: 1,215,628), 4,447,263 as a scrip dividend and 2,949,601 for cash consideration of Â£3.7 million (2003: Â£0.5 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 29,126 shares have still to be issued from this reserve. During the year options over 5.6 million shares have been granted at a range of prices between Â£1.613/4 and Â£2.49. Options outstanding under the various share option schemes at 31 December 2004 amount to 52.3 million shares (31 December 2003: 55.4 million). Of these, 35.1 million are under option to Partners of the St. James's Place Partnership, 13.8 million are under option to executives and senior management (including 4.2 million under option to Directors) and 3.4 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 2004, that had not vested unconditionally to option holders, is Â£10.7 million (2003: Â£10.1 million). The consideration paid for shares over which options have not yet been granted was Â£1.0 million. The total number of options including those in the SJP Employee Trust, together with their anticipated proceeds, are set out in the table below. Earliest date Average Number of share Anticipated of exercise Exercise options Proceeds outstanding price --------- ------------- ----------- Â£ Million Â£' Million Immediate 1.68 23.1 38.7 Jan - Jun 2005 2.08 1.3 2.7 Jul - Dec 2005 1.45 5.3 7.7 Jan - Jun 2006 0.94 4.9 4.6 Jul - Dec 2006 1.42 3.1 4.4 Jan - Jun 2007 1.64 5.3 8.7 Jul - Dec 2007 1.51 4.5 6.8 Jan - Jun 2008 0.96 2.6 2.5 Jul - Dec 2008 1.29 0.7 0.9 Jan - Jun 2009 1.57 0.7 1.1 Jul - Dec 2009 1.20 0.5 0.6 Jan - Jun 2010 2.00 0.2 0.4 Jul - Dec 2010 1.00 0.1 0.1 --------- -------- -------- 52.3 79.2 ======== ======== Included within those share options that are immediately exercisable are 12.5 million options with an expiry date before the end of July 2007 with anticipated proceeds of Â£16.7 million. 11. RESERVES Group 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 2004 5.1 0.2 2.2 117.4 (10.1) Release of reserve on issue of shares 0.1 (0.1) - - - Consideration paid for own shares - - - - (1.4) Own shares vesting charge - - (0.8) 0.8 Credit in respect of share option charges - - - 0.5 - Scrip dividend 7.3 - - - - Exercise of options 3.4 - - - - Retained profit for the year - - - 24.5 - -------- -------- -------- -------- -------- At 31 December 2004 15.9 0.1 2.2 141.6 (10.7) ======== ======== ======== ======== ======== * 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 based on the annual investigation of the long-term business. The assumptions underlying the calculation of the provision for statutory solvency purposes have been determined by the respective Board of Directors of the insurance companies on advice of professionally qualified actuaries. All such values have been determined in accordance with the regulatory requirements and in accordance with generally accepted actuarial and accounting practice. The assumptions are detailed in the returns to the regulatory authorities that are due to be submitted during the first half of 2005 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 which are subject to a margin of prudence. Linked policies The total liability for unit linked policies is equal to the sum of the value of the assets to which the contracts are linked and the long-term business provision. The long-term provision consists of sterling reserves designed to cover any future cash flows without recourse to additional capital and takes account of the risks and uncertainties for each separate class of business. The cash flows are projected assuming: â€¢ contracts remain in force until their natural expiry; â€¢ unit growth rates of between 4.8% and 6% per annum (2003: between 4.8% and 6%), depending on the tax status and territory of the contract; â€¢ a projection of current expenses assuming inflation of between 2.9% and 4% per annum (2003: between 3.5% and 4%) depending on the territory of the contract; and â€¢ mortality and morbidity costs are determined following a comparison of market data with actual experience. The rates used are based on recognised industry tables or tables provided by reassurers, suitably adjusted to reflect this comparison The key assumptions used were in the following ranges of the published tables shown: Risk Assumption Mortality Whole life assurance business 75% - 130% AM/AF92 Single premium business 