Final Results

St. James's Place Capital PLC 28 February 2006 St. James's Place Capital Preliminary Announcement 28 February 2006 St. James's Place Capital plc today announces its annual results for the year ended 31 December 2005. 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 2005 PRE-TAX PROFIT Â£213.4 MILLION UP 63% St James's Place Capital plc (SJPC), the wealth management group, announces its annual results for the year ended 31 December 2005. European Embedded Value highlights include: â€¢Total Group profit before tax of Â£213.4 million up 63% (2004: profit before tax of Â£130.9 million) â€¢Group operating profit up 51% at Â£114.5 million (2004: Â£75.8 million) â€¢New business profits of Â£67.2 million for the year (2004: Â£45.8 million) up 47% â€¢Net asset value per share 185.2 pence (2004: 151.0 pence) up 23% International Financial Reporting Standards highlights include: â€¢Profit before shareholder tax of Â£43.2 million (2004: Â£34.4 million) up 26% â€¢Total profit before tax of Â£127.1 million up 124% (2004: Â£56.8 million) â€¢Net asset value per share 61.4 pence (2004: 50.6 pence) up 21% Other highlights include: â€¢New business for the year up 25% (measured on an annual premium equivalent) â€¢Funds under management up 29% to Â£12.3 billion Proposed final dividend of 1.85p per share making a total dividend for the year of 3.15p (2004: 2.85p) an increase of 10.5% for the full year. Mike Wilson, Chairman, commented: 'We are delighted with the 63% increase in pre-tax profits and the strength of the financial results in all areas. 'We believe that these results clearly demonstrate the value of marketing exclusively through our own dedicated distribution of experienced advisers, the St. James's Place Partnership. 'The Board is confident that our business model gives us competitive advantage and that St. James's Place is well positioned to capitalise on opportunities going forward.' CHAIRMAN'S STATEMENT I am delighted to report substantial growth in new business and a very strong financial performance during 2005, both exceeding our stretching objectives for the year. New business from long-term savings and investments (measured on the industry basis of annual premiums plus one tenth of single premiums) was up 25% over the year. Financial Performance The financial statements have been restated to present the result and prior year comparatives in accordance with International Financial Reporting Standards ('IFRS'). The Supplementary Financial Information, previously called Achieved Profit, has been restated to follow the new European Embedded Value Principles ('EEV'). The underlying operating profits before shareholder tax on the IFRS basis were Â£33.7 million (2004: Â£6.4 million) and after taking into account the disposal of LAHC, total profits before shareholder tax were Â£43.2 million (2004: Â£34.4 million). On the EEV basis, which the Board believes provides a more meaningful measure of the Group's performance, the pre-tax operating profit was Â£114.5 million (2004: Â£75.8 million) an increase of 51%. Total pre-tax profit, which includes the investment variance, was up from Â£130.9 million last year to Â£213.4 million in 2005. The Financial Commentary on pages 7 to 15 provides further details on the results for the year. Dividend The Board is recommending a final dividend of 1.85 pence per share, giving a total dividend of 3.15 pence per share for the year, representing a 10.5% increase over the prior year. Subject to the approval of shareholders at the Annual General Meeting, the final dividend will be paid on 17 May 2006 to those shareholders on the register as at 10 March 2006. Partners and Staff 2005 has been an excellent year of growth in both new business and profits which could not have been achieved without the enthusiasm, commitment and dedication of members of the Partnership and our staff. On behalf of the Directors and shareholders I would like to thank all members of the St. James's Place community for their contribution to our results last year. Foundation The St. James's Place Foundation, the Group's charitable trust, had another record year for fund raising in 2005. Funds raised including the Company matching were Â£1.7 million. As well as the regular funds raised by the 82% of our community giving on a monthly basis by gift aid, there have been many individual and team challenges with a number of events each raising over Â£100,000. On behalf of the Director team I 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. Board Changes As detailed in my statement included in our interim results, 2005 has seen some significant Board changes. After many years service, Lord Weir, Anthony Loehnis and Charles Bailey all retired from the Board during the year. In addition Phil Hodkinson and Grenville Turner stepped down as HBOS representatives and were replaced by John Edwards. I would like to thank each of them on behalf of the Board for their excellent contribution and support over the years. Simon Gulliford, Mike Power and Roger Walsom were appointed to the Board as independent non executive Directors during 2005 and all three are already making a valuable contribution to the Group. These changes will enable us to comply with the Combined Code provision that at least half the Board comprises independent non-executive Directors. Following the announcement that James Crosby will resign as Chief Executive of HBOS in July 2006 we announced on 17 February 2006 that James will step down from the SJPC Board on 31 May 2006 to be replaced by Andy Hornby, James's designated successor as Chief Executive of HBOS. At the same time John Edwards will step down as HBOS's other representative on our Board and will be replaced by Jo Dawson, the newly appointed HBOS director responsible for Insurance and Investment. Change of Company Name As we have now disposed of all our non core investments, the Board feels it is appropriate to remove the word 'Capital' from our company name. Accordingly, a resolution changing the name of the Company to St. James's Place plc will be put to shareholders at the Annual General Meeting on 9 May 2006. Mike Wilson 27 February 2006 CHIEF EXECUTIVE'S STATEMENT Introduction I said in our 2004 report that we foresaw very good prospects for continued growth over the longer term which we believed would deliver superior shareholder returns. I am pleased to report that with very positive market conditions in 2005 we were able to deliver outstanding growth and, as a consequence, excellent returns for our shareholders. We remain excited by the growth opportunities available to us in our chosen wealth management market sector and believe that our business is well positioned to further capitalise on these opportunities as one of the UK's pre-eminent and trusted face to face advisers. The St. James's Place Partnership Our proven adviser based approach to wealth management is built around the experienced members of the St. James's Place Partnership. Our number one goal is to ensure that St. James's Place remains a place where our Partners' businesses can continue to grow. In doing so our retention rate of existing Partners will continue to be excellent and we will ensure that we remain attractive to new high quality advisers. Membership of the St. James's Place Partnership at 31 December 2005 was 1,148, up 1.5% over the year in line with the revised expectations we set at the 2005 half year. The slow growth in Partnership numbers has been our one area of disappointment. We have put in place measures to improve our recruitment result, including the appointment of a dedicated recruitment Director and some of our most senior and dedicated managers are now solely focused on Partnership recruitment. We believe that we remain one of the best homes for high quality, trusted financial advisers and that we will see growth in the number of Partners in the future. When we look around the financial adviser market place we see a number of opportunities to attract advisers looking for a financially secure and stable home for their businesses, and a place where the advice they give to their clients benefits from the St. James's Place advice guarantee. The productivity of the Partnership increased by an impressive 23% over the year and is now around the same level as its previous peak in 2001, ignoring any inflationary increase. We believe there continues to be scope for future increases. In the last quarter we were delighted that the Partnership was voted the Best Financial Adviser in the Guardian / Observer Consumer Finance Awards, a true reflection of their quality. New Business New business is measured and presented as annual premium equivalent. This is the standard industry measure and is the sum of annual premiums plus one-tenth of single premiums. We have two key new business objectives, firstly to grow new business by 15 - 20% per annum over the longer term and secondly for our own products to represent at least 80% of the new business sold. I am pleased to report that we exceeded both of these objectives in 2005. New business growth during the year was Â£221 million, which is a 25% increase on 2004. The manufactured portion of new business was 83%, up 2% on 2004. We have now seen nine consecutive quarters of new business growth with the final quarter of 2005, up 39% over the corresponding quarter last year resulting in our highest ever quarter of new business. We were also pleased with the 33% growth in single premium business which included a 36% rise in pension business along with a 36% increase in unit trust business. In addition regular premium pension business grew by 19% and excluding sales of the non-manufactured stakeholder pensions the growth was 51%. Gross fees from our wealth management services rose by 33% to Â£28.3 million. Investment Management UK equity markets made their third consecutive year of gains in 2005. The FTSE All Share index achieved growth of 22% with income reinvested and most international equity markets made similar advances. This growth, together with new inflows of business from private, corporate and trustee clients and strong investment performance has resulted in our total funds under management exceeding more than Â£12 billion for the first time. The active involvement of our Investment Committee was once again demonstrated with a change to the management of our Select Managed fund. In April 2005 the Committee announced its decision to appoint Nick Purves of Schroder Investment Management as manager of the UK equity component of the fund. Our Investment Committee continues to appoint and monitor some of the best investment professionals with the aim of producing superior investment returns for our clients over the longer term. This approach has resulted in many accolades for our funds and 2005 has proven to be no different. From a Group perspective, we were awarded 1st place over 3 years in the category of Best Mixed / Multi Asset Unit Trust Group by Lipper and awarded second place over 1 year in the Best UK Pensions Group (Smaller) category by Standard & Poor's. The THSP Managed Pension Fund was, once again, awarded 1st place in the Balanced Managed Pension Fund Sector by Standard & Poor's. More notably, this was the fourth occasion in five years the Fund had received this award. Our GAM Managed Pension Fund was also ranked as the best Balanced Managed Pension Fund over 5 years by Moneywise. Investment in IT Systems Over the last three years we have been investing in our technology infrastructure with the aim of improving and streamlining business processing. Our Service Delivery Infrastructure programme (SDI) is largely complete and we are now in the process of rolling this out across the company and the Partnership. The new infrastructure is already proving beneficial in terms of improved business processing, access to client data records and management information. Regulation and Compliance Once again the regulatory landscape continued to change in 2005. The key event was the arrival of the depolarised market. St. James's Place adopted the new depolarisation rules prior to the June 2005 deadline. In most senses this turned out to be very much business as usual for us given the earlier expansion in the range of products and services we offer. We continued to expend considerable effort on ensuring that our business maintained the highest possible regulatory standards. We have a good and close working relationship with the FSA whom we regard as a key stakeholder. 