Final Results

St. James's Place PLC 27 February 2007 PRESS RELEASE St. James's Place Preliminary Announcement 27 February 2007 St. James's Place plc, the wealth management group, today announces its annual results for the year ended 31 December 2006. The text of the announcement is attached: Enquiries: Mike Wilson, Chairman Tel: 020 7514 1907 Andrew Croft, Group Finance Director Tel: 020 7514 1907 Brunswick Group LLP Tel: 020 7404 5959 (PAGE 1) Announcement of Annual Results for the year ended 31 December 2006 OPERATING PROFIT OF £176.0 MILLION UP 54% St. James's Place plc (SJP), the wealth management group, announces its annual results for the year ended 31 December 2006. European Embedded Value highlights include: • Operating profit of £176.0 million (2005: £114.5 million) up 54% • New business profits of £115.2 million (2005: £67.2 million) up 71% • Net asset value per share 222.6 pence (2005: 185.2 pence) up 20% International Financial Reporting Standards highlights include: • Profit before shareholder tax of £107.6 million (2005: £43.2 million) up 149% • Net asset value per share 82.4 pence (2005: 61.4 pence) up 34% Other highlights include: • New business for the year of £349.1 million (measured on an annual premium equivalent) up 58% • Funds under management at £15.4 billion up 25% Dividend Proposed final dividend of 2.15p per share making a total dividend for the year of 3.65p (2005: 3.15p) an increase of 16% for the full year. Due to significant one off cash generation during 2006, the Board has further proposed to pay an additional special dividend to shareholders of 6.35 pence per share. Mike Wilson, Chairman, commented: 'We are delighted with the 54% increase in operating profit and the strength of the financial results in all areas. 'We have now had three consecutive years of strong growth in both new business and profits. 'There is an increasing need for quality financial advice and our target market is rapidly expanding. We remain convinced that the St. James's Place Partnership gives us a real competitive edge to capitalise on opportunities going forward.' (PAGE 2) CHAIRMAN'S STATEMENT I am delighted to report a third consecutive year of substantial growth in both new business and profits during 2006. New business from long-term savings and investments (measured on an APE basis, the standard industry measure of annual premiums plus one tenth of single premiums) was up 58% and funds under management ended the year at £15.4 billion up 25%. Financial Performance As usual we have presented our results on both an IFRS (International Financial Reporting Standards) basis and an EEV (European Embedded Value) basis. We continue to believe that the EEV basis provides a more meaningful measure of the group's performance. On the IFRS basis the operating profit, before shareholder tax, increased by 149% from £43.2 million to £107.6 million whilst the total profit before tax increased from £127.1 million to £179.9 million. The pre-tax operating profit on the EEV basis was £176.0 million compared with £114.5 million for the prior year, an increase of 54%. The total pre-tax profit for the year increased by 14% from £213.4 million to £244.0 million. The Financial Commentary on pages 5 to 12 provides further details on the results for the year. Dividend As indicated in the Interim Report the Board has recommended increasing the final dividend by 16% to 2.15 pence per share (2005: 1.85 pence per share) giving a full year dividend of 3.65 pence per share (2005: 3.15 pence per share) an increase of 16%. Due to significant one off cash generation during 2006, as detailed in the Financial Commentary on page 5, the Board has recommended an additional one off special dividend of 6.35 pence per share. Subject to the approval of shareholders at the Annual General Meeting both the final dividend and the special dividend will be paid on 18 May 2007 to those shareholders on the register as at 9 March 2007. New Business 2006 was a record year for new business at £349.1 million up 58%, with the growth in each quarter of the year exceeding 50%. This achievement was particularly pleasing following the 25% growth in 2005 and 19% in 2004. The main drivers of new business growth last year were: - investment business which increased by 49% in favourable market conditions and - pensions business which increased by 96% benefiting from the new pension legislation introduced in April 2006 (Pensions A Day). 2006 total new single premiums (investments and pensions) were up 62% at £2.6 billion (2005:£1.6 billion), which contributed to the 25% increase in funds under management to £15.4 billion at the end of the year. Very importantly from a profitability point of view our own manufactured products represented 87% of total APE, exceeding both our stated objective of 80% and the corresponding figure of 83% for 2005. Gross fees from our other wealth management services rose by 26% to £35.7 million (2005: £28.3 million). The St. James's Place Partnership The substantial increase in the productivity of the Partnership accounted for the majority of our new business growth in 2004 and 2005. This remained the case in 2006, when productivity per Partner increased by a further 61%, with new business per Partner at £312,000 (almost double the level achieved two years earlier). This growth in 2006 resulted from an increase in business secured from existing and new clients - as well as a significant increase in the size of investments made. (PAGE 3) We continue to believe that the quality of the Partnership provides for further growth in productivity. However our objective remains to increase new business at 15 - 20% over the longer term and this will realistically be achieved by not only continuing to increase productivity per Partner, but also by increasing the size of the Partnership. I am pleased to report that we are now benefiting from the recruitment measures, highlighted in the 2005 Report and Accounts, which were taken to increase the size of the Partnership. The size of the Partnership at 31 December 2006 was 1,157 which, after taking account of the Home of Choice transaction (announced on 17 October 2006), represents underlying growth for the year of some 5 - 6%, in line with our 2006 objective. We remain committed to recruiting only the highest quality financial advisers into the Partnership and to retaining only those who are profitable to the Group in the longer term. Investment management We are delighted that our distinctive approach to investment management continues to deliver superior performance in both the short and longer term. Over the last five years, to the end of 2006, 80% of our funds under management were in the top quartile against their respective peer group. Over the last 1, 3 and 5 years our pension managed funds have all achieved top quartile performance relative to their peer groups and the record of these funds since launch also shows top quartile results with two funds, the SJP GAM and the SJP THSP pension funds ranked first amongst their respective peer group. In November 2006 we announced that a number of new funds would be available at the start of 2007. These new funds are the St. James's Place Jupiter Cautious Funds, the MPC UK Growth Unit Trust, the Invista Property Unit Trust, the Newton Global Unit Trust and two worldwide funds managed by Polaris Capital Management. Bernie Horn from Polaris Capital Management has recently won MarketWatch's Mutual Fund Manager of the Year award for 2006 and we are pleased to bring such outstanding investment experience to our clients in the UK. At the same time we announced that Andrew Green's funds would be closed to new business from the end of 2006. This decision was taken in conjunction with Andrew as he was concerned that the growth in the volume of funds he was being asked to manage would make it difficult for him to maintain his investment style, and hence his investment performance. At the end of July we replaced the Select Managed Fund with two new managers chosen by the Investment Committee. The two managers, Richard Peirson at AXA/ Framlington and Paul Butler at Newton Investment Management were selected from the 80 plus managers considered by Stamford Associates, our independent investment consultants. At the same time, Nick Purves took over Ted William's portfolio on the Schroders managed fund. We deliberately choose a relatively small but exceptionally talented range of fund managers - and if we need to, as we have shown in the past, we will make changes to ensure we deliver results for our clients. Importantly the investment performance we have achieved shows that the approach works. Foundation The St. James's Place Foundation, the Group's charitable trust, plays an important role within the St. James's Place community and I am delighted to report that over the last fifteen years the cumulative amount raised is over £10 million. 