90% AM/AF92 Morbidity 74% - 285% CIBT93 adj The resulting cash flows are discounted to calculate the long-term provision at a rate of interest of between 3.0% and 4.75% (2003: between 3.5% and 4.75%), depending on the tax status and territory of the contract. Non-linked policies The long-term provisions for non-linked policies are calculated using the gross premium valuation method. Under this method the provision is equal to the discounted value of any excess of future contractual benefits over future premiums, taking account of the risks and uncertainties for each separate class of business using prudent assumptions for investment return, costs and insurance risks. The assumed rate of investment return is 3.0% (2003: 3.25%) for this business. Mortality and morbidity costs are determined following a comparison of market data with actual experience. The rates used are based on recognised industry tables, suitably adjusted to reflect this comparison. The key assumptions used were in the following ranges of the published tables shown: Risk Assumption Mortality 75% - 140% TM/TF92 Morbidity 74% - 285% CIBT93 adj Sensitivities The calculation of the long-term technical provision is sensitive to changes in the above assumptions and market conditions. Wherever possible it is the policy of the Group to match the long-term technical provisions with appropriate assets to reduce the overall impact of changes in the investment yields on shareholder funds. The table below shows the estimated impact of changes in assumptions on the long-term provision, net of reassurance, and the overall impact on shareholder funds, taking account of changes in asset values. Assumption Change Impact on the long-term provision Impact on the shareholder funds Â£' Million Â£' Million Unit +1% (0.9) 0.9 growth -1% 1.1 (1.1) Investment +1% (5.9) 2.3 return -1% 8.3 (3.6) Expense +1% 7.7 (7.7) inflation -1% (5.8) 5.8 Critical illness experience 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£11.3 million (2003: Â£11.6 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 there is a liability of Â£11.3 million (2003: Â£11.6 million). The cash balance outstanding under the arrangement at 31 December 2004 was, however, Â£ nil (2003: Â£ nil). Options and guarantees None of the business written by the life assurance companies in the Group features options and guarantees whose potential value is affected by the behaviour of financial variables. Other Following the recent Advocate General's opinion on a case relating to the repositioning of the VAT exemption for insurance related services (see Financial Commentary for further details), a long-term business reserve of Â£4.0 million pre-tax has been established against any adverse outcome (31 December 2003: Â£nil). 13. PROVISIONS FOR OTHER RISKS AND CHARGES Deferred Other Total Tax Provisions --------- --------- ---------- Â£' Million Â£' Million Â£' Million At 1 January 2004 14.8 1.3 16.1 (Credit)/charge to the profit and loss account (10.1) 16.4 6.3 Cash paid - - - --------- --------- ---------- At 31 December 2004 4.7 17.7 22.4 ========= ========= ========== Other provisions consist of Â£16.5 million to meet possible claims under the transaction warranties and indemnities on the sale of the Group's investment into LAHC, Â£1 million in respect of the policyholder costs of redress for endowment business and Â£0.2 million in respect of the outstanding SJPC 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 liability is analysed as follows: 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Deferred acquisition costs 12.0 14.8 Valuation of tax losses (7.3) - --------- --------- 4.7 14.8 ========= ========= As mentioned in the Financial Commentary, SJPC has unrelieved expenses of Â£116 million. The tax losses comprising excess and deferred expenses have been recognised to the extent to which they are considered to be recoverable. The unprovided deferred tax asset is Â£15.9 million at 31 December 2004. 