2006 Developments The major development in 2006 is Pensions A Day in April where a whole range of pensions regulations will be replaced by a single set of rules. Following A day we will be launching two new plans: the St. James's Place Retirement Plan and the St. James's Place Drawdown Plan. These two new pension plans will form part of our Retirement Account currently under development and which will allow Partners and clients to have a consolidated and complete picture of all their retirement plans in one place, the St. James's Place Retirement Account. Investing, building and preserving capital is the centre of our wealth management proposition and our investment approach has an enviable long term track record. We must continue to evolve and we have recently announced the addition of two new funds to our range: a high interest cash bond managed by AIG and the St. James's Place AIM Portfolio managed by Close Brothers and specifically designed to offer full Inheritance Tax mitigation. Partners and Employees I would like to echo the comments Mike has already made in his Chairman's Statement on the continued enthusiasm, commitment and dedication of both the Partnership and our employees and to add my thanks to our whole community including our outsourced service providers - a tremendous effort by everyone. Our mission statement for the Partnership is 'To be regarded as the most professional and trusted provider of advice on wealth management'. The advice is backed by the St. James's Place Guarantee, which states that the St. James's Place stands behind and guarantees the advice given by members of the Partnership when recommending any of the products and services provided by the companies in the St. James's Place group. Inherent in everything we do is our desire to be fair and reasonable to clients and all our stakeholders. Outlook The market backdrop remains positive for what we do for the following reasons: â€¢ Demographics - people are living longer and as a result time in retirement is both longer and more expensive, â€¢ Economics - the burden of funding pensions is continuing to shift from companies to individuals especially with the demise of defined benefit schemes, â€¢ Property - the increase in residential property valuations over the last decade has meant that for an increasing number of people their estates now fall into the inheritance tax net, â€¢ Individuals - are increasingly on their own to plan and provide for their own financial future. No longer can they rely on their company and the pension fund trustees to do it for them; they will need to take advice from another individual whom, most importantly, they trust. We are in a growth market and the Board believes that St. James's Place remains well positioned to capitalise on these opportunities going forward. Mark Lund 27 February 2006 FINANCIAL COMMENTARY The financial commentary is as usual 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 2005 has seen some considerable changes in the bases we are required to follow in preparing the financial results. In common with all listed companies EU law requires us to present our 2005 primary financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted for use in the European Union. In adopting IFRS we have restated the consolidated balance sheet at 31 December 2004, the related consolidated income statement and the consolidated statement of changes in equity for the year ended 31 December 2004. Full details of the restatement are shown on pages 51 to 59. This restatement differs from that initially published by the Group primarily due to changes in the presentation of policyholder tax and the classification of insurance and investment contracts. The restated profit after tax and net assets are unaffected. As shareholders are aware in addition to the primary financial information SJPC and life assurance groups generally provide supplementary financial information which takes into account the future expected cash flows from the in-force business. Following industry guidance and in common with other listed life assurance groups the previously reported Achieved Profit ('AP') result has been restated for the adoption of the European Embedded Value ('EEV') Principles. Full details of the restatement are included in our press release entitled 'Restatement of 2004 Full Year Results Under European Embedded Value Principles' issued on 8 December 2005. International Financial Reporting Standards (IFRS) The IFRS result is shown on pages 29 to 59. IFRS requires the pre-tax profit of the life business to be 'grossed-up' for policyholder tax. The corresponding amount is then deducted within the tax charge. This requirement results in the current year pre-tax profit being 'grossed-up' by some Â£83.9 million (2004: Â£22.4 million) giving a total pre-tax profit of Â£127.1 million (2004: Â£56.8 million). This 'grossing-up' makes the pre-tax profit very volatile and does not reflect the shareholder return from the life business. The following table and accompanying narrative refer to the profit of the Group after eliminating this 'gross-up'. Year Ended Year Ended 31 December 31 December 2005 2004 Â£' Million Â£' Million ------------ ------------ Life business 29.3 7.0 Unit trust business 12.8 11.8 Other (4.1) (6.8) ------------ ------------ 38.0 12.0 IT systems development (4.3) (5.6) ------------ ------------ Operating profit 33.7 6.4 Profit on sale of LAHC 9.5 28.0 ------------ ------------ Profit before shareholder tax 43.2 34.4 Policyholder tax 83.9 22.4 ------------ ------------ Total pre-tax profit 127.1 56.8 ============ ============ Profit after tax 47.6 39.7 ============ ============ The life business pre-tax profit for the year was Â£29.3 million (2004: Â£7.0 million). The significant improvement in the life result reflects the higher funds under management, additional tax relief obtained for the company's expenses and the release of a Â£4.0 million provision. Shareholders will recall that this provision was established last year against an adverse outcome of a VAT case awaiting judgement from the European Court of Justice (ECJ). Although the ECJ decision did produce an adverse outcome, the adoption of legislative changes to implement the Court's decision has been postponed on the advice of the European Commission pending an EU review of VAT in the wider financial services sector. Therefore a provision is no longer considered appropriate. The profit for the unit trust business was Â£12.8 million (2004: Â£11.8 million) which reflects the higher funds under management. The other operations of the business incurred a loss of Â£4.1 million (2004: Â£6.8 million). Included within this figure is a Â£3.0 million cost (2004: Â£2.3 million) of expensing share options in accordance with IFRS2. The corresponding loss for 2004 included one-off expenditure of some Â£3.0 million pre-tax together with a Â£1.0 million pre-tax cost of establishing a provision to cover the potential redress on in-force endowment policies. During the current year a further Â£0.5 million pre-tax was set aside for the potential endowment redress and at 31 December 2005 the remaining provision was Â£1.5 million. The costs incurred on the strategic IT system development during the year were Â£4.3 million pre-tax (2004: Â£5.6 million). This majority of this development is now completed and the future running costs will be included in operational expenses going forward. Taking into account these factors the pre-tax operating profit was Â£33.7 million (2004: Â£6.4 million). In 2004 SJPC disposed of its holding in LAHC and reported a pre-tax profit of Â£28.0 million. At the time of the disposal a provision of Â£16.5 million was established against possible claims under the transaction warranties and indemnities. During 2005 Â£9.5 million of the provision has been released following a review of the status of the warranties and indemnities position. At 31 December 2005 the remaining provision was Â£7.0 million. The resulting total profit before shareholder tax on an IFRS basis was Â£43.2 million, compared with Â£34.4 million for the prior year. The total net assets were Â£274.5 million (2004: Â£222.2 million) resulting in a net asset value per share of 61.4 pence (2004: 50.6 pence). European Embedded Value Basis The table below summarises the pre-tax profit of the combined business. Year Ended Year Ended 31 December 31 December 2005 2004 Â£' Million Â£' Million ------------ ------------ Life business 92.3 57.3 Unit trust business 30.6 30.9 Other (4.1) (6.8) ------------ ------------ 118.8 81.4 IT systems development (4.3) (5.6) ------------ ------------ Operating profit 114.5 75.8 Investment return variance 86.1 26.5 Economic assumption changes 3.3 0.6 ------------ ------------ Profit from core business 203.9 102.9 Profit on sale of LAHC 9.5 28.0 ------------ ------------ Total pre-tax profit 213.4 130.9 ============ ============ Profit after tax 160.7 101.0 ============ ============ The life business operating profit for the year was Â£92.3 million pre-tax (2004: Â£57.3 million pre-tax) and a full analysis of the result is shown on page 23. This significant improvement is down to an increase in the new business contribution together with an improvement in the experience variance. The new business contribution increased by 62% from Â£29.9 million pre-tax for 2004 to Â£48.4 million pre-tax, reflecting the strong growth and favourable mix of new business together with the continued control of establishment expenses. In 2005 there was a positive experience variance of Â£1.7 million pre-tax compared with a negative experience variance in 2004 of Â£11.2 million pre-tax. Included in the current year positive variance is the reversal of the Â£4.0 million VAT provision mentioned earlier. The balance of the experience variance in 2005 is the sum of a number of items including positive tax effects and negative mortality experience. The large 2004 negative experience variance was predominantly due to the establishment of the Â£4.0 million VAT provision released in 2005 and an increase to the maintenance expense loading assumed in the EEV calculation. The pre-tax operating profit of the unit trust business was Â£30.6 million (2004: Â£30.9 million) and a full analysis of this result is shown on page 24. The new business contribution in the current year was up from Â£15.9 million pre-tax to Â£18.8 million pre-tax, and there was a small positive experience variance of Â£0.6 million compared with a Â£5.2 million pre-tax positive experience variance in the prior year. The high positive experience variance in 2004 reflected stronger persistency whilst the small deterioration in persistency rates experienced in the first half of 2005 has not been repeated. As noted earlier in this statement, the other operations of the Group incurred a loss for the year of Â£4.1 million (2004: loss of Â£6.8 million) and the costs of the strategic IT systems development were Â£4.3 million (2004: Â£5.6 million). The resulting pre-tax operating profit for the year was Â£114.5 million (2004: Â£75.8 million) an increase of 51%. During the year the average after tax increase in our fund prices ranged from 13-18% above the embedded value assumption resulting in a positive investment variance of Â£86.1 million pre-tax (2004: Â£26.5 million). Taking into account the release of the LAHC provision covered earlier in this statement and the small profit arising from the changes to the economic assumptions, the total pre-tax profit for the year was Â£213.4 million some Â£82.5 million higher than the Â£130.9 million for the prior year. The total net assets on an EEV basis at 31 December 2005 were Â£828.8 million (2004: Â£663.4 million) resulting in a net asset value per share of 185.2 pence (2004: 151.0 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. 