2006 was another record year with funds raised of £1.9 million, including the company matching. More than 80% of our own people give on a monthly basis by gift aid. The Board would like to thank all members of St. James's Place and those suppliers who have generously supported the Foundation by way of sponsorship and donations. (PAGE 4) Partners and staff 2006 has been a record year for both new business and profits. On behalf of the Directors and shareholders I would like to thank the Partnership, our employees and the staff in our administration centres for their outstanding contribution to our results last year. I believe that the quality of our people at every level is exceptional. I am continually amazed by their enthusiasm, commitment and dedication. Board changes In my half year statement I commented that Sir James Crosby and John Edwards stepped down from the Board on 31 May 2006 to be replaced by Andy Hornby and Jo Dawson. I would like to repeat my welcome to Andy and Jo to the Board and again thank James and John for their contribution. We announced on 5 January 2007 that the Board and Mark Lund had jointly agreed that Mark would step down as Chief Executive and leave the Group. The Board would like to thank Mark for his contribution over the last three years. The search for a new Chief Executive is underway. In the meantime David Bellamy, who has been the Managing Director over the last five years, has taken over responsibility for the day to day running of St. James's Place, supported by Andrew Croft (Group Finance Director) and Ian Gascoigne (Group Sales Director). The Board has every confidence that this senior and experienced executive team will continue to drive the business forward until the new Chief Executive is appointed. Outlook We have now had three consecutive years of strong growth in both new business and profits. The social, economic and demographic conditions remain positive for our proven adviser based approach to wealth management. There is an increasing need for quality financial advice and our target market is expanding rapidly. We remain convinced that the St. James's Place Partnership gives us a real competitive edge to capitalise on opportunities going forward. Our new business has grown at a compound rate of over 16% per annum over the last ten years and our longer term objective remains to grow new business by 15 - 20% per annum. Mike Wilson 26 February 2007 (PAGE 5) FINANCIAL COMMENTARY This Financial Commentary is presented in its usual two sections: the first section provides a summary of the results on both an IFRS and EEV basis, whilst the second section covers other matters of interest to shareholders and investors. Section 1: Commentary on the results International Financial Reporting Standards (IFRS) The IFRS result is shown on pages 25 to 40. As noted in previous financial commentaries the IFRS result requires the pre-tax profit of the life business to be 'grossed up' for policyholder tax, with the corresponding amount then being deducted within the tax charge. The table below reflects the IFRS result after eliminating this 'gross up' in order to show the shareholder return from the business. Year Ended Year Ended 31 December 2006 31 December 2005 £' Million £' Million Life business 85.5 29.3 Unit trust business 18.0 12.8 Other (2.9) (4.1) IT systems development - (4.3) Operating profit 100.6 33.7 LAHC 7.0 9.5 Operating profit 107.6 43.2 Policyholder tax 72.3 83.9 Total pre-tax profit 179.9 127.1 Profit after tax 88.0 47.6 Life Business The profit from the life business increased from £29.3 million to £85.5 million, an increase of 192%. The increase in profit reflects partly the increase in new business, partly the higher funds under management during the year and partly the effect of adopting a new reserving methodology at the end of 2006. This is described in more detail later in the commentary. The increase in the new business levels has resulted in the impact of the combined DAC (deferred acquisition costs) and DIR (deferred income reserve) movement during the year being £15.1 million higher than the prior year at £28.8 million (2005: £13.7 million). The higher funds under management have increased the investment management charges accruing to the life business during the year. In the second half of 2006 the Financial Services Authority (FSA) relaxed the reserving methodology required to be followed by life companies and we have fully adopted these changes at the year end which has resulted in a profit before tax of £14.7 million. (PAGE 6) Unit Trust Business The growth in new business and the higher funds under management have resulted in the pre-tax unit trust profit increasing by 41% from £12.8 million in 2005 to £18.0 million in the current year. The movement in the DAC and DIR reduced the profit by £2.4 million in the current year (2005: £1.0 million). Other Other operations contributed a loss for the year of £2.9 million, compared with a loss of £4.1 million for 2005. Included within the current year loss is an amount of £1.75 million for the expected deferred income in future years from the transfer of the mortgage Partners to the specialist provider Home of Choice which was announced on 17 October 2006. Ignoring this deferred income the loss for the current year would have been £4.6 million which includes the cost of expensing share options at £7.6 million (2005: £3.0 million). IT systems Development As noted in last year's statement the major IT systems development was largely completed in 2005 and consequently no development costs were incurred during 2006 (2005: £4.3 million). Operating profit The total operating profit for the year was £100.6 million, which was almost three times the £33.7 million for the prior year. LAHC At the time of the 2004 disposal of LAHC a provision of £16.5 million was established against possible claims under the transaction warranties and indemnities. During 2005 £9.5 million of the provision was released and following a review of the status of the warranties and indemnities the remaining provision of £7.0 million has been released in 2006. The resulting total profit before shareholder tax was £107.6 million compared with £43.2 million for the prior year. The total net assets were £382.2 million (2005: £274.5 million) resulting in a net asset value per share of 82.4 pence (2005: 61.4 pence). European Embedded Value Basis The table below summaries the pre-tax profit of the combined business and the detailed result is shown on pages 13 to 23. Year Ended Year Ended 31 December 2006 31 December 2005 £' Million £' Million Life business 139.0 92.3 Unit trust business 39.9 30.6 Other (2.9) (4.1) IT systems development - (4.3) Operating profit 176.0 114.5 Investment return 70.8 86.1 Economic assumption changes (9.8) 3.3 Profit from core business 237.0 203.9 Profit on sale of LAHC 7.0 9.5 Total pre-tax profits 244.0 213.4 Post tax profit 184.2 160.7 (PAGE 7) Life Business Operating profit has increased by 51% from £92.3 million to £139.0 million and a full analysis of the result is shown on page 19. The new business profit has increased from £48.4 million to £87.6 million, an impressive growth of 81%. The significant growth in this figure is a combination of the increased volumes, the favourable business mix and limiting establishment expense growth. The latter two points mean that not only is there more profit from the higher volumes, but we are also making more profit per pound of APE. Section 2 of this commentary provides further detail on the new business margin. The experience variance during the year reduced operating profit by £2.6 million (2005: positive variance of £1.7 million). As usual this figure reflects a combination of positives and negatives but the one variance worthy of note relates to pension persistency. Following the introduction of the new pensions legislation in April of this year, we have observed a number of clients, aged between 50 and 70, converting their existing pension policies to our new Income Drawdown product to take advantage of the flexibility introduced by the new legislation and in particular the tax free cash provisions. The total of these conversions