14. AMOUNTS OWED TO CREDIT INSTITUTIONS 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Bank loan 22.4 53.6 ========= ========= Bank facility On 1 January 2004 the Group had an unsecured revolving credit facility amounting to Â£60 million expiring on 7 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£30.0 million at an interest rate of 4.71% per annum. During the year the outstanding amount was repaid and the bank facility cancelled. Fixed Sum Guarantee The Company has previously 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 agrees, 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 and a settlement of the outstanding balance. At 1 January 2004, the balance of Bank of Scotland loans covered by this guarantee was Â£15 million and at 31 December 2004 the balance was Â£52.5 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£22.4 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 INFLOW FROM OPERATING ACTIVITIES 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Operating profit before tax 10.8 10.1 Interest paid 1.2 2.1 Interest received (3.2) (3.7) Profit relating to long-term business (9.0) (1.6) Profit on sale of fixed assets (0.1) (0.1) Depreciation 2.9 2.8 Share of profit of associated undertakings - (3.4) P&L credit in respect of share option charges 0.5 - Decrease in debtors and prepayments 9.5 3.2 (Decrease)/increase in creditors (0.2) 10.1 Decrease/(increase) in debtor from long-term business 7.4 (5.6) --------- --------- Net cash inflow from operating activities 19.8 13.9 ========= ========= 16. MOVEMENT IN OPENING AND CLOSING PORTFOLIO INVESTMENTS, NET OF FINANCING 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Increase in cash holdings 48.6 7.2 Repayment/(draw down) of loan 31.2 (8.6) Portfolio investments: deposits with credit institutions (3.0) (1.7) --------- --------- Total movement in portfolio investments, net of financing 76.8 (3.1) --------- --------- Portfolio investments, net of financing at (14.6) (11.5) 1 January ========= ========= Portfolio investments, net of financing at 62.2 (14.6) 31 December ========= ========= 17. RELATED PARTY TRANSACTIONS HBOS plc The relationship between SJPC and the HBOS Group is governed by a Relationship Agreement. SJPC also has arm's 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£3.0 million (2003: Â£4.1 million). â€¢ Commission from the sale of Stakeholder pensions for Clerical Medical. The amounts receivable during the year were Â£2.9 million (2003: Â£3.7 million). â€¢ Commission from the sale of Halifax, Bank of Scotland and Birmingham Midshires mortgages. The amounts receivable during the year were Â£5.4 million (2003: Â£4.1 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 25. 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 2004 these deposits amounted to Â£7.7 million (2003: Â£0.2 million). â€¢ At the beginning of the year, as part of a syndicate, the Bank of Scotland plc provided a 50% share of a revolving credit facility of Â£30 million (2003: Â£30 million) on normal commercial terms. This facility was cancelled during the year. â€¢ SJPC has previously 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. The total amount of loans covered by this guarantee at 31 December 2004 is Â£52.5 million (2003: Â£15 million). â€¢ Insight Investment Management Limited, ('Insight'), a subsidiary of HBOS plc, has been appointed as discretionary investment manager to a number of SJPC life, pension and unit trust funds. Total investment management fees payable to Insight during the year were Â£1.5 million (2003: Â£nil). â€¢ During the year, Â£0.1 million was paid to HBOS plc in respect of the services of non-executive SJPC Board Directors and for the provision of assistance with various SJPC internal projects. 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 2003 or 2004. Statutory accounts for 2003 have been delivered to the registrar of companies and those for 2004 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 2004 is expected to be posted to shareholders by 5 April 2005. 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 Year Ended 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Life business 62.9 44.0 Unit trust business 12.0 11.0 Other (4.6) (2.5) --------- --------- 70.3 52.5 IT systems development (5.6) (3.4) --------- --------- Operating profit 64.7 49.1 Investment return variances 20.6 36.8 Economic assumption changes 2.2 (1.2) One off budget changes - (7.6) Cost of solvency capital - (3.6) --------- --------- Profit from core business 87.5 73.5 Profit from other business LAHC 28.0 3.4 --------- --------- Achieved profit on ordinary activities before taxation 115.5 76.9 --------- --------- Taxation Life business (23.4) (19.0) Unit trust business (3.6) (3.3) Other 0.2 0.7 LAHC - (1.0) --------- --------- (26.8) (22.6) Achieved profit on ordinary activities after tax 88.7 54.3 Dividends (12.3) (11.8) --------- --------- Retained achieved profit for the financial year 76.4 42.5 ========= ========= Year Ended Year Ended 31 December 31 December 2004 2003 --------- --------- Â£' Million Â£' Million Reconciliation of the movement in the life achieved profit shareholders' funds Opening shareholders' funds 441.1 399.8 Post tax profit for the year 88.7 54.3 Dividends (12.3) (11.8) P&L reserve credit in respect of share option charges 0.5 0.8 Consideration paid for own shares (1.4) (2.5) Issue of share capital 11.8 0.5 --------- --------- Shareholders funds on an achieved profit basis carried forward 528.4 441.1 ========= ========= CONSOLIDATED BALANCE SHEET AT 31 DECEMBER INCLUDING LIFE BUSINESS ON AN ACHIEVED PROFIT BASIS Assets 2004 2003 -------- --------- Â£' Million Â£' Million Investments Land and buildings 1.4 1.3 Other financial investments 129.4 154.1 -------- --------- 130.8 155.4 Value of in-force business - Long-term insurance 362.9 313.1 Assets held to cover linked liabilities 7,456.2 6,195.8 Reinsurers' share of technical provisions 70.3 79.1 Debtors 64.4 57.0 Other assets 93.7 54.2 Prepayments and accrued income 4.2 5.1 Deferred acquisition costs 44.5 53.5 -------- --------- Total Assets 8,227.0 6,913.2 ======== ========= Liabilities Capital and reserves Called up share capital 65.9 64.8 Share premium account 15.9 5.1 Shares to be issued 0.1 0.2 Other reserves 457.2 381.1 -------- --------- 539.1 451.2 Own shares reserve (10.7) (10.1) -------- --------- Equity shareholders' funds 528.4 441.1 Technical provisions 124.2 133.3 Technical provisions for linked liabilities 7,456.2 6,195.8 Provisions for other risks and charges 22.4 16.1 Creditors 68.4 96.2 Accruals and deferred income 27.4 30.7 -------- --------- Total Liabilities 8,227.0 6,913.2 ======== ========= 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. 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 2004 are set out below alongside the comparatives for 31 December 2003. Year Ended Year Ended 31 December 31 December 2004 2003 Risk discount rate (net of tax) 8.00% 8.25% Future investment returns: - Fixed Interest 4.50% 4.75% - Equities 7.00% 7.25% - Unit-linked funds: - Capital growth 3.70% 3.75% - Dividend income 2.80% 3.00% - Total 6.50% 6.75% Expense inflation 4.25% 4.25% Indexation of capital gains 1.80% 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 (2.75% at 31 December 2004). 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 0.5%. 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. There is a provision of Â£6.9 million before tax (31 December 2003: Â£12.5 million) within the cash flows to provide for adverse morbidity and persistency experience on critical illness plans. 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 2003. Following the recent Advocate General's opinion on a case relating to the repositioning of the VAT exemption for insurance related services (see Financial Commentary for further details), a provision of Â£4.0 million pre-tax has been established against any adverse outcome (31 December 2003: Â£nil). 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 Year Ended 31 December 31 December 2004 2003 ------------- ------------- Â£' Million Â£' Million New business contribution 23.7 13.5 Profit from existing business Unwind of discount rate 38.1 32.1 Experience variances (2.8) (6.9) Operating assumption changes 0.7 2.8 Investment income 3.2 2.5 --------- ---------- Life operating achieved profit before tax 62.9 44.0 Investment return variances 20.6 36.8 Economic assumption changes 2.2 (1.2) One off budget changes - (7.6) Cost of solvency capital - (3.6) --------- ---------- Life achieved profit before tax 85.7 68.4 Attributed tax (23.4) (19.0) --------- ---------- Life achieved profit after tax 62.3 49.4 ========= ========== 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£17.5 million (2003: Â£10.3 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 Pre-tax Post-tax long-term business in-force Â£' Million Â£' Million Â£' Million ---------- ---------- ---------- Reported value at 31 December 2004 23.7 17.5 362.9 Risk discount +1% (5.2) (3.7) (23.3) rate -1% 5.6 4.0 24.7 Investment +1% 4.8 3.4 21.3 return -1% (4.5) (3.2) (21.9) Current x110% (3.2) (2.3) (14.3) withdrawal x90% 3.5 2.5 15.6 rate Unit +10% - - 32.3 values -10% - - (29.5) 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 Year Ended 31 December 31 December 2004 2003 ---------- ---------- Â£' Million Â£' Million Life business 62.9 44.0 Unit trust business 29.5 19.4 Other (4.6) (2.5) --------- ---------- 87.8 60.9 IT systems development (5.6) (3.4) --------- ---------- Operating profit 82.2 57.5 Investment return variances 30.0 55.3 Economic assumption changes 2.1 (1.1) One off budget changes - (7.6) Cost of solvency capital - (3.6) --------- ---------- Profit from core business 114.3 100.5 Profit from other business LAHC 28.0 3.4 --------- ---------- Achieved profit on ordinary activities before taxation 142.3 103.9 --------- ---------- Taxation Life business (23.4) (19.0) Unit trust business (11.6) (11.4) Other 0.2 0.7 LAHC - (1.0) ---------- ------------- (34.8) (30.7) Achieved profit on ordinary activities after tax 107.5 73.2 ========== ============= SUMMARISED NET ASSET STATEMENT 31 December 31 December 2004 2003 ---------- ------------- Â£' Million Â£' Million Value of in-force - Unit trust 104.8 86.2 - Long-term insurance 362.9 313.1 Other net assets 165.5 128.0 ---------- ------------- Consolidated net assets under Achieved Profits basis 633.2 527.3 ========== ============= Net asset per share (pence) 144.1 122.1 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 informaton in this announcement. B. COMPONENTS OF THE LIFE AND UNIT TRUST ACHIEVED PROFIT Unit trust business Year Ended Year Ended 31 December 31 December 2004 2003 --------- ---------- Â£' Million Â£' Million New business contribution 14.3 11.5 Profit from existing business Unwind of discount rate 9.3 7.4 Experience variances 5.9 2.2 Operating assumption changes - (1.7) --------- ---------- Unit trust operating achieved profit before tax 29.5 19.4 Investment return variances 9.4 18.5 Economic assumption changes (0.2) 0.1 --------- ---------- Unit trust achieved profit before tax 38.7 38.0 Attributed tax (11.6) (11.4) --------- ---------- Unit trust achieved profit after tax 27.1 26.6 ========= ========== 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£10.0 million (2003: Â£8.0 million). Unit trust and life business combined Year Ended Year Ended 31 December 31 December 2004 2003 ---------- ---------- Â£' Million Â£' Million New business contribution 38.0 25.0 Profit from existing business Unwind of discount rate 47.4 39.5 Experience variances 3.1 (4.7) Operating assumption changes 0.7 1.1 Investment income 3.2 2.5 --------- ---------- Operating achieved profit before tax 92.4 63.4 Investment return variances 30.0 55.3 Economic assumption changes 2.0 (1.1) One off budget changes - (7.6) Cost of solvency capital - (3.6) --------- ---------- Achieved profit before tax 124.4 106.4 Attributed tax (35.0) (30.4) --------- ---------- Achieved profit after tax 89.4 76.0 ========= ========== 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£27.5 million (2003: Â£18.3 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 Pre-tax Post-tax long-term business in force Â£' Million Â£' Million Â£' Million ---------- ---------- ------------ Reported value at 31 December 2004 38.0 27.5 467.7 Risk discount +1% (6.3) (4.5) (29.2) rate -1% 6.8 4.8 31.0 Investment +1% 6.1 4.3 28.2 return -1% (5.7) (4.1) (28.5) Current x110% (4.1) (2.9) (19.8) withdrawal x90% 4.5 3.2 21.5 rate Unit value +10% - - 42.9 withdrawal -10% - - (40.1) rate D. RECONCILIATION OF MSSB FIGURES TO ACHIEVED PROFIT FIGURES 2004 2003 Â£' Million Â£' Million -------- -------- MSSB profit before tax 38.8 10.1 Movement in life value of in-force 76.7 66.8 -------- -------- Achieved profit before tax for life business 115.5 76.9 Movement in unit trust value of in-force 26.8 27.0 -------- -------- Total achieved profit before tax 142.3 103.9 ======== ======== MSSB net assets 215.0 179.6 Less: purchased value of in-force (49.5) (51.6) Add: life value of in-force 362.9 313.1 -------- -------- Achieved profit net assets for life business 528.4 441.1 Add: unit trust value of in-force 104.8 86.2 -------- -------- Total achieved profit net assets 633.2 527.3 ======== ======== This information is provided by RNS The company news service from the London Stock Exchange

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