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£5.0 million (2004: Â£2.8 million), sales of stakeholder products of Â£1.6 million (2004: Â£2.1 million) and sales through the Protection Panel of Â£9.8 million (2004: Â£9.3 million). The table below shows the breakdown of expenses in the same format as usual: Year Ended Year Ended 31 December 31 December 2005 2004 Category Â£' Million Â£' Million ----------- ----------- Paid from policy margins Commission 131.6 99.1 Investment expenses 35.1 25.2 Third party administration 19.2 20.5 ----------- ----------- 185.9 144.8 Direct expenses Other new business related costs 20.5 16.7 Establishment costs 75.4 71.7 Contribution from third party product sales (16.4) (14.2) ----------- ----------- 79.5 74.2 ----------- ----------- 265.4 219.0 =========== =========== At the start of the year we set a target of maintaining the growth in the establishment expenses at between 5-10% below the corresponding growth in new business. The growth in the establishment expenses has been maintained at 5.2% which is some 20% below the growth in new business - therefore exceeding our target in this respect and expanding the new business margin. For 2006 we have set a target of maintaining the growth in the establishment expenses in a range of 5-8% and 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) 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 2005 there remain approximately Â£112.9 million (2004: Â£115.7 million) of excess unrelieved expenses and Â£209.3 million (2004: Â£191.8 million) of deferred expenses being carried forward for use in future years. Of these, Â£145.9 million (2004: Â£38.4 million) were required to cover an excess of realised losses in the unit linked funds over those available to the Company. The utilisation of these expenses depends considerably upon the level and timing of future net realised capital gains, allowing for the interchanges between the total company and fund gain positions. The EEV Principles require a revised calculation approach for the tax assets relative to previous years, including the application of a stochastic methodology, as the value does not move linearly with market movements. Within the EEV result, the value at 31 December 2005 was Â£17.8 million (2004: Â£28.9 million). For IFRS reporting, the value placed on the deferred tax asset was Â£16.0 million (2004: Â£7.3 million). (iii) Operational Risks and Capital Management The Group's policy to managing the solvency capital in the regulated entities is as follows: â€¢ wherever possible, its liabilities are matched to appropriate assets to minimise exposure to fluctuating stock markets and interest rates; â€¢ the solvency assets are held in deposits, AA or better rated corporate bonds, government gilts or AAA rated money market funds; â€¢ the Group has never written nor intends to write business with onerous investment guarantees or options; â€¢ the group has no defined benefit pension scheme liabilities. (iv) Life business capital available and solvency requirements 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 and liabilities in respect of the life assurance business are summarised in the tables below. Capital SJP UK (1) SJPI (1) Other Subsidiaries, Group Total Consolidation and IFRS Adjustments Â£' Million Â£' Million Â£' Million Â£' Million --------- --------- ------------ --------- Shareholders' funds outside fund 6.9 83.7 (2) 90.6 Shareholders' funds inside fund 91.1 45.5 47.3 (3) 183.9 --------- --------- ------------ --------- Total shareholders' funds 98.0 45.5 131.0 274.5 Adjustments on regulatory basis: Adjustment to (4.4) (3.2) (7.6) assets Other (33.9) (5.0) (38.9) adjustments --------- --------- ------------ --------- Total available capital resources 59.7 37.3 131.0 228.0 ========= ========= ============ ========= Liabilities SJP UK SJPI Other Subsidiaries, Group Total Consolidation and IFRS Adjustments Â£' Million Â£' Million Â£' Million Â£' Million -------- --------- ------------ --------- Long-term business and 149.7 6.3 156.0 claims provisions Unit linked 7,664.5 2,036.7 (9,426.6) (4) 274.6 liabilities -------- --------- ------------ --------- Total insurance contract 7,814.2 2,043.0 (9,426.6) 430.6 liability ======== ========= ============ ========= provisions Notes (1) Under local GAAP (2) This represents the other net assets of the Group including capital allocated to other regulated business (3) This adjustment represents the purchased value of in-force business within the life fund (4) Re-classified as investment contracts under IFRS The change in total shareholders' funds available to the life businesses from that at 31 December 2004 reflects the post tax profits for 2005 calculated under local GAAP. The sensitivity of pre-tax profit and shareholders' funds to changes in market conditions, together with the effect of actual changes in assumptions in 2005, is set out in note 6. The processes used to determine the assumptions that have the greatest effect on the easurement of insurance liabilities are set out in note 2. 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. The required minimum solvency margin for the two life businesses is currently approximately Â£32.0 million (2004:Â£30.0 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. In calculating the EEV 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 2005 was approximately Â£3.0 million post tax (2004: Â£3.0 million). (v) Analysis of the Embedded Value The table below provides a summarised breakdown of the Embedded Value position at the reporting dates: Year Year Ended Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Value of in-force - Life 503.0 404.4 - Unit trust 140.7 113.5 Solvency assets 185.1 145.5 --------- --------- Total embedded value 828.8 663.4 ========= ========= (vi) Share options maturity Options outstanding under the various share option schemes at 31 December 2005 amount to 56.5 million (31 December 2004: 52.3 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 of Average Number of Anticipated exercise exercise share options proceeds price outstanding ---------- ----------- --------- Â£ Million Â£' Million Prior to Jan 2006 1.67 24.1 40.3 Jan - Jun 2006 0.92 4.8 4.4 Jul - Dec 2006 1.43 3.0 4.3 Jan - Jun 2007 1.65 5.1 8.4 Jul - Dec 2007 1.51 4.3 6.5 Jan - Jun 2008 1.04 2.4 2.5 Jul - Dec 2008 1.33 0.3 0.4 Jan - Jun 2009 1.57 0.7 1.1 Jul - Dec 2009 2.34 11.1 26.0 Jan - Jun 2010 2.40 0.5 1.2 Jul - Dec 2010 2.00 0.2 0.4 --------- --------- 56.5 95.5 ========= ========= Included within those share options with an earliest date of exercise prior to January 2006 are 10.1 million options with an expiry date before the end of July 2007 with anticipated proceeds of Â£13.4 million. Of those options with an earliest date of exercise prior to January 2006, 2,845,350 options require further performance conditions to be met before vesting unconditionally. (vii) VAT As mentioned earlier in this statement the European Commission has announced a review of the VAT exemption currently applied to the insurance and financial services industries. A consultation document is expected to be issued in early spring and the Company remains exposed to the risk of a change in the existing VAT exemption definitions. Andrew Croft 27 February 2006 RESULTS ON 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 2005 2004 --------- --------- Â£' Million Â£' Million Life business 92.3 57.3 Unit trust business 30.6 30.9 Other (4.1) (6.8) --------- --------- 118.8 81.4 IT systems development (4.3) (5.6) --------- --------- Operating profit 114.5 75.8 Investment return variances 86.1 26.5 Economic assumption changes 3.3 0.6 --------- --------- Profit from core business 203.9 102.9 Profit from other business Profit on sale of LAHC 9.5 28.0 --------- --------- EEV profit on ordinary activities before 213.4 130.9 tax Taxation Life business (42.7) (19.1) Unit trust business (15.8) (12.0) Other 5.8 1.2 LAHC - - --------- --------- (52.7) (29.9) --------- --------- EEV profit on ordinary activities after 160.7 101.0 tax ========= ========= CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Opening equity shareholders' funds on an 663.4 561.5 EEV basis Post tax profit for the year 160.7 101.0 Dividends (12.7) (11.8) Issue of share capital 14.9 11.8 Consideration paid for own shares (0.5) (1.4) P&L reserve credit in respect of share option charges 3.0 2.3 -------- --------- Closing equity shareholders' funds on an 828.8 663.4 EEV basis ========= ========= CONSOLIDATED BALANCE SHEET 31 December 31 December 2005 2004 ----------- ---------- Â£' Million Â£' Million Assets Intangible assets Deferred acquisition costs 325.0 294.4 Value of long-term business in-force - long-term insurance 460.9 377.2 - unit trusts 140.7 113.5 ----------- ---------- 926.6 785.1 Property & equipment 5.9 6.9 Deferred tax assets 70.5 54.9 Investment property 319.4 129.8 Investments 8,473.6 6,675.8 Reinsurance share of insurance provisions 77.9 70.3 Insurance contract receivables 15.1 8.5 Income tax assets 21.0 7.8 Other receivables 97.1 89.9 Cash & cash equivalents 1,337.7 897.2 ----------- ---------- Total assets 11,344.8 8,726.2 =========== ========== Liabilities Insurance contract liability provisions 430.6 351.3 Other provisions 9.6 17.7 Financial liabilities 9,431.6 7,221.2 Deferred tax liabilities 192.5 103.8 Reinsurance payables 8.9 11.3 Payables related to direct insurance contracts 19.5 11.2 Deferred income 249.7 231.8 Income tax liabilities 9.9 5.1 Other payables 71.4 51.2 Net asset value attributable to unit holders 92.3 58.2 ----------- ---------- Total liabilities 10,516.0 8,062.8 =========== ========== Net assets 828.8 663.4 =========== ========== Shareholders' equity Share capital 67.1 65.9 Share premium 29.6 15.9 Other reserves 732.1 581.6 ----------- ---------- Total shareholders' equity 828.8 663.4 =========== ========== Pence Pence ----------- ---------- Net assets per share 185.2 151.0 =========== ========== NOTES TO THE EUROPEAN EMBEDDED VALUE BASIS I. BASIS OF PREPARATION The supplementary information on pages 16 to 28 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. 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 this projected profit stream. The Group has replaced the Achieved Profits basis previously used in its supplementary financial statements with the EEV basis. A restatement of the results for the year ended 31 December 2004 was issued on 8 December 2005 and these results have been included as the prior year comparatives in this supplementary information. A copy of the restatement document can be obtained from the Group's website, www.sjpc.co.uk, from 2005 Press Releases under Company Announcements. II. METHODOLOGY AND ASSUMPTIONS (a) Covered business The covered business is the life, pension and investment business, including unit trust business, undertaken by the Group. (b) 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: â€¢ The risk discount rate â€¢ The allowance for the cost of financial options and guarantees â€¢ 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. (c) 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. 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. This average risk discount rate has also been used to calculate the published value of new business. (d) 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%. (e) 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 required 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. (f) 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. (g) 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. (h) 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 carried forward unutilised expenses). 