have been included in our reported results and amount to some £4.4 million of APE and of £1.7 million of new business profit. As a result of these conversions we have experienced pension outflows during 2006 which exceed our long term EEV assumption. We anticipate this will continue to be the case for the next couple of years prior to the level of demand stabilising and our pension outflows returning to normal. Consequently we have made a £3.9 million provision within the calculation of the embedded value to reflect the anticipated level of conversions over the next two years. It is worth noting that excluding these conversions to our own income drawdown product, there has been no change in the underlying persistency of our pensions business and, if anything, persistency looks to have improved in the over 50 category. There are two operating assumption changes which have been made to the calculation of the embedded value. Firstly, as noted in the IFRS section, we have adopted the new reserving methodology introduced by the FSA which has increased the embedded value by £7.1 million reflecting the cost of the ' lock-in' for those reserves that have now been released. Secondly there has been a strengthening of our mortality and morbidity assumptions which has reduced the embedded value by some £9.5 million. Unit Trust Business The operating profit has increased by 30% from £30.6 million to £39.9 million and a full analysis of the unit trust result is shown on page 20. The new business profit has increased by 47% to £27.6 million from £18.8 million for the prior year reflecting the stronger new business during the year. As highlighted at the half year we have strengthened the persistency assumptions for the unit trust business having noted a small deterioration in the first half of the year. The £3.1 million cost of this strengthening is reflected within the operating assumption changes. There has been no further deterioration noted in the second half of the year. Other and IT Systems Development The loss from other operations and the costs of the IT systems development have previously been commented on in the IFRS section. Investment Return The investment return reflects the average after tax increase in our fund prices over and above that assumed in the calculation of the embedded value. During 2006 this average after tax increase was some 5-11% higher than the return assumed resulting in a positive investment return of £70.8 million (2005: £86.1 million reflecting 13-18% outperformance). (PAGE 8) Economic Assumption Change Gilt yields have increased by 0.6% since the start of the year impacting the economic assumptions underlying the embedded value. This has resulted in a reduction in the embedded value of £9.8 million. The corresponding figure for 2005 was an increase in the embedded value of £3.3 million reflecting a decrease in the gilt yields during that year. Taking into account the release of the LAHC provision covered earlier in this statement, the total pre-tax profit for the year was £244.0 million compared with £213.4 million for the prior year. The total net assets on an EEV basis were £1,032.7 million (2005: £828.8 million) resulting in a net asset value per share of 222.6 pence (2005: 185.2 pence). 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. The 'contribution from third party product sales' reflects the net income received from wealth management sales of £6.6 million (2005: £5.0 million), sales of stakeholder products of £1.4 million (2005: £1.6 million) and sales through the Protection Panel of £9.7 million (2005: £9.8 million). The table below provides the familiar breakdown of expenses. Year Ended Year Ended 31 December 2006 31 December 2005 Category £' Million £' Million Paid from policy margins Commission 167.2 131.6 Investment expenses 55.7 35.1 Third party administration 20.9 19.2 243.8 185.9 Direct expenses Other new business related costs 35.4 20.5 Establishment costs 86.2 75.4 Contribution from third party product sales (17.7) (16.4) 103.9 79.5 347.7 265.4 (PAGE 9) At the start of the year we set a target of maintaining the growth in the establishment expenses at between 5-8%. The objective of setting this target was to create a 5-10% gap between the expense growth and the new business growth. The establishment expense growth for the year was 14% and, although above the 5-8% target set at the beginning of the year, this was on the back of 58% new business growth, significantly above the new business target. Importantly the gap between the new business growth and the expense growth ended the year at some 44% above our stated objective. Consequently, as shown below, the new business margin expanded. For 2007 we have set a target of maintaining the growth in the establishment expenses to less than 10%; if we achieve both this target and the new business growth target, then shareholders can expect a further expansion in new business margins in the coming year. (ii) New Business margin The insurance sector has historically disclosed new business in terms of Annual Premium Equivalent (APE). Most commentators would agree that APE no longer has much correlation with the underlying profitability of the new business and consequently the industry is moving to provide additional disclosure on the present value of new business premiums (PVNBP). APE is calculated as the sum of regular premiums plus 1/10th single premiums. PVNBPs are calculated as single premiums plus the present value of expected premiums from regular premium business, allowing for lapses and other EEV assumptions. Noted in the table below is the new business margin calculated both as a % of APE and PVNBP. 2006 2005 Life business New business profit (£' m) 87.6 48.4 APE (£'m) 294.6 183.5 Margin (%) 29.7 26.4 PVNBP (£'m) 2,124.1 1,275.7 Margin (%) 4.1 3.8 Unit trust business New business profit (£' m) 27.6 18.8 APE (£'m) 54.5 37.5 Margin (%) 50.6 50.1 PVNBP (£'m) 534.2 369.4 Margin (%) 5.2 5.1 Total business New business profit (£' m) 115.2 67.2 APE (£'m) 349.1 221.0 Margin (%) 33.0 30.4 PVNBP (£'m) 2,658.3 1,645.1 Margin (%) 4.3 4.1 (PAGE 10) The PVNBP calculation only includes our manufactured business as it is not sensible to apply the principles to the non-manufactured business. The new business margin has been beneficially affected by the rate of growth in new business, the proportion of manufactured business, the underlying business mix and by maintaining the growth in the level of expenses to well below the growth in new business. (iii) Cashflow Shareholders have requested additional disclosure on the underlying cashflow of the group and this new section of the commentary covers this area of interest. This is new disclosure and comparatives are not provided. The information is provided post tax. It is first necessary to adjust the post tax IFRS profits for the 'non- cash' items to obtain an adjusted post tax figure which is more representative of the underlying cashflow of the business. The table below sets out these adjustments: 2006 £'m Post tax IFRS result 88.0 Adjustments Movement in deferred acquisitions cost (68.6) Movement in deferred income 42.2 Amortisation of purchased VIF 3.1 Movement in financial reassurance balance (8.9) Release of LAHC provision (7.0) Share option expense 7.6 Movement in deferred tax asset (13.3) Movement in deferred tax liability* 23.2 Other (0.9) Adjusted post tax cashflow 65.4 * excluding amounts in respect of the unit linked funds Taking account of these non-cash adjustments the group generated positive cashflow of £65.4 million during 2006. The table and commentary below provide an indicative unaudited analysis of the sources of this cashflow. Note 2006 £'m Net annual management fee 1 93.2 Unwind of surrender penalties 2 (32.6) Profit arising on new business 3 1.9 Establishment expenses 4 (62.1) Miscellaneous 5 12.1 Tax relief on b/fwd expenses 6 22.6 FSA reserving change 7 20.9 Investment income 8 9.4 Post tax cashflow 65.4 Notes 1. The net annual management fee: this is the income on the funds under management that the group retains after payment of the associated costs. Broadly speaking the group retains around 1% pre-tax of funds under management. (PAGE 11) 2. Unwind of surrender penalties: this relates to the reserving methodology applied to the surrender penalties within the charging structure of the single premium life bonds. At the outset of the life bond we establish a liability net of the outstanding surrender penalty which would apply if the policy were to be encashed. As the surrender penalty reduces to zero so the liability to the policyholder is enhanced by increasing their funds by 1% per annum over the first six years of the product life, to correspond to this 'unwind' of the surrender penalty. In other words there is a cash transfer from the shareholder to the policyholder. 