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 2005 are set out below: Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ----------- Risk discount rate (net of tax) 7.3% 7.7% Future investment returns: - Gilts 4.3% 4.7% - Equities 7.3% 7.7% - Unit-linked funds - Capital growth 3.6% 4.2% - Dividend income 3.0% 2.8% - Total 6.6% 7.0% Expense inflation 4.3% 4.4% Indexation of capital gains 2.0% 2.1% The assumed future pre-tax returns on fixed interest securities are set by reference to the yield on 10 year gilts. 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 valuation of 10 year index-linked gilts (2.8% at 31 December 2005). This rate is increased by 1.5%, to reflect higher increases in earnings, to derive the expense inflation assumption. The 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 on a regular basis. 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. 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) Other Points 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, changes in reserving basis (other than economic assumption changes) and 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. 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. A provision of Â£7.0 million before tax (31 December 2004: Â£7.0 million) has been included within the cash flows to provide for adverse morbidity experience on critical illness plans. IV. COMPONENTS OF EEV PROFIT (a) Life Business Note Year Ended Year Ended 31 December 31 December 2005 2004 Restated ---------- ---------- Â£' Million Â£' Million New business contribution 1 48.4 29.9 Profit from existing business Unwind of discount rate 41.1 36.0 Experience variances 1.7 (11.2) Operating assumption (2.5) (0.5) changes Investment income 3.6 3.1 ---------- ---------- Operating profit before tax 92.3 57.3 Investment return variances 63.6 17.2 Economic assumption changes 3.8 0.9 ---------- ---------- Profit before tax 159.7 75.4 Attributed tax (42.7) (19.1) ---------- ---------- Profit after tax 117.0 56.3 ========== ========== Note 1: New business contribution after tax is Â£35.3 million (December 2004: Â£22.3 million) (b) Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2005 2004 Restated ---------- ---------- Â£' Million Â£' Million New business contribution 1 18.8 15.9 Profit from existing business Unwind of discount rate 11.2 9.8 Experience variances 0.6 5.2 Operating assumption - - changes ---------- ---------- Operating profit before tax 30.6 30.9 Investment return variances 22.5 9.3 Economic assumption changes (0.5) (0.3) ---------- ---------- Profit before tax 52.6 39.9 Attributed tax (15.8) (12.0) ---------- ---------- Profit after tax 36.8 27.9 ========== ========== Note 1: New business contribution after tax is Â£13.2 million (December 2004: Â£11.1 million) (c) Combined Life and Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2005 2004 Restated ---------- ---------- Â£' Million Â£' Million New business contribution 1 67.2 45.8 Profit from existing business: Unwind of discount rate 52.3 45.8 Experience variances 2.3 (6.0) Operating assumption 2 (2.5) (0.5) changes Investment income 3.6 3.1 ---------- ---------- Operating profit before tax 122.9 88.2 Investment return variances 86.1 26.5 Economic assumption changes 3.3 0.6 ---------- ---------- Profit before tax 212.3 115.3 Attributed tax (58.5) (31.1) --------- ---------- Profit after tax 153.8 84.2 ========== ========== Note 1: New business contribution after tax is Â£48.5 million (December 2004: Â£33.4 million). Note 2: The operating assumption changes in 2005 include changes to mortality, morbidity and expense assumptions. (d) Detailed Analysis In order to better explain the movement in capital flows, the components of the EEV profit 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. Year Ended 31 December 2005 Movement Movement Movement in IFRS in PVIF in EEV Net Assets ---------- -------- --------- Â£' Million Â£' Million Â£' Million New business contribution (43.4) 91.9 48.5 Profit from existing business 60.4 (60.4) - Unwind of discount - 38.0 38.0 rate Experience variances 18.6 (17.2) 1.4 Operating assumption (13.5) 11.6 (1.9) changes Investment return 2.9 - 2.9 Investment return variances 4.9 57.7 62.6 Economic assumption changes - 2.4 2.4 Profit on sale of LAHC 9.5 - 9.5 Miscellaneous 8.2 (10.9) (2.7) ---------- -------- --------- Profit after tax 47.6 113.1 160.7 ========== ======== ========= 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 components of the operating assumption changes are the increases in insurance contract liability provisions due to changes in the mortality, morbidity and expense assumptions. These were allowed for in the 2004 EEV PVIF and have resulted in a transfer from PVIF to net assets this year. 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 -------- --------- -------- Â£' Million Â£' Million Â£' Million Value at 31 December 2005 67.2 48.5 828.8 100bp reduction in 1 13.0 9.4 51.2 risk discount rate 100bp reduction in risk-free rates, with corresponding change 3.0 2.1 2.6 in fixed interest asset values 10% reduction in 8.4 6.1 35.0 withdrawal rates 10% reduction in 10.0 7.3 12.1 expenses 10% reduction in market value of n/a n/a (53.6) equity assets 5% reduction in mortality and morbidity 2 0.6 0.4 3.5 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. VI. RECONCILIATION OF IFRS AND EEV PROFIT BEFORE TAX AND NET ASSETS Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ---------- Â£' Million Â£' Million IFRS profit before tax 127.1 56.8 Movement in life value of in-force 46.5 46.0 Movement in unit trust value of in-force 39.8 28.1 ---------- ---------- Total EEV profit before tax 213.4 130.9 ---------- ---------- Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ---------- Â£' Million Â£' Million IFRS net assets 274.5 222.2 Less: acquired value of in-force (67.4) (70.5) Add: deferred tax on acquired value of 20.1 21.0 in-force Add: life value of in-force 460.9 377.2 Add: unit trust value of in-force 140.7 113.5 ---------- ---------- EEV net assets 828.8 663.4 ---------- ---------- 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 2005 2004 ---------- ---------- Â£' Million Â£' Million Life company free assets 65.0 43.2 Required life company solvency capital 32.0 30.0 Other subsidiaries, consolidation and IFRS adjustments 177.5 149.0 ---------- ---------- IFRS net assets 274.5 222.2 ---------- ---------- Year Ended 31 December 2005 ---------- Â£' Million Life company free assets at 1 January 43.2 Investment in new business (40.1) Profit from existing business 61.0 Investment return 2.9 Movement in required solvency capital (2.0) ---------- Life company free assets at 65.0 31 December ---------- RESULTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS CONSOLIDATED INCOME STATEMENT Note Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Insurance premium revenue 104.6 108.5 Less premiums ceded to reinsurers (31.2) (27.2) --------- --------- Net insurance premium revenue 73.4 81.3 Fee and commission income 82.4 62.7 Profit on sale of investment in Life Assurance Holding Corporation 9.5 28.0 Other investment return 1,812.0 819.5 --------- --------- Total investment income 1,821.5 847.5 Other operating income 1.9 1.5 --------- --------- Net income 3 1,979.2 993.0 Policy claims and benefits Gross amount (60.9) (59.8) Reinsurers' share 26.2 21.7 --------- --------- Net policyholder claims and benefits incurred (34.7) (38.1) Change in insurance contract liabilities Gross amount (75.4) (10.5) Reinsurers' share 9.2 (6.9) --------- --------- Net change in insurance contract liabilities (66.2) (17.4) Investment contract benefits (1,480.9) (647.5) Fees, commission and other acquisition costs (218.8) (179.2) Administration expenses (48.4) (49.8) Other operating expenses (3.1) (3.0) --------- --------- (270.3) (232.0) --------- --------- Operating profit 127.1 58.0 Financing costs - (1.2) --------- --------- Profit before tax 3 127.1 56.8 Tax on policyholders' return (83.9) (22.4) Tax on shareholders' return 4.4 5.3 --------- --------- Total tax expense (79.5) (17.1) --------- --------- Profit for period attributable to shareholders 47.6 39.7 ========= ========= Dividends 4 12.7 11.8 --------- --------- Pence Pence Dividend per share Interim dividend 4 1.30 1.25 Proposed final dividend 4 1.85 1.60 --------- --------- Total 3.15 2.85 Basic earnings per share 5 10.8 9.1 Diluted earnings per share 5 10.3 8.8 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Opening equity shareholders' funds 222.2 181.6 Profit for the financial period, being total recognised income for the financial period 47.6 39.7 Dividends (12.7) (11.8) Issue of share capital Scrip dividend 8.4 8.0 Exercise of share options 6.5 3.8 Consideration paid for own shares (0.5) (1.4) P & L reserve credit in respect of share option charges 3.0 2.3 --------- --------- Net increase to shareholders' funds 52.3 40.6 --------- --------- Closing equity shareholders' funds 274.5 222.2 ========= ========= CONSOLIDATED BALANCE SHEET AT 31 DECEMBER Note 2005 2004 --------- --------- Â£' Million Â£' Million Assets Intangible assets Deferred acquisition costs 325.0 294.4 Acquired value of in force 67.4 70.5 business --------- --------- 392.4 364.9 Property & equipment 5.9 6.9 Deferred tax assets 70.5 54.9 Investment property 319.4 129.8 Investments Equities 7,317.3 5,637.9 Fixed income securities 573.1 656.3 Investment in Collective 583.0 381.4 Investment Schemes Currency forwards 0.2 0.2 Reinsurance assets 77.9 70.3 Insurance contract receivables 15.1 8.5 Income tax assets 21.0 7.8 Other receivables 97.1 89.9 Cash & cash equivalents 1,337.7 897.2 --------- --------- Total assets 10,810.6 8,306.0 ========= ========= Liabilities Insurance contract liability provisions 6 430.6 351.3 Other provisions 7 9.6 17.7 Financial liabilities Investment contracts 9,411.9 7,192.2 Borrowings 17.2 22.4 Currency forwards 2.5 6.6 Deferred tax liabilities 212.6 124.8 Reinsurance payables 8.9 11.3 Payables related to direct insurance contracts 19.5 11.2 Deferredncome 249.7 231.8 Income tax liiabilities 9.9 5.1 Other payables 71.4 51.2 Net asset value attributable to unit holders 92.3 58.2 --------- --------- Total liabilities 10,536.1 8,083.8 ========= ========= Net assets 274.5 222.2 ========= ========= Shareholders' equity Share capital 8 67.1 65.9 Share premium 9 29.6 15.9 Other reserves 9 (8.7) (8.4) Retained earnings 9 186.5 148.8 --------- --------- Total shareholders'equity 274.5 222.2 ========= ========= Pence Pence --------- --------- Net assets per share 61.4 50.6 ========= ========= CONSOLIDATED STATEMENT OF CASH FLOWS Note Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Cash generated from operations 10 445.1 (89.6) Interest paid - (1.2) Income taxes (paid) / received (2.4) 2.9 --------- --------- Net cash from operating activities 442.7 (87.9) Cash flows from investing activities Acquisition of property, plant and equipment (1.9) (3.1) Proceeds from sale of plant and equipment 0.2 0.3 Investments: Proceeds from sale 3.8 64.4 --------- --------- Net cash from investing activities 2.1 61.6 Cash flows from financing activities Proceeds from the issue of share capital 5.7 3.7 Consideration paid for own shares (0.5) (1.4) Repayment of borrowings (5.2) (31.2) Dividends paid (4.3) (3.8) --------- --------- Net cash from financing activities (4.3) (32.7) --------- --------- Net increase / (decrease) in cash and cash equivalents 440.5 (59.0) Cash and cash equivalents at 1 897.2 956.2 January --------- --------- Cash and cash equivalents at 31 December 1,337.7 897.2 ========= ========= NOTES TO THE ACCOUNTS 1. ACCOUNTING POLICIES St. James's Place Capital plc ('the Company') is a company incorporated and domiciled in England and Wales. Statement of Compliance The group financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group'). The group financial statements 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: â€¢ Amendments to IAS 1 Presentation of Financial Statements (Capital Disclosures) â€¢ 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. The Group is preparing its financial statements in accordance with IFRS as adopted for use in the EU for the first time and consequently has applied IFRS 1. An explanation of how the transition to adopted IFRSs has affected the reported financial position, financial performance and cash flows of the Group is provided in note 12. Basis of Preparation The financial statements are presented in pounds sterling, rounded to the nearest one hundred thousand pounds. They are prepared on a historical cost basis except for assets classified as investment property, investments and currency forwards, which are held at fair value. The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, assets and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgment made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 2. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS balance sheet as at 1 January 2004 for the purpose of transition to IFRS. Summary of Significant Accounting Policies (a) Basis of consolidation The consolidated financial information incorporates the assets, liabilities and the results of the Company and of its subsidiary undertakings. Subsidiaries are those entities in which the Group directly or indirectly has the power to govern the financial and operating policies in order to gain benefits from its activities (including unit trusts in which the Group holds more than half of the units). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intragroup balances, and any income and expenses or unrealised gains and losses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. (b) Product classification The Group's products are classified for accounting purposes as either insurance contracts or investment contracts. Insurance contracts are contracts which transfer significant insurance risk. Contracts that do not transfer significant insurance risk are treated as investment contracts. Where contracts contain both insurance and investment components and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts and investment contracts respectively. (c) Long term business (i) Premium income For unit-linked insurance contracts, premiums are recognised as revenue when the liabilities arising from them are recognised. All other premiums are accounted for when due for payment. Investment contract premiums are not included in the income statement but are reported as deposits to investment contract liabilities in the balance sheet. (ii) Revenue from investment contracts Fees charged for services related to the management of investment contracts are recognised as revenue as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services, are deferred and amortised over the anticipated period in which services will be provided. (iii) Claims For insurance contracts, death claims are accounted for on notification of death. Surrenders for non-linked policies are accounted for when payment is made. Critical illness claims are accounted for when admitted. All other claims and surrenders are accounted for when payment is due. For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities. The movement in investment contract benefits represents the investment return credited to policyholders. (iv) Acquisition costs For insurance contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and processing new business. Acquisition costs which are incurred during a financial year are deferred by use of an explicit asset which is amortised over the period during which the costs are expected to be recoverable and in accordance with the incidence of future related margins. For investment contracts only directly related acquisition costs, which vary with and are related to securing new contracts and renewing existing contracts, are deferred to the extent that they are recoverable out of future revenue. Deferred acquisition costs are amortised on a straight line basis over the average lifetime of the Group's investment contracts. All other costs are recognised as expenses when incurred. (v) Insurance contract liabilities Under current IFRS requirements, insurance contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices. Insurance contract liability provisions are determined following an annual actuarial investigation of the long-term fund in accordance with regulatory requirements. The provisions are calculated on the basis of current information and using the gross premium valuation method. The Group's accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4, as they consider current estimates of all contractual cash flows, and of related cash flow such as claims handling costs. Long-term business provisions can never be definitive as to their timing nor the amount of claims and are therefore subject to subsequent reassessment on a regular basis. (vi) Investment contracts Investment contracts consist of unit linked contracts. Unit linked liabilities are measured at fair value by reference to the value of the underlying net asset value of the Group's unitised investment funds, determined on a bid value, at the balance sheet date. An allowance for deduction of future tax to be paid in respect of unrealised capital gains, discounted to reflect the time period over which such gains are expected to be realised, is also reflected in the measurement of unit linked liabilities. The decision by the Group to designate its unit linked liabilities as fair value through the income statement reflects the fact that the underlying investment portfolio is managed, and its performance evaluated, on a fair value basis. (d) Reinsurance The Group's insurance subsidiaries cede insurance premiums and risk in the normal course of business. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct reinsurance business being reinsured. Reinsurance assets include balances due from reinsurance companies for paid and unpaid losses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. (e) Fee & commission income Fee and commission income primarily consists of management fees on investment contracts (see accounting policy note c (ii)) and commission due in respect of products sold on behalf of third parties. Commission is accounted for when earned. (f) Investment return Investment return comprises investment income and investment gains and losses. Investment income includes dividends, interest and rent. Dividends are accrued on an ex-dividend basis. Interest and rent are accounted for on an accruals basis. (g) Revenue Revenue consists principally of insurance premiums, fee and commission income and investment return. Accounting policies in respect of each of these are set out in the following accounting policy notes: â€¢ Insurance premiums : (c) (i) â€¢ Fee and commission income: (e) â€¢ Investment return: (f) (h) Expenses (i) Operating lease payments Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and are spread over the life of the lease. (ii) Financing costs Financing costs comprise interest payable on borrowings calculated using the effective interest rate method. (i) Income taxes Income tax on the profit or loss for the year comprises current and deferred tax payable by policyholders and shareholders. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting or taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (iii) Policyholder and shareholder tax The total income tax expense for a period includes tax which is not related to profits earned by shareholders for the period, being the tax that is attributed to policyholders in the unit linked funds. The tax charge in the income statement is therefore analysed between shareholders' tax and policyholders' tax, the latter reflecting tax charges paid by the unit linked funds to relevant tax authorities and deductions for deferred tax on unrealised capital gains provided within the UK unit linked funds. (j) Dividends Dividend distributions to the Company's shareholders are recognised as liabilities in the period in which the dividends are declared, and, for the final dividend, when approved by the Company's shareholders at the annual general meeting. (k) Intangible assets (i) Deferred acquisition costs See accounting policy note c (iv). (ii) Acquired value of in-force business Investment and insurance contracts acquired in business combinations are measured at fair value, being the present value of future profits, at the time of acquisition. The acquired value of in-force contracts is amortised over the estimated life of the contracts. The acquired value of in-force business is expressed as a gross figure in the balance sheet with the associated tax included within deferred tax liabilities. (iii) Goodwill Goodwill on the acquisition of subsidiaries prior to 31 March 2004 has been charged directly to reserves. Prospectively the Group's policy is to recognise goodwill on the balance sheet as an intangible asset, measured at cost less any accumulated impairment losses. (l) Property & equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses (see accounting policy note q). The deemed cost of owner occupied property is the fair value by a determined independent valuer as at 1 January 2004, the date of transition to IFRS. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the property and equipment as follows: â€¢ Computers: 3 years â€¢ Fixtures and fittings: 5 years â€¢ Office equipment: 5 years â€¢ Motor vehicles: 4 years â€¢ Buildings: 50 years (m) Investment property Investment properties, which are all held within the unit linked funds, are properties which are held to earn rental income and / or for capital appreciation. They are stated at fair value. An external, independent valuer, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, values the portfolio every month. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy note (f). (n) Investments The Group's investments are all classified as fair value through profit and loss, with all gains and losses recognised through the income statement. The fair values of quoted financial investments, which represent the vast majority of the Group's investments, are based on current bid prices. The decision by the Group to designate its investments at fair value through the income statement reflects the fact that the investment portfolio is managed, and its performance evaluated, on a fair value basis. If the market for a financial investment is not active, the Group establishes fair value by using valuation techniques such as recent arm's length transactions, reference to similar listed investments, discounted cash flow models or option pricing models. The Group recognises purchases and sales of investments on trade date. (o) Currency forwards The Group uses currency forwards within its unit-linked funds to hedge its exposure to foreign currency. Each contract is recognised initially at cost and is subsequently stated at fair value, with all changes in value recognised in the income statement. (p) Other receivables Other receivables are stated at amortised cost less impairment losses. (q) Impairment policy Formal reviews to assess the recoverability of deferred acquisition costs on insurance and investment contracts and the acquired value of in-force business are carried out at each balance sheet date. The carrying amounts of the Group's other assets that are not carried at fair value are also reviewed to determine whether there is any indication of impairment. If there is any indication of irrecoverability or impairment, the asset's recoverable amount is estimated. Impairment losses are reversed - through the income statement - if there is a change in the estimates used to determine the recoverable amount. Such losses are reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation where applicable, if no impairment loss had been recognised. (r) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments, and bank overdrafts to the extent that the Group has a right of set-off. (s) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. The Group recognises provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (t) Borrowings Borrowings are recognised initially at fair value, net of transaction costs, and subsequently stated at amortised cost. The difference between the proceeds and the redemption value is recognised in the income statement over the borrowing period on an effective interest rate basis. (u) Other payables Other payables are stated at amortised cost. (v) Net asset value attributable to unit holders The Group consolidates unit trusts in which it holds more than half of the units. The minority interests in these unit trusts are measured at fair value and are shown in the balance sheet as net assets attributable to unit holders. Income attributable to the holdings is accounted for within investment income, offset by a corresponding change in investment contract benefits. (w) Employee benefits (i) Pension obligations The Group operates a defined contribution personal pension plan for its employees. Contributions to this plan are recognised as an expense in the income statement as incurred. The Group also has an occupational pension scheme with both a defined contribution and a defined benefit section, both of which are closed to new members. Contributions to the defined contribution section, in respect of existing members, are recognised as an expense in the income statement as incurred. The defined benefit section has no active members and there are thus no employer contributions. The residual liabilities to the current and deferred pensioners have been matched by purchased annuities (both immediate and deferred) from insurance companies and therefore no surplus or deficit will arise. (ii) Share-based payments The Group operates a number of share-based payment plans. The fair value of equity instruments granted is recognised as an expense spread over the vesting period of the instrument, with a corresponding increase in equity in the case of equity settled plans. The total amount to be expensed is determined by reference to the fair value of the awards at the grant date, measured using standard option pricing models. At each balance sheet date, the Group revises its estimate of the number of equity instruments that are expected to vest and it recognises the impact of the revision of original estimates, if any, in the income statement, such that the amount recognised for employee services are based on the number of shares that actually vest. The charge to the income statement is not revised for any changes in market vesting conditions. (x) Treasury shares Where any Group company purchases the Company's equity share capital, the consideration paid is deducted from equity attributable to shareholders, as disclosed in the Treasury Shares reserve. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to shareholders, net of any directly attributable incremental transaction costs and the related income tax effects. (y) Foreign currency translation The Group's presentational currency is pounds sterling. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which these entities operate. Foreign currency transactions are translated into sterling using the approximate exchange rate prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gain or losses on translation are recognised in the income statement. Non-monetary assets and liabilities which are held at historical cost are translated using exchange rates prevailing at the date of transaction; those held at fair value are translated using exchange rates ruling at the date on which the fair value was determined. (z) Segment reporting The principal activity of the Group is the transaction of long term insurance and investment business and the Group segments its operations by lines of business: life, unit trust and other business. Expenses allocated to business units reflect those expenses incurred by the legal entities comprising the segments. Separate geographical segmental information is not presented since the Group does not segment its business geographically, its customer base being predominantly based in the United Kingdom. (aa) Current and non-current disclosure Assets and liabilities which are expected to be recovered or settled no more than twelve months after the balance sheet date are disclosed as current. Those expected to be recovered or settled more than twelve months after the balance sheet date are disclosed as non-current. Deferred tax balances are all treated as non-current. 2. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING ACCOUNTING POLICIES The primary area in which the Group has applied judgment 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. The principal areas in which the Group applies accounting estimates and assumptions are in deciding the amount of management expenses that are treated as acquisition expenses, the amortisation of deferred acquisition costs and deferred income, providing for long term insurance business and in determining the fair value and amortisation of acquired in-force business. Estimates are also applied in determining the recoverability of deferred acquisition costs and the acquired value of in-force business. 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 deferred income are amortised on a straight-line basis over the average lifetime of the underlying investment 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. 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. The assumptions used in the calculation of insurance business liabilities that have the greatest effect on the income statement of the Group are the assumed rate of investment return, the expenses assumed and the mortality and morbidity tables used for the calculation of non-linked insurance liabilities. The valuation discount rate for non-linked business was set at 3.0% at 31 December 2005 (3.0% as at 31 December 2004). This rate is based on the regulatory maximum allowable rate rounded to the lower 0.1%. The expenses assumed for the insurance business are based on an investigation of the expenses incurred in respect of each line of business. They are assumed to increase with inflation each year. The inflation rate assumed at 31 December 2005 is between 2.9% and 4.0% depending on the territory of the contract (between 2.9% and 4.0% as at 31 December 2004). Mortality 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 rates used in the valuation are between 60% and 242% of TM/TF92. Morbidity rates are based on those charged by our reassurers for recent new business. Estimates are also applied in determining the level of deferred tax asset on unrelieved expenses and other provisions. 3. 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: Net Income Year Ended Year Ended 31 December 31 December 2005 2004 ---------- --------- Â£' Million Â£' Million Life business Net insurance premium income 73.4 81.3 Net movement on deferred income (7.8) (2.9) Investment income - unit linked policyholders 1,787.2 811.5 ---------- --------- Total life business 1,852.8 889.9 Unit trust business Fee income 49.0 35.3 Net movement on deferred income (10.1) (5.3) ---------- --------- Total unit trust business 38.9 30.0 Other business Commission income 51.3 35.6 Investment income - sale of investment in LAHC 9.5 28.0 Investment income - other shareholders 5.4 3.1 Investment income - other(1) 19.4 4.9 Other operating income 1.9 1.5 ---------- --------- Total other business 87.5 73.1 ---------- --------- Net income(2) 1,979.2 993.0 ========== ========= (1) Investment income - other relates to investment income on minority interest holdings in the St. James's Place unit trusts which are subject to consolidation (the minority interest 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 income is generated from external transactions. Segment Result Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ---------- Â£' Million Â£' Million Life business Policyholder tax gross up 83.9 22.4 Shareholder 29.3 7.0 Unit trust business 12.8 11.8 Profit on sale of investment -LAHC 9.5 28.0 Other loss (8.4) (11.2) ------ ------ Total other business 1.1 16.8 ---------- ---------- Total operating profit 127.1 58.0 Financing costs - (1.2) ---------- ---------- Profit before tax 127.1 56.8 Income taxes Policyholder tax (83.9) (22.4) Shareholder tax 4.4 5.3 ---------- ---------- Profit after tax 47.6 39.7 ========== ========== Other segmental information is set out below: Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ---------- Â£' Million Â£' Million Segment Assets Life business 10,433.9 8,016.5 Unit trust business 82.2 57.8 Other business 260.7 250.8 Unallocated assets 91.5 62.7 Consolidation adjustments (57.7) (81.8) ---------- ---------- Total Assets 10,810.6 8,306.0 ---------- ---------- Segment Liabilities Life business 10,097.9 7,780.5 Unit trust business 76.9 54.4 Other business 72.8 153.8 Unallocated liabilities 222.5 129.9 Consolidation adjustments 66.0 (34.8) ---------- ---------- Total Liabilities 10,536.1 8,083.8 ---------- ---------- Capital expenditure Other business 1.9 3.1 Depreciation Expense Other business 2.8 2.9 Amortisation Expense Life business - DAC 36.2 36.8 Life business - PVIF 3.1 2.9 Unit trust business - DAC 4.2 3.5 4. 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 2005 2004 2005 2004 --------- --------- --------- --------- Pence per share Pence per share Â£' Million Â£' Million Final dividend in respect of previous financial year 1.60 1.50 6.9 6.4 Interim dividend in respect of current financial year 1.30 1.25 5.8 5.4 --------- --------- --------- --------- Total 2.90 2.75 12.7 11.8 ========= ========= ========= ========= The directors have resolved to pay a final dividend of 1.85 pence per share (2004: 1.60 pence). This amounts to Â£8.3 million (2004: Â£6.9 million) and will, subject to shareholder approval at the Annual General Meeting, be paid on 17 May 2006 to those shareholders on the register as at 10 March 2006. 5. EARNINGS PER SHARE Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Pence Pence Basic earnings per share 10.8 9.1 Adjustments - disposal of LAHC (2.2) (6.5) --------- --------- Basic adjusted earnings per share 8.6 2.6 ========= ========= Diluted earnings per share 10.3 8.8 Adjustments - disposal of LAHC (2.1) (6.2) --------- --------- Diluted adjusted earnings per share 8.2 2.6 ========= ========= The earnings per share (EPS) calculations are based on the following figures: Year Ended Year Ended 31 December 31 December 2005 2004 --------- --------- Â£' Million Â£' Million Earnings Profit after tax (for both basic and diluted EPS) 47.6 39.7 Adjustments - disposal of LAHC (9.5) (28.0) --------- --------- Adjusted profit (for both basic and diluted EPS) 38.1 11.7 --------- --------- Weighted average number of shares Weighted average number of ordinary shares in issue (for basic EPS) 442.0 434.6 Adjustments for outstanding share options 20.4 14.7 --------- --------- Weighted average number of ordinary shares (for diluted EPS) 462.4 449.3 --------- --------- 6. INSURANCE CONTRACT LIABILITY PROVISIONS Year Ended Year Ended 31 December 31 December 2005 2004 ---------- ---------- Â£' Million Â£' Million Balance at 1 January 351.3 341.3 Change in insurance contract liabilities - gross 75.4 10.5 Change in claims provision 3.9 (0.5) ---------- ---------- Balance at 31 December 430.6 351.3 ========== ========== The effect of changes in assumptions used to measure insurance assets and insurance liabilities The tables below set out the impact of actual changes in assumptions on insurance assets and liabilities and the sensitivity of the profit and loss and net assets to the key variables used to measure insurance assets and liabilities. The analyses reflect the change in the variable/assumption shown while all other variables/assumptions are left unchanged. In practice variables/ assumptions may change at the same time as some may be correlated (for example, an increase in interest rates may also result in an increase in expenses if the increase reflects higher inflation). It should also be noted that in some instances sensitivities are non-linear. Sensitivity Analysis Change in Assumption Change in Change in Change in Change in Profit before Profit before Net Net Tax Tax Assets Assets 2005 2004 2005 2004 ------------------- ------------ ------------ ---------- ---------- % Â£' Million Â£' Million Â£' Million Â£' Million Interest rates -1% 2.5 3.4 1.2 2.2 Expense assumptions -10% 4.3 1.4 3.9 1.2 Mortality / morbidity -5% 1.6 1.7 1.4 1.5 Impact of Actual Changes Increase in Increase in Increase in Increase in in Assumptions Gross Insurance Gross Insurance Gross Insurance Gross Insurance Liabilities Liabilities Assets Assets 2005 2004 2005 2004 ----------- --------- --------- --------- Â£' Million Â£' Million Â£' Million Â£' Million Economic assumptions 0.3 1.1 2.7 1.1 Expenses 4.3 2.6 - - Mortality / morbidity 5.8 2.0 - - 7. OTHER PROVISIONS LAHC Endowments Office Other Total Restructuring Provisions -------- --------- ------------- ---------- ---------- Â£' Million Â£' Million Â£' Million Â£' Million Â£' Million At 1 January 2005 16.5 1.0 - 0.2 17.7 Charged to the consolidated income statement Additional provisons - 0.5 0.9 - 1.4 Unused amounts released (9.5) - - - (9.5) --------- --------- --------- --------- -------- At 31 December 2005 7.0 1.5 0.9 0.2 9.6 ======== ========= ========= ======== ======== Current 4.5 0.8 0.9 - 6.2 Non current 2.5 0.7 - 0.2 3.4 -------- --------- --------- -------- -------- 7.0 1.5 0.9 0.2 9.6 -------- --------- --------- -------- -------- The LAHC provision relates 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 2004, Â£9.5 million of the provision has been released. The provision at 31 December 2005 represents the Directors' best estimate of the likely maximum outflow over the next two years. 