3. Profit arising from new business: this is the cash flow arising in the year after taking into account the directly attributable expenses. 4. Establishment expenses: these are the post tax expenses commented on in point (i) above and represent the running costs of the Group's infrastructure. 5. Miscellaneous: this represents the cashflow of the business not covered in any of the other categories. It will include miscellaneous product charges, reserving changes, experience variances and the income and expenses included within the Other operations of the business. 6. Tax relief on expenses b/fwd; as shareholders will recall from previous financial commentaries the UK life company obtains tax relief for its expenses against the tax deductions on the income and capital gains within the unit-linked life funds. At the start of the year there was approximately £112.9 million of excess unrelieved expenses. During 2006 we have obtained relief for these expenses which has given rise to positive cashflow of £22.6 million. At the end of 2006 there were no remaining unrelieved expenses. 7. FSA reserving change: as mentioned in the results section of this commentary the FSA have relaxed the reserving methodology required to be followed by life companies. The adoption of these changes has resulted in a one off £20.9 million. 8. Investment income: this is the income accruing on the investments and cash held for regulatory purposes together with the interest received on the surplus capital held by the group. (iv) Analysis of the Embedded Value The table below provides a summarised breakdown of the Embedded Value position at the reporting dates: Year Ended Year Ended 31 December 2006 31 December 2005 £' Million £' Million Value of in-force - Life 590.8 503.0 - Unit trust 171.5 140.7 Solvency assets 270.4 185.1 Total embedded value 1,032.7 828.8 (v) Share options maturity Options outstanding under the various share option schemes at 31 December 2006 amount to 46.2 million (31 December 2005: 56.5 million). (PAGE 12) The total number of options including those in the SJP Employee Trust, together with their anticipated proceeds, are set out in the table below: Average Number of exercise share options Anticipated Earliest date of exercise price outstanding proceeds £ Million £' Million Prior to 31 Dec 2006 1.68 16,862,520 28.3 Jan - Jun 2007 1.68 4,323,086 7.3 Jul - Dec 2007 1.56 4,322,782 6.7 Jan - Jun 2008 1.04 2,306,634 2.4 Jul - Dec 2008 1.93 400,010 0.8 Jan - Jun 2009 2.23 1,087,136 2.4 Jul - Dec 2009 2.75 16,191,857 44.4 Jan - Jun 2010 2.19 503,961 1.1 Jul - Dec 2010 2.28 162,867 0.4 Jan - Jun 2011 2.43 3,334 - 46,164,187 93.8 Included within those share options with an earliest date of exercise prior to January 2007 are 3.9 million options with an expiry date before the end of July 2007 with anticipated proceeds of £5.2 million. Of those options with an earliest date of exercise prior to January 2007, 1.8 million options require further performance conditions to be met before vesting unconditionally. Andrew Croft 26 February 2007 (PAGE 13) EUROPEAN EMBEDDED VALUE BASIS The following supplementary information shows the result for the Group adopting a European Embedded Value (EEV) basis for reporting the results of its wholly owned life and unit trust businesses. CONSOLIDATED Income Statement Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Life business 139.0 92.3 Unit trust business 39.9 30.6 Other (2.9) (4.1) 176.0 118.8 IT systems development - (4.3) Operating profit 176.0 114.5 Investment return variances 70.8 86.1 Economic assumption changes (9.8) 3.3 Profit from core business 237.0 203.9 Profit from other business Profit on sale of LAHC 7.0 9.5 EEV profit on ordinary activities before tax 244.0 213.4 Taxation Life business (46.5) (42.7) Unit trust business (19.4) (15.8) Other 6.1 5.8 LAHC - - (59.8) (52.7) EEV profit on ordinary activities after tax 184.2 160.7 (PAGE 14) CONSOLIDATED Statement of Changes in Equity Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Opening equity shareholders' funds on an EEV basis 828.8 663.4 Post tax profit for the year 184.2 160.7 Dividends (15.1) (12.7) Issue of share capital 30.3 14.9 Consideration paid for own shares (5.4) (0.5) P&L reserve credit in respect of share option charges 7.6 3.0 P & L reserve credit in respect of proceeds from exercise of share options of shares held in trust 2.3 - Closing equity shareholders' funds on an EEV basis 1,032.7 828.8 (PAGE 15) CONSOLIDATED BALANCE SHEET 31 December 31 December 2006 2005 £' Million £' Million Assets Intangible assets Deferred acquisition costs 393.6 325.0 Value of long-term business in-force - long-term insurance 524.1 460.9 - unit trusts 171.5 140.7 1,089.2 926.6 Property & equipment 6.3 5.9 Deferred tax assets 83.8 70.5 Investment property 568.2 319.4 Investments 10,573.8 8,473.6 Reinsurance share of insurance provisions 28.3 77.9 Insurance contract receivables 11.5 15.1 Income tax assets 9.7 21.0 Other receivables 87.1 97.1 Cash & cash equivalents 1,606.9 1,337.7 Total assets 14,064.8 11,344.8 Liabilities Insurance contract liability provisions 374.3 430.6 Other provisions 3.1 9.6 Financial liabilities 11,833.0 9,431.6 Deferred tax liabilities 258.4 192.5 Reinsurance payables - 8.9 Payables related to direct insurance contracts 18.5 19.5 Deferred income 291.9 249.7 Income tax liabilities 19.9 9.9 Other payables 100.5 71.4 Net asset value attributable to unit holders 132.5 92.3 Total liabilities 13,032.1 10,516.0 Net assets 1,032.7 828.8 Shareholders' equity Share capital 69.6 67.1 Share premium 57.4 29.6 Other reserves 905.7 732.1 Total shareholders' equity 1,032.7 828.8 Pence Pence Net assets per share 222.6 185.2 (PAGE 16) NOTES TO THE EUROPEAN EMBEDDED VALUE BASIS I. BASIS OF PREPARATION The supplementary information on pages 13 to 23 shows the Group's results as measured on a European Embedded Value (EEV) basis. This includes the results of the life, pension and investment business, including unit trust business, undertaken by the Group on a basis determined in accordance with the EEV Principles issued in May 2004 by the Chief Financial Officers Forum, a group of chief financial officers from 19 major European insurers, as supplemented by the Additional Guidance on EEV Disclosures issued in October 2005 (together 'the EEV Principles'). The treatment of all other transactions and balances is unchanged from the primary financial statements on an IFRS basis. The objectives of the EEV basis is to provide shareholders with more realistic information on the financial position and performance of the Group than that provided by the IFRS basis. Under the EEV methodology, profit is recognised as it is earned over the life of the products within the covered business. The embedded value of the covered business is the sum of the shareholders' net worth in respect of the covered business and the present value of the projected profit stream. II. METHODOLOGY (a) Covered business The covered business is the life, pension and investment business, including unit trust business, undertaken by the Group. (b) Calculation of EEV Profit from existing business comprises the expected return on the value of in-force business at the start of the year plus the impact of any changes in the assumptions regarding future operating experience, plus changes in reserving basis (other than economic assumption changes), plus profits and losses caused by differences between the actual experience for the period and the assumptions used to calculate the embedded value at the end of the period. (c) Allowance for risk The allowance for risk in the shareholder cash flows is a key feature of the EEV Principles. The EEV Principles set out three main areas of allowance for risk in the embedded value: • The risk discount rate • The allowance for the cost of financial options and guarantees • The cost of holding both prudential reserves and any additional capital required The reported EEV allows for risk via a risk discount rate based on a bottom-up market-consistent approach, plus an appropriate additional margin for non-market risk. The Group does not offer products that carry any significant financial guarantees or options. (d) Deriving the risk discount rate A market-consistent