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. 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. 8. SHARE CAPITAL Number of Share Capital Ordinary Shares ---------------- ---------------------- Â£' Million At 1 January 2004 431,927,882 64.8 Scrip dividend 4,447,263 0.7 Exercise of options 2,949,601 0.4 ----------- ---------- At 31 December 2004 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 =========== ========== The total authorised number of ordinary shares is 605 million (2004: 605 million), with a par value of 15 pence per share (2004: 15 pence per share). All issued shares are fully paid. 9. RESERVES Share Treasury Profit and Shares to be Miscellaneous Total Premium Shares Loss Reserve Issued Reserve Reserves Reserve -------- -------- -------------- ----------- ------------ ------- Â£' Million Â£' Million Â£' Million Â£' Million Â£' Million Â£' Million At 1 January 2004 5.1 (10.1) 119.4 0.2 2.2 116.8 Profit for the year 39.7 39.7 Dividends (11.8) (11.8) Issue of share capital Scrip dividend 7.3 7.3 dividend Exercise of options 3.4 3.4 Consideration paid for own shares (1.4) (1.4) Own shares vesting charge 0.8 (0.8) - Release of reserves on issue of shares 0.1 (0.1) - P & L reserve credit in respect of share option 2.3 2.3 -------- -------- ------- -------- --------- -------- At 31 December 2004 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 (0.5) (0.5) for own shares Own shares vesting 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 ======== ======== ======= ======== ========= ======== 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 SJPC in 1997. SJPC 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 1,969 shares have still to be issued from the reserve. Miscellaneous reserves represent other non-distributable reserves. 10. CASH GENERATED FROM OPERATIONS Year Ended Year Ended 31 December 31 December 2005 2004 ---------- --------- Â£' Million Â£' Million Cash flows from operating activities Profit before tax for the period 127.1 56.8 Adjustments for: Depreciation 2.8 2.9 Amortisation of acquired value of in force 3.1 2.9 Fair value gains on non-operating investments (0.1) (0.1) Interest expense - 1.2 P&L reserve credit in respect of share option 3.0 2.3 charges Profit on sale of investment (9.5) (28.0) Changes in operating assets and liabilities Increase in deferred acquisition costs (30.6) (18.3) Increase in investment property (189.6) (129.8) Increase in investments (1,797.8) (1,242.4) (Increase) / decrease in reinsurance assets (7.6) 8.8 Increase in insurance contract receivables (6.6) (4.0) Increase in other receivables (23.5) (4.5) Increase in insurance contract liability provisions 79.3 10.0 Increase / (decrease) in provisions 1.4 (0.1) Increase in financial liabilities 2,215.6 1,236.1 Decrease in reinsurance liabilities (2.4) (0.3) Increase in payables related to direct insurance contracts 8.3 1.8 Increase in deferred income 17.9 8.2 Increase / (decrease) in other payables 20.2 (9.2) Increase in net assets attributable to unit holders 34.1 16.1 ---------- --------- Cash generated from operations 445.1 (89.6) ========== ========= 11. RELATED PARTY TRANSACTIONS The Company and the Group have entered into related party transactions with HBOS plc ('HBOS'), various subsidiaries of HBOS and the directors of the Company and the Group. HBOS, which owns 60.0% of the Company's share capital, is the ultimate controlling party of the Group. Transactions with HBOS and HBOS Group Companies The following transactions were carried out, on an arm's length basis, with HBOS and its subsidiaries during the year: â€¢ Commission of Â£2.5 million (2004: Â£3.0 million) was receivable from the sale of banking services for St. James's Place Bank (a division of Halifax plc) â€¢ Commission of Â£1.7 million (2004: Â£2.9 million) was receivable from the sale of Stakeholder pensions offered by Clerical Medical â€¢ Commission of Â£5.5 million (2004: Â£5.4 million) was receivable from the sale of Halifax, Bank of Scotland and Birmingham Midshires mortgages â€¢ HBOS provided a guarantee at a cost of Â£0.5 million (2004:Â£0.5 million) to the Company's reassurers in respect of the Company's obligations in relation to a financial reassurance arrangement â€¢ During the year, deposits were placed with Bank of Scotland on normal commercial terms. At 31 December 2005 these deposits amounted to Â£1.7 million (2004: Â£7.7 million) â€¢ Amounts lent by, or assigned to, the Bank of Scotland to members of The St. James's Place Partnership, under guarantee by SJPC, totalled Â£65.7 million (2004: Â£52.5 million) â€¢ Fees of Â£2.8 million (2004: Â£1.5 million) were payable to Insight Investment Management Limited in respect of investment management services to a number of SJPC life, pension and unit trust funds. The outstanding balance payable at 31 December 2005 was Â£0.6 million (2004: Â£0.6 million) â€¢ Fees of Â£0.1 million (2004: Â£0.1 million) were payable to HBOS in respect of the services of non-executive SJPC Board Directors â€¢ SJPC Board Directors have been included in a directors' and officers' insurance policy negotiated on a group basis by HBOS. 12. EXPLANATION OF TRANSITION TO IFRS As stated in note 1, these are the Group's first financial statements prepared in accordance with IFRS. The accounting policies set out in note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of the opening IFRS balance at 1 January 2004, the Group's date of transition to IFRSs. IFRS 1 (First-time Adoption of International Financial Reporting Standards) does allow a number of exemptions or elections on adoption of IFRS for the first time, and the Group has taken advantage of the following provisions: â€¢ The Group has elected not to apply the provisions of IFRS 2 (Share-based Payment) to options and equity instruments granted on or before 7 November 2002 or to equity instruments that were granted after 7 November 2002 that had vested before 1 January 2005. â€¢ The Group has also elected not to apply the provisions of IFRS 3 (Business Combinations) prior to the date of transition, and no adjustments have therefore been made for business combinations prior to 1 January 2004. â€¢ The Group has elected to restate owner occupied property at fair value at 1 January 2004 and to treat this fair value as the deemed cost at that date. The Group has not taken advantage of the exemption from the requirement to restate comparative information in the first year of adoption of IFRS for IAS 32 (Financial Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition and Measurement) and IFRS 4 (Insurance Contracts). In preparing its opening IFRS balance sheet the Group has adjusted amounts previously reported in its financial statements prepared in accordance with its former basis of accounting, UK GAAP. An explanation of how the transition from UK GAAP to IFRSs has affected the Group's financial position, financial performance and cash flows is set out in the following tables and the accompanying commentary. This transition statement differs from that initially published by the Group on 26 July 2005, principally as a result of the further refinement of the Group's approach to the analysis of contracts between investment and insurance and the treatment of tax within the Group's UK unit linked funds. The restated profit after tax and net assets are unaffected. GROUP TRANSITION STATEMENT Consolidated Income Statement for the year ended 31 December 2004 UK GAAP ADJUSTMENTS IFRS Investment DAC / Unit Linked Unit Trusts Other - Other - No Contracts DIR Assets Equity Impact Equity Impact ----------------------------------------------------------------------------------------------------- Note (a) Note (b) Note (c) Note (d) Note (e) Note (f) Note (g) Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Net insurance premium revenue 1,107.6 (1,026.3) 81.3 Fee & commission income 14.5 (8.2) 56.4 62.7 Investment income 845.2 (2.4) 4.9 (0.2) 847.5 Other operating income 1.5 1.5 -------------------------------------------------------------------------------------------------- Net income 1,968.8 (1,026.3) (8.2) (2.4) 4.9 (0.2) 56.4 993.0 Net policyholder claims & benefits incurred (476.7) 438.6 (38.1) Change in insurance contract liabilities (1,258.7) 1,241.3 (17.4) Change in investment contract liabilities - (662.8) 20.2 (4.9) (647.5) Expenses (200.0) 27.3 (2.1) (57.2) (232.0) --------------------------------------------------------------------------------------------------- Operating profit 33.4 (9.2) 19.1 17.8 - (2.3) (0.8) 58.0 Financing costs (1.2) (1.2) --------------------------------------------------------------------------------------------------- Profit before tax 32.2 (9.2) 19.1 17.8 - (2.3) (0.8) 56.8 Tax on policyholders' return 8.0 (17.8) (12.6) (22.4) Tax on shareholders' return (3.4) 1.5 (6.7) (0.5) 1.0 13.4 5.3 -------------------------------------------------------------------------------------------------- Total tax (expense) / credit 4.6 1.5 (6.7) (18.3) - 1.0 0.8 (17.1) Profit for the period attributable to shareholders 36.8 (7.7) 12.4 (0.5) - (1.3) - 39.7 ================================================================================================== Dividends 12.3 (0.5) 11.8 Consolidated Balance Sheet at 31 December 2004 UK GAAP* ADJUSTMENTS IFRS Unit Unit Other - Other - No Investment DAC / Linked Trusts Equity Equity Contracts DIR Assets Impact Impact ---------------------------------------------------------------------------------- Note (a) Note (b) Note (c) Note (d) Note (e) Note (f) Note (g) Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Assets Intangible assets Deferred 44.5 249.9 294.4 acquisition costs Acquired value of 49.5 21.0 70.5 in-force business ---------------------------------------------------------------------------------- 94.0 249.9 21.0 364.9 Property & equipment 7.1 (0.2) 6.9 Deferred tax assets - 0.5 45.4 1.7 7.3 54.9 Investment property - 129.8 129.8 Investments Equities - 5,582.1 55.8 5,637.9 Fixed income 57.6 598.7 656.3 securities Investment in - 305.3 76.1 381.4 Collective Investment Schemes Currency forwards - 0.2 0.2 Assets held to cover linked liabilities 7,456.2 (7,456.2) - Reinsurers' share of insurance provisions 70.3 70.3 Insurance contract receivables 8.5 8.5 Income tax assets 7.8 7.8 Other receivables 52.3 37.3 0.3 89.9 Cash & cash equivalents 159.8 811.3 2.2 (76.1) 897.2 ---------------------------------------------------------------------------------- Total assets 7,913.6 0.5 295.3 8.5 58.3 1.5 28.3 8,306.0 Liabilities Insurance contract liability provisions 124.2 227.1 351.3 Unit linked liabilities 7,456.2 (7,456.2) - Other provisions 17.7 17.7 Financial liabilities Investment - 7,223.8 (31.6) 7,192.2 contracts Borrowings 22.4 22.4 Currency forwards - 6.6 6.6 