embedded value for each product class has been calculated. In principle, each cash flow is valued using the discount rate applied to such a cash flow in the capital markets. However in practice, where cash flows are either independent or move linearly with market movement, it is possible to apply a simplified method known as the 'certainty equivalent' approach. Under this approach all assets are assumed to earn the risk free rate and are discounted using that risk free rate. A market-consistent cost of holding the required capital has also been calculated. (PAGE 17) As part of this approach, an appropriate adjustment has been made to reflect the fact that the value of tax relief on expenses does not move linearly with market movements. Finally, an additional allowance for non-market risk has been made by increasing the discount rate by 0.8%. For presentational purposes, a risk discount rate has then been calculated which under the EEV basis gives the same value determined above. This provides an average risk discount rate for the EEV and is described in relation to the risk free rate. This average risk discount rate has also been used to calculate the published value of new business. (e) Non-market risk Best estimate assumptions have been established based on available information and when used within the market consistent calculations provide the primary evaluation of the impact of non-market risk. However, some non-market operational risks are not symmetric, with adverse experience having a higher impact on the EEV than favourable experience. Allowance has been made for this by increasing the risk discount rate by 0.8%. (f) Cost of required capital In light of the results of internal analysis, the Directors consider that the minimum regulatory capital provides adequate capital cover for the risks inherent in the covered business. The required capital for the EEV calculations has therefore been set to the minimum regulatory capital. The EEV includes a reduction for the cost of holding the required capital. No allowance has been made for any potential adjustment that the investors may apply because they do not have direct control over their capital. Any such adjustment would be subjective, as different investors will have different views of what, if any, adjustment should be made. (g) New business The new business contribution arising from reported new business premiums has been calculated using the same assumptions as used in the EEV at the end of the financial year. The value of contractual incremental premiums to existing business is treated as new business in the year of the increment, rather than at the outset of the policy. This approach better reflects the way the Group manages its business. The value of new business has been established at the end of the reporting period and has been calculated using actual acquisition costs. (h) Expenses The expense assumptions include allowance for both the costs charged by the relevant third party administrators for acquisition and maintenance, and the corporate costs incurred in respect of covered business. The corporate costs have been apportioned so that the total maintenance costs represent the anticipated ongoing expenses, including systems development costs, which are expected to arise in future years in meeting the policy servicing requirements of the in-force business. (i) Taxation The EEV includes the present value of tax relief on life assurance expenses calculated on a market-consistent basis. This calculation takes into account all expense and income amounts projected for the in-force business (including any carried forward unutilised relief on expenses). (PAGE 18) In determining the market-consistent value an appropriate allowance is made to reflect the fact that the value of tax relief on expenses does not move linearly with market movements. The impact of this is assessed using a stochastic simulation model that is regularly calibrated to market conditions. When calculating the value of new business, priority is given to relieving the expenses relating to that business. III. Assumptions (a) Economic Assumptions The principal economic assumptions used within the cash flows at 31 December 2006 are set out below: Year Ended Year Ended 31 December 31 December 2006 2005 Risk free rate 4.9% 4.3% Inflation rate 3.0% 2.8% Risk discount rate (net of tax) 8.0% 7.3% Future investment returns: - Gilts 4.9% 4.3% - Equities 7.9% 7.3% - Unit linked funds - Capital growth 4.5% 3.6% - Dividend income 2.8% 3.0% - Total 7.3% 6.6% Expense inflation 3.6% 4.3% Indexation of capital gains 2.2% 2.0% The risk free rate is set by reference to the yield on 10 year gilts. The other investment returns are set by reference to these. The inflation rate is derived from the implicit inflation in the valuation of 10 year index-linked gilts. This rate is increased by 1.5%, to reflect higher increases in earnings and the expense inflation assumption is calculated as 80% of earnings inflation. The inflation rate is reduced by 10% to derive the indexation of capital gains for the proportion of the fund invested in equities. (b) Experience Assumptions The principal experience assumptions have been set on a best estimate basis. They are reviewed regularly. The persistency assumptions are derived from the Group's own experience, or where insufficient data exists, from external industry experience. Maintenance expenses have been set in line with the costs charged by the Group's third party administrators, together with an allowance for the Group's own maintenance costs. (PAGE 19) Mortality and morbidity assumptions have been set by reference to the Group's own experience, published industry data and the rates set by the Group's reassurers. (c) Taxation Future taxation has been determined assuming a continuation of the current tax legislation. The EEV result has been calculated on an after-tax basis and has been grossed up to a pre-tax level for presentation in the profit and loss account. The corporation tax rate used for this grossing up is 28% for UK life and pensions business, 12.5% for Irish life and pensions business and 30% for unit trust business. IV. COMPONENTS OF EEV PROFIT (a) Life Business Note Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million New business contribution 1 87.6 48.4 Profit from existing business Unwind of discount rate 50.3 41.1 Experience variances (2.6) 1.7 Operating assumption changes (2.4) (2.5) Investment income 6.1 3.6 Operating profit before tax 139.0 92.3 Investment return variances 46.8 63.6 Economic assumption changes (10.6) 3.8 Profit before tax 175.2 159.7 Attributed tax (46.5) (42.7) Profit after tax 128.7 117.0 Note 1: New business contribution after tax is £63.9 million (2005: £35.3 million) (PAGE 20) (b) Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million New business contribution 1 27.6 18.8 Profit from existing business Unwind of discount rate 15.2 11.2 Experience variances 0.2 0.6 Operating assumption changes (3.1) - Operating profit before tax 39.9 30.6 Investment return variances 24.0 22.5 Economic assumption changes 0.8 (0.5) Profit before tax 64.7 52.6 Attributed tax (19.4) (15.8) Profit after tax 45.3 36.8 Note 1: New business contribution after tax is £19.3 million (2005: £13.2 million) (c) Combined Life and Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million New business contribution 1 115.2 67.2 Profit from existing business: Unwind of discount rate 65.5 52.3 Experience variances (2.4) 2.3 Operating assumption changes (5.5) (2.5) Investment income 6.1 3.6 Operating profit before tax 178.9 122.9 Investment return variances 70.8 86.1 Economic assumption changes (9.8) 3.3 Profit before tax 239.9 212.3 Attributed tax (65.9) (58.5) Profit after tax 174.0 153.8 Note 1: New business contribution after tax is £83.2 million (2005: £48.5 million). (PAGE 21) (d) Detailed Analysis In order to better explain the movement in capital flows, the components of the EEV profit for the year ended 31 December 2006 are shown separately between the movement in IFRS net assets and the present value of the in-force business (PVIF) in the table below. All figures are shown net of tax. Movement in IFRS Movement Movement Net Assets in PVIF in EEV £' Million £' Million £' Million New business contribution (52.9) 136.1 83.2 Profit from existing business 83.2 (83.2) - Unwind of discount rate - 47.5 47.5 Experience variances 13.2 (14.5) (1.3) Operating assumption changes 20.4 (24.4) (4.0) Investment return 4.6 0.1 4.7 Investment return variances 3.9 47.2 51.1 Economic assumption changes (1.1) (6.1) (7.2) Profit on sale of LAHC 7.0 - 7.0 Miscellaneous 9.7 (6.5) 3.2 Profit after tax 88.0 96.2 184.2 The main component of the experience variances is the use of brought-forward realised tax losses. This has increased the IFRS net assets and reduced the value of the tax assets in the PVIF. The main component of the operating assumption changes is the decrease in insurance contract liability provisions due to the changes introduced by the FSA in PS 06/14. (PAGE 22) V. EUROPEAN EMBEDDED VALUE SENSITIVITIES The table below shows the estimated impact on the combined life and unit trust reported value of new business and EEV to changes in various EEV calculated assumptions. In each case, only the indicated item is varied relative to the restated values. Change in new business contribution Change in European Embedded Value Note Pre-tax Post-tax Post-tax £' Million £' Million £' Million Value at 31 December 2006 115.2 83.2 1,032.7 100bp reduction in risk discount rate 1 19.5 14.1 58.8 100bp reduction in risk free rates, with corresponding change in fixed interest asset values 1.7 1.2 7.2 10% reduction in withdrawal rates 11.2 8.1 39.9 10% reduction in expenses 1.5 1.1 10.7 10% reduction in market value of equity assets - - (73.7) 5% reduction in mortality and morbidity 2 0.8 0.6 4.6 100bp increase in equity expected returns 3 - - - Note 1: Although not directly relevant under a market-consistent valuation where the risk discount rate is a derived disclosure only, this sensitivity shows the level of adjustment which would be required to reflect differing investor views of risk. Note 2: Assumes the benefit of lower experience is passed on to clients and reassurers at the earliest opportunity. Note 3: As a market-consistent approach is used, equity expected returns only affect the derived discount rates and not the embedded value or contribution to profit from new business. (PAGE 23) VI. RECONCILIATION OF IFRS AND EEV PROFIT BEFORE TAX AND NET ASSETS Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million IFRS profit before tax 179.9 127.1 Movement in life value of in-force 17.4 46.5 Movement in unit trust value of in-force 46.7 39.8 Total EEV profit before tax 244.0 213.4 Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million IFRS net assets 382.2 274.5 Less: acquired value of in-force (64.3) (67.4) Add: deferred tax on acquired value of in-force 19.2 20.1 Add: life value of in-force 524.1 460.9 Add: unit trust value of in-force 171.5 140.7 EEV net assets 1,032.7 828.8 VII. RECONCILIATION OF LIFE COMPANY FREE ASSETS TO CONSOLIDATED GROUP EQUITY AND ANALYSIS OF MOVEMENT IN FREE ASSETS Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Life company free assets 105.4 65.0 Required life company solvency capital 33.0 32.0 Other subsidiaries, consolidation and IFRS adjustments 243.8 177.5 IFRS net assets 382.2 274.5 Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Life company free assets at 1 January 65.0 43.2 Investment in new business (54.2) (40.1) Profit from existing business 91.0 61.0 Investment return 4.6 2.9 Movement in required solvency capital (1.0) (2.0) Life company free assets at 31 December 105.4 65.0 (PAGE 24) RESULTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (PAGE 25) CONSOLIDATED INCOME STATEMENT Year Ended Year Ended 31 December 31 December Note 2006 2005 £' Million £' Million Insurance premium revenue 101.2 104.6 Less premiums ceded to reinsurers (33.8) (31.2) Net insurance premium revenue 67.4 73.4 Fee and commission income 87.6 82.4 Profit on sale of investment in Life Assurance Holding Corporation 7.0 9.5 Other investment return 1,519.3 1,838.1 Total investment income 1,526.3 1,847.6 Other operating income 1.8 1.9 Net revenue 4 1,683.1 2,005.3 Policy claims and benefits Gross amount (58.2) (60.9) Reinsurers' share 23.1 26.2 Net policyholder claims and benefits incurred (35.1) (34.7) Change in insurance contract liabilities Gross amount 62.0 (75.4) Reinsurers' share (41.0) 9.2 Net change in insurance contract liabilities 21.0 (66.2) Investment contract benefits (1,139.3) (1,480.9) Fees, commission and other acquisition costs (260.6) (218.8) Administration expenses (86.1) (74.5) Other operating expenses (3.1) (3.1) (349.8) (296.4) Operating profit 179.9 127.1 Financing costs - - Profit before tax 4 179.9 127.1 Tax on policyholders' return (72.3) (83.9) Tax on shareholders' return (19.6) 4.4 Total tax expense (91.9) (79.5) Profit for period attributable to shareholders 88.0 47.6 Pence Pence Basic earnings per share 5 19.4 10.8 Diluted earnings per share 5 18.4 10.3 £' Million £' Million Dividends 6 15.1 12.7 Dividend per share Pence Pence Interim dividend 6 1.50 1.30 Proposed final dividend 6 2.15 1.85 Total 3.65 3.15 Proposed special dividend 6.35 - (PAGE 26) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Opening equity shareholders' funds 274.5 222.2 Profit for the financial period, being total recognised income for the financial period 88.0 47.6 Dividends (15.1) (12.7) Issue of share capital Scrip dividend 11.1 8.4 Exercise of share options 19.2 6.5 Consideration paid for own shares (5.4) (0.5) P & L reserve credit in respect of share option charges 7.6 3.0 P & L reserve credit in respect of proceeds from exercise of share options of shares held in trust 2.3 - Net increase to shareholders' funds 107.7 52.3 Closing equity shareholders' funds 382.2 274.5 (PAGE 27) CONSOLIDATED BALANCE SHEET AT 31 DECEMBER Note 2006 2005 £' Million £' Million Assets Intangible assets Deferred acquisition costs 393.6 325.0 Acquired value of in force business 64.3 67.4 457.9 392.4 Property & equipment 6.3 5.9 Deferred tax assets 83.8 70.5 Investment property 568.2 319.4 Investments Equities 9,014.5 7,317.3 Fixed income securities 595.2 573.1 Investment in Collective Investment Schemes 963.9 583.0 Currency forwards 0.2 0.2 Reinsurance assets 28.3 77.9 Insurance contract receivables 11.5 15.1 Income tax assets 9.7 21.0 Other receivables 87.1 97.1 Cash & cash equivalents 1,606.9 1,337.7 Total assets 13,433.5 10,810.6 Liabilities Insurance contract liability provisions 7 374.3 430.6 Other provisions 8 3.1 9.6 Financial liabilities Investment contracts 11,819.8 9,411.9 Borrowings 13.1 17.2 Currency forwards 0.1 2.5 Deferred tax liabilities 277.6 212.6 Reinsurance payables - 8.9 Payables related to direct insurance contracts 18.5 19.5 Deferred income 291.9 249.7 Income tax liabilities 19.9 9.9 Other payables 100.5 71.4 Net asset value attributable to unit holders 132.5 92.3 Total liabilities 13,051.3 10,536.1 Net assets 382.2 274.5 Shareholders' equity Share capital 9 69.6 67.1 Share premium 10 57.4 29.6 Other reserves 10 (8.4) (8.7) Retained earnings 10 263.6 186.5 Total shareholders' equity 382.2 274.5 Pence Pence Net assets per share 82.4 61.4 (PAGE 28) CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Cash flows from operating activities Profit before tax for the period 179.9 127.1 Adjustments for: Depreciation 2.5 2.8 Amortisation of acquired value of in-force business 3.1 3.1 Fair value gains on non-operating investments (0.1) (0.1) P&L reserve credit in respect of share option charges 7.6 3.0 Profit on sale of investment (7.0) (9.5) Changes in operating assets and liabilities Increase in deferred acquisition costs (68.6) (30.6) Increase in investment property (248.8) (189.6) Increase in investments (2,100.2) (1,797.8) Decrease / (increase) in reassurance assets 49.6 (7.6) Decrease / (increase) in insurance contract receivables 3.6 (6.6) Increase in other receivables (3.5) (23.5) Decrease / (increase) in insurance contract liability provisions (56.3) 79.3 Increase in provisions (excluding LAHC) 0.5 1.4 Increase in financial liabilities (excluding borrowings) 2,405.5 2,215.6 Decrease in reinsurance liabilities (8.9) (2.4) Decrease / (increase) in payables related to direct insurance contracts (1.0) 8.3 Increase in deferred income 42.2 17.9 Increase in other payables 29.1 20.2 Increase in net assets attributable to unit holders 40.2 34.1 Cash generated from operations 269.4 445.1 Income taxes paid (9.3) (2.4) Net cash from operating activities 260.1 442.7 Cash flows from investing activities Acquisition of property and equipment (3.0) (1.9) Proceeds from sale of plant and equipment 0.2 0.2 Proceeds from sale of LAHC 3.9 3.8 Net cash from investing activities 1.1 2.1 Cash flows from financing activities Proceeds from the issue of share capital 30.3 14.1 Consideration paid for own shares (5.4) (0.5) Proceeds from exercise of options over shares held in trust 2.3 - Repayment of borrowings (4.1) (5.2) Dividends paid (15.1) (12.7) Net cash from financing activities 8.0 (4.3) Net increase in cash and cash equivalents 269.2 440.5 Cash and cash equivalents at 1 January 1,337.7 897.2 Cash and cash equivalents at 31 December 1,606.9 1,337.7 (PAGE 29) NOTES TO THE CONSOLIDATED ACCOUNTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS 1. BASIS OF PREPARATION The group financial statements consolidate those of the Company and its subsidiaries and have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ('adopted IFRSs'). The Group has applied all IFRSs and interpretations adopted by the EU including all amendments to existing standards that are not effective until later accounting periods, except for the following: • Amendments to IAS 1 Presentation of Financial Statements (Capital Disclosures) • IFRS 7 Financial Instruments: Disclosures The effective date for both this amendment and the new standard is 1 January 2007, and it is likely that further disclosures will be required when the standards are applied. The group financial statements also comply with the revised Statement of Recommended Practice issued by the Association of British Insurers in December 2005 in so far as these requirements do not contradict IFRS requirements. 2. 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 2005. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Judgements The primary area in which the Group has applied judgement in applying accounting policies lies in the classification and unbundling of contracts between insurance and investment business. Contracts with a significant degree of insurance risk are treated as insurance; pension contracts in general have been treated as investment contracts and, where they contain a significant degree of insurance risk, they have been unbundled. All other contracts are treated as investment contracts. The Group has also elected to treat all assets backing linked and non unit-linked contracts as fair value through profit or loss although some of the assets in question may ultimately be held to maturity. Estimates The principal areas in which the Group applies accounting estimates are: • providing for long-term insurance business; • deciding the amount of management expenses that are treated as acquisition expenses; • amortisation and recoverability of deferred acquisition costs and deferred income; and • determining the fair value, amortisation and recoverability of acquired in-force business. Estimates are also applied in determining the level of deferred tax asset on unrelieved expenses and other provisions. The Group has applied estimation techniques consistent with those applied for the prior year accounts, except in application of PS 06/14, which has been applied in full and has had a significant effect on the reported results. (PAGE 30) Providing for long-term insurance business In 2006 the FSA made changes to the reserving requirements for insurance contracts through PS 06/14. The most important change was to introduce an allowance for the effect of lapses. However they also made a distinction between attributable and non-attributable expenses and required only that non-attributable expenses be reserved for at portfolio level. The lapse assumption was set prudently based on an investigation of experience during the year, as was the level of attributable expenses. No additional reserve was required for non-attributable expenses, as the future costs were less than future margins emerging. The adoption of PS 06/14 has increased pre-tax profits by £14.7 million in 2006. The other assumptions used in the calculation of insurance business liabilities that have a significant effect on the income statement of the Group are the assumed rate of investment return (based on the regulatory maximum rounded to the lower 0.1%) and the mortality and morbidity tables used for the calculation of non-linked insurance liabilities (based on the results of an investigation of experience during the year). Greater detail on the assumptions applied is shown in note 7. Other estimates Certain management expenses vary with the level of sales and have been treated as acquisition costs. Each line of costs has been reviewed and its variability to sales volumes estimated on the basis of the level of costs that would be incurred if sales ceased. Deferred acquisition costs and income on investment contracts are amortised on a straight-line basis over the average lifetime of the underlying contracts. The average lifetime of the contracts has been estimated from the experienced termination rates and the average age of clients at inception and maturity. Deferred acquisition costs and income on insurance contracts are amortised over the period during which the costs are expected to be recoverable in accordance with the projected emergence of future margins. There have been no new business combinations during the year. The acquired value of the in-force business has been amortised on a basis that reflects the expected profit stream arising from the business acquired at the date of acquisition. This profit stream is estimated from the experienced termination rates, expenses of management and age of the clients under the individual contracts as well as global estimates of investment growth, based on recent experience at the date of acquisition. Deferred acquisition costs and acquired value of in-force business relating to insurance and investment contracts are tested annually for recoverability by reference to expected future income levels. (PAGE 31) 4. SEGMENT REPORTING The Group segments its operations into three lines of business: 1. Life business - offering pensions, protection and investment products through the Group's life assurance subsidiaries; 2. Unit trust business - offering unit trust investment products, including ISAs and PEPs, through the St. James's Place Unit Trust Group; and 3. Other - offering financial products such as annuities, mortgages and stakeholder pensions, from third party providers. The income and results of these segments are as follows: Year Ended Year Ended 31 December 31 December Net Revenue 2006 2005 £' Million £' Million Life business Net insurance premium income 67.4 73.4 Net movement on deferred income (23.3) (7.8) Investment income - unit linked policyholders 1,503.9 1,813.3 Segment revenue 1,548.0 1,878.9 Unit trust business Fee income (excluding deferred income) 67.7 49.0 Net movement on deferred income (18.9) (10.1) Segment revenue 48.8 38.9 Other business Commission income 62.1 51.3 Investment income - sale of investment in LAHC 7.0 9.5 Investment income - other shareholders 6.7 5.4 Investment income - other(1) 8.7 19.4 Other operating income 1.8 1.9 Segment revenue 86.3 87.5 Total revenue(2) 1,683.1 2,005.3 (1) Investment income - other relates to investment income on third party holdings in the St. James's Place unit trusts which are subject to consolidation (the third party holdings are disclosed as 'net asset value attributable to unit holders' within the balance sheet). This income is offset by a change in investment contract benefits within the income statement. (2) All revenue is generated from external transactions. (PAGE 32) Year Ended Year Ended Segment Result 31 December 31 December 2006 2005 £' Million £' Million Life business Shareholder 85.5 29.3 Policyholder tax gross up 72.3 83.9 Unit trust business 18.0 12.8 Profit on sale of investment - LAHC 7.0 9.5 Other loss (2.9) (8.4) Total other business 4.1 1.1 Total operating profit 179.9 127.1 Financing costs - - Profit before tax 179.9 127.1 Income taxes Policyholder tax (72.3) (83.9) Shareholder tax (19.6) 4.4 Profit after tax 88.0 47.6 (PAGE 33) Other Segmental Information Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Segment Assets Life business 12,963.5 10,433.9 Unit trust business 103.3 82.2 Other business 303.9 260.7 Unallocated assets 93.5 91.5 Consolidation adjustments (30.7) (57.7) Total Assets 13,433.5 10,810.6 Segment Liabilities Life business 12,481.8 10,097.9 Unit trust business 94.0 76.9 Other business 69.4 72.8 Unallocated liabilities 297.5 222.5 Consolidation adjustments 108.6 66.0 Total Liabilities 13,051.3 10,536.1 Capital expenditure Other business 3.0 1.9 Depreciation Expense Other business 2.5 2.8 Amortisation Expense Life business - DAC 35.0 36.2 Life business - acquired value of in-force business 3.1 3.1 Unit trust business - DAC 5.2 4.2 5. EARNINGS PER SHARE Year Ended Year Ended 31 December 31 December 2006 2005 Pence Pence Basic earnings per share 19.4 10.8 Adjustments - disposal of LAHC (1.5) (2.2) Basic adjusted earnings per share 17.9 8.6 Diluted earnings per share 18.4 10.3 Adjustments - disposal of LAHC (1.5) (2.1) Diluted adjusted earnings per share 16.9 8.2 (PAGE 34) The earnings per share (EPS) calculations are based on the following figures: Year Ended Year Ended 31 December 31 December 2006 2005 £' Million £' Million Earnings Profit after tax (for both basic and diluted EPS) 88.0 47.6 Adjustments - disposal of LAHC (7.0) (9.5) Adjusted profit (for both basic and diluted EPS) 81.0 38.1 Weighted average number of shares Weighted average number of ordinary shares in issue (for basic EPS) 452.8 442.0 Adjustments for outstanding share options 25.8 20.4 Weighted average number of ordinary shares (for diluted EPS) 478.6 462.4 6. DIVIDENDS The following dividends have been paid by the Group: Year Ended Year Ended Year Ended Year Ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Pence per share Pence per share £' Million £' Million Final dividend in respect of previous financial year 1.85 1.60 8.3 6.9 Interim dividend in respect of current financial year 1.50 1.30 6.8 5.8 Total 3.35 2.90 15.1 12.7 The Directors have recommended a final dividend of 2.15 pence per share (2005: 1.85 pence). This amounts to £10.0 million (2005: £8.3 million) and will, subject to shareholder approval at the Annual General Meeting, be paid on 18 May 2007 to those shareholders on the register as at 9 March 2007. The Directors have also recommended the payment of a special payment of 6.35 pence (2005: nil), which amounts to £29.5 million. Subject to shareholder approval at the Annual General Meeting, it will also be paid on 18 May 2007 to those shareholders on the register as at 9 March 2007. (PAGE 35) 7. INSURANCE LIABILITIES 31 December 31 December 2006 2005 £' Million £' Million Balance at 1 January 430.6 351.4 Movement in unit linked liabilities 32.9 47.4 Movement in non-unit linked liabilities New business (2.9) (2.0) Existing business 2.9 7.4 Effect of PS06/14 (43.7) - Other assumption changes (29.4) 28.4 Claims reserve reclassification (14.9) - Experience variance (1.2) (2.0) Total movement in non-unit linked liabilities (89.2) 31.8 Balance at 31 December 374.3 430.6 Current 44.9 47.4 Non current 329.4 383.2 374.3 430.6 The changes introduced by the Financial Services Authority in PS06/14 resulted in significantly lower reserves. Other assumption changes in the year included revised expenses, lower future mortality and morbidity and release of additional reserves. (PAGE 36) Assumptions used in the calculation of liabilities The principal assumptions used in the calculation of the liabilities are: Assumption Description Interest rate The valuation interest rate is calculated by reference to the long term gilt yield at 31 December 2006 and the specific gilts backing the liabilities. The specific rates used are between 3.2% and 4.5% depending on the tax regime (3.0% and 4.3% at 31 December 2005). Mortality Mortality is based on company experience and is set at 72% of the TM/F92 tables with an additional loading for smokers. The shape has changed since 2005 although the overall level is similar. Morbidity - CI Morbidity is based on company experience. The shape has changed since 2005 although the level is similar. Sample annual rates per £ for a male non-smoker are: Age Rate 25 0.000703 35 0.001235 45 0.002953 Morbidity - PHI Morbidity is based on company experience. The rates have increased since 2005. Sample annual rates per £ income benefit p.a. for a male non-smoker are: Age Rate 25 0.00586 35 0.01547 45 0.03356 Expenses Contract liabilities are calculated allowing for the actual costs of administration of the business. The assumption for protection business has reduced which has been offset by an increase in the pension assumption. Product Cost Investment bonds £19.63 Pension business £39.07 Protection business £31.28 (PAGE 37) Persistency Allowance is made for a prudent level of lapses within the calculation of the liabilities. There was no allowance for lapses in 2005. Sample lapse rates include: Product 1 - 5 years 6 + years Bond 3% 5% Protection 14% 11% Single premium pensions 2% 8% Note: the lapse assumptions for single premium business vary by age rather than duration. The rates included in the table above are in respect of a plan commencing at age 55. 8. OTHER PROVISIONS LAHC Endowments Office Other Total Restructuring Provisions £' Million £' Million £' Million £' Million £' Million At 1 January 2006 7.0 1.5 0.9 0.2 9.6 Charged to the consolidated income statement - (0.7) (0.9) - (1.6) Additional provisions - - 2.1 - 2.1 Unused amounts released (7.0) - - - (7.0) At 31 December 2006 - 0.8 2.1 0.2 3.1 Current - 0.5 1.1 0.1 1.7 Non current - 0.3 1.0 0.1 1.4 - 0.8 2.1 0.2 3.1 The LAHC provision related to possible endowment and pensions sales claims under the transaction warranties and indemnities associated with the disposal of LAHC in 2004. Following the settlement of various matters for which the Group had made provision at 31 December 2005, all of the provision has been released. The endowments provision relates to the cost of redress for mortgage endowment complaints. The provision is based on estimates of the total number of complaints expected to be upheld and the average cost of redress. The office restructuring provision represents the expected amounts payable under a number of non-cancellable operating leases for office space that the Group no longer occupies. (PAGE 38) The provision is based on estimates of the rental payable until the approximate dates on which the Group expects either to have sublet the affected space or to have reached break clauses within the relevant lease agreements. Other provisions refer to outstanding obligations remaining from the Halifax acquisition of 60% of the share capital of the Company in June 2000. 9. SHARE CAPITAL Number of Ordinary Shares Share Capital £' Million At 1 January 2005 439,324,746 65.9 Scrip dividend 3,428,344 0.5 Exercise of options 4,678,033 0.7 At 31 December 2005 447,431,123 67.1 Scrip dividend 3,553,044 0.5 Exercise of options 12,874,781 2.0 At 31 December 2006 463,858,948 69.6 The total authorised number of ordinary shares is 605 million (2005: 605 million), with a par value of 15 pence per share (2005: 15 pence per share). All issued shares are fully paid. (PAGE 39) 10. RESERVES Treasury Profit and Shares to Share Shares Loss be Issued Miscellaneous Premium Reserve Reserve Reserve Reserves Total £' Million £' Million £' Million £' Million £' Million £' Million At 1 January 2005 15.9 (10.7) 148.8 0.1 2.2 156.3 Profit for the year 47.6 47.6 Dividends (12.7) (12.7) Issue of share capital Scrip dividend 7.9 7.9 Exercise of options 5.8 5.8 Consideration paid for own shares (0.5) (0.5) Own shares vesting charge 0.2 (0.2) - P & L reserve credit in respect of share option charges 3.0 3.0 At 31 December 2005 29.6 (11.0) 186.5 0.1 2.2 207.4 Profit for the year 88.0 88.0 Dividends (15.1) (15.1) Issue of share capital Scrip dividend 10.6 10.6 Exercise of options 17.2 17.2 Consideration paid for own shares (5.4) (5.4) Own shares vesting charge 3.4 (3.4) - P & L reserve credit in respect of proceeds from exercise of share options of shares held in trust 2.3 2.3 P & L reserve credit in respect of share option charges 7.6 7.6 At 31 December 2006 57.4 (10.7) 263.6 0.1 2.2 312.6 The shares to be issued reserve was established on the acquisition of the remaining share capital of St. James's Place Wealth Management Group ('SJPWM') by SJP in 1997. SJP agreed at the time of the acquisition to issue further shares, up to a maximum of 25.8 million, to satisfy the exercise of options in SJPWM held at the time of acquisition. The reserve was established in recognition of this commitment and 821 shares have still to be issued from the reserve. Miscellaneous reserves represent other non-distributable reserves. 11. NON-STATUTORY ACCOUNTS The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2006 or 2005 but is derived from those accounts. Statutory accounts for 2005 have been delivered to the registrar of companies, and those for 2006 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. (PAGE 40) 12. ANNUAL REPORT The Company's annual report and accounts for the year ended 31 December 2006 is expected to be posted to shareholders by 3 April 2007. 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.sjp.co.uk. This information is provided by RNS The company news service from the London Stock Exchange

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