Deferred tax liabilities 4.7 3.2 66.9 21.7 28.3 124.8 Reinsurance payables 11.3 11.3 Payables related to direct insurance contracts 11.2 11.2 Deferred income - 231.8 231.8 Income tax liabilities 5.1 5.1 Other payables 45.8 12.3 0.1 (7.0) 51.2 Net asset value attributable to unit holders - 58.2 58.2 ---------------------------------------------------------------------------------- Total liabilities 7,698.6 (2.1) 298.7 9.0 58.3 (7.0) 28.3 8,083.8 Net assets 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2 ================================================================================== Shareholders' equity Share capital 65.9 65.9 Share premium 15.9 15.9 Other reserves (8.4) (8.4) Retained earnings 141.6 2.6 (3.4) (0.5) 8.5 148.8 ---------------------------------------------------------------------------------- Total shareholders' equity 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2 ---------------------------------------------------------------------------------- Consolidated Statement of Changes in Equity Year Ended 31 December 2004 UK GAAP IFRS ---------- --------- Â£' Million Â£' Million Opening equity 179.6 181.6 shareholders' funds ---------- --------- Profit for the financial period 36.8 39.7 ---------- --------- Total recognised income for the financial period 36.8 39.7 Dividends (12.3) (11.8) Issue of share capital Scrip dividend 8.0 8.0 Exercise of share options 3.8 3.8 Consideration paid for own shares (1.4) (1.4) P & L reserve credit in respect of share option changes 0.5 2.3 ---------- --------- Net increase to shareholders' funds 35.4 40.6 Closing equity shareholders' funds 215.0 222.2 equity ========== ======== Consolidated Balance Sheet at 1 January 2004 UK GAAP* ADJUSTMENTS IFRS Unit Unit Other - Other - No Investment DAC / Linked Trusts Equity Equity Contracts DIR Assets Impact Impact ------------------------------------------------------------------------------------ Note (a) Note (b) Note (c) Note (d) Note (e) Note (f) Note (g) Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Â£' m Assets Intangible assets Deferred 53.5 222.6 276.1 acquisition costs Acquired value of 51.6 21.8 73.4 in-force business ------------------------------------------------------------------------------------ 105.1 222.6 21.8 349.5 Property & equipment 7.1 7.1 Deferred tax assets - 44.5 0.6 45.1 Investment property - - Investments Equities 31.6 4,581.5 39.9 4,653.0 Fixed income 52.8 489.3 542.1 securities Investment in - 235.8 25.4 261.2 Collective Investment Schemes Currency forwards - 8.6 8.6 Assets held to cover linked liabilities 6,195.8 (6,195.8) - Reinsurers' share of insurance provisions 79.1 79.1 Insurance contract receivables 4.5 4.5 Income tax assets 5.9 5.9 Other receivables 51.7 21.5 0.2 73.4 Cash & cash equivalents 118.1 861.4 2.1 (25.4) 956.2 ------------------------------------------------------------------------------------ Total assets 6,651.7 - 267.1 2.3 42.2 0.6 21.8 6,985.7 Liabilities Insurance contract liability provisions 133.3 208.0 341.3 Unit linked liabilities 6,195.8 (6,195.8) - Other provisions 1.3 1.3 Financial liabilities Investment - 5,973.4 (11.4) 5,962.0 contracts Borrowings 53.6 53.6 Currency forwards - 0.7 0.7 Deferred tax liabilities 14.8 4.1 59.3 3.5 21.8 103.5 Reinsurance payables 11.6 11.6 Payables related to direct insurance contracts 9.4 9.4 Deferred income - 223.6 223.6 Income tax liabilities 5.1 5.1 Other payables 47.2 9.5 0.1 (6.9) 49.9 Net asset value attributable to unit holders 42.1 42.1 ------------------------------------------------------------------------------------ Total liabilities 6,472.1 (10.3) 282.9 2.3 42.2 (6.9) 21.8 6,804.1 Net assets 179.6 10.3 (15.8) - - 7.5 - 181.6 ==================================================================================== Shareholders' equity Share capital 64.8 64.8 Share premium 5.1 5.1 Other reserves (7.7) (7.7) Retained earnings 117.4 10.3 (15.8) 7.5 119.4 ------------------------------------------------------------------------------------ Total shareholders' equity 179.6 10.3 (15.8) - - 7.5 - 181.6 ==================================================================================== * Reanalysed under IFRS format (a) UK GAAP Mapping to IFRS Format The UK GAAP balance sheet has been presented in a format consistent with International Financial Reporting Standards, IFRS. No changes, other than the reanalysis under IFRS format, have been made to the numbers previously reported for UK GAAP. (b) Accounting for Investment Contracts Under UK GAAP all long term contracts written by an insurance company are accounted for on a similar basis. Under IFRS 4 (Insurance Contracts) products are classified for accounting purposes between insurance and investment contracts, depending on the level of insurance risk assumed, and the liabilities for insurance and investment contracts are disclosed separately within the balance sheet. Amounts receivable under investment contracts are no longer shown as premiums in the income statement but are treated as deposits and added to investment contract liabilities. Similarly amounts payable under investment contracts are not recorded as claims in the income statement but as deductions from investment contract liabilities. None of these reclassification adjustments has any impact on profit after tax or shareholders' equity. In addition, however, under UK GAAP the Group held certain reserves on products that are now classified as investment contracts. These reserves are released under IFRS. The impact is to decrease profit after tax by Â£7.7 million for the year ended 31 December 2004, with a Â£2.6 million increase in shareholders' equity (Â£10.3 million at 1 January 2004). (c) Deferred Acquisition Costs and Deferred Income (DAC/DIR) Revenue and expense for investment contracts are recognised in accordance with IAS 18 (Revenue). Under IAS 18, revenue arising from investment contracts must be recognised over the life of the contract and an explicit deferred income liability is recognised for any front end fees which relate to services to be provided in future periods. Under UK GAAP no such liability is recognised and front end fees are recognised when received. The recognition of deferred income (net of the associated deferred tax asset) decreases shareholders' equity by Â£186.4m at 31 December 2004 (Â£179.1 million at 1 January 2004) and decreases profit after tax by Â£7.3 million for the year ended 31 December 2004. In addition under IAS18 (Revenue) only directly attributable incremental acquisition costs are deferred. However the introduction of IFRS significantly extends the range of investment contracts where costs may be deferred. This deferral of additional acquisition costs (net of the associated deferred tax liability) has increased shareholders' equity by Â£183.0 million at 31 December 2004 (Â£163.3 million at 1 January 2004) and increased profit after tax by Â£19.7 million for the year ended 31 December 2004. Consequently, the aggregate deferred income and deferred acquisition cost adjustments have decreased shareholders' equity by Â£3.4 million as at 31 December 2004 (Â£15.8 million at 1 January 2004), and increased profit after tax by Â£12.4 million for the year ended 31 December 2004. (d) Unit Linked Asset Analysis and Valuation There are a number of adjustments associated with the presentation, valuation and taxation of unit linked business: (i) Under UK GAAP assets held to cover unit-linked liabilities are disclosed as a single line item, whereas under IFRS they are disclosed under the relevant investment and other balance sheet categories. This reclassification has no impact on profit after tax or shareholders' equity. (ii) Under IFRS the Group's investments are classified as fair value through profit or loss and IAS 39 (Financial Instruments: Recognition and Measurement) requires that the fair value for listed investment be determined at a bid value, rather than at mid value as under UK GAAP. This revaluation from mid to bid for the assets held within the unit-linked funds is offset by a change in investment contract benefits and thus has no impact on profit after tax or shareholders' equity. (iii) Under IFRS the Group is required to account for the movement in the deferred tax on unrealised capital gains provided within the unit linked funds as a tax charge (or credit) rather than being offset against the unrealised capital gains within investment return. Adjustment has therefore been made to gross up the Â£17.8 million movement in deferred tax for the year ended 31 December 2004. This has increased profit before tax by Â£17.8 million, but profit after tax and shareholders' equity are unaffected. (iv) Under UK GAAP the Group discounted the deferred tax on unrealised capital gains provided within the unit-linked funds to reflect the expected time period over which the gains are expected to be realised. While this discounting is required in determining the unit-linked liability, IFRS does not permit the discounting of deferred tax in the computation of unit linked assets (resulting in an asset liability mismatch). Additional adjustments have therefore been made to account for the unprovided tax liability within the unit linked assets. This has reduced profit after tax by Â£0.5 million for the year ended 31 December 2004 and shareholders' equity by Â£0.5 million at 31 December 2004 (Â£ nil at 1 January 2004). Any tax liability would be met from the unit linked funds rather than the Group. (e) Consolidation of Unit Trusts IFRS requires the consolidation of certain St. James's Place Unit Trusts in which the Group, via its unit linked funds, owns more than half of the units. These did not previously require consolidation under UK GAAP, but a different definition of the circumstances in which an entity is deemed to be under the control of an investor applies under IFRS. The consolidation of these unit trusts has no impact on profit after tax or shareholders' equity. (f) Other Adjustments - Impact on Shareholders' Equity There are a number of other adjustments which affect profit after tax and shareholders' equity, as set out below: (i) Dividend Recognition Under previous UK GAAP dividends were recognised in the period to which they related regardless of whether they had been declared or approved. Under IAS 10 (Events After the Balance Sheet Date) dividends may only be recognised when they have been declared and approved. The IFRS dividend for the year ended 31 December 2004 therefore represents the final 2003 dividend and the interim 2004 dividend. The reversal of the final 2004 dividend has resulted in an increase in shareholders' equity of Â£7.0 million at 31 December 2004 (1 January 2004 Â£6.5 million). (ii) Share Based Payment Under UK GAAP the costs of awards to employees and members of the St. James's Place Partnership under share based payment plans, other than Save As YouEarn Plans, were recognised immediately if no performance criteria applied. Where performance criteria applied, the cost was recognised over the period to which the performance criteria related. In both circumstances the cost of awards was based on the underlying share price at the date of grant of the awards, less any expected contribution. The cost was based on a reasonable expectation of the extent to which performance criteria would be met and any subsequent changes in that expectation were reflected in the income statement. Under IFRS 2 (Share-based Payment)equity instruments granted after 7 November 2002 which remain unvested at 1 January 2005 are measured at fair value. The fair value of the equity instrument is determined at grant date and recognised over the vesting period, with a corresponding adjustment in equity. In addition, a deferred tax asset, representing the expected future tax deduction in respect of instruments granted and based on intrinsic value, is also recognised. The effect of this change in accounting treatment is to decrease profit after tax by Â£1.1 million in the year ended 31 December 2004. However due to adjustments in equity, shareholders'equity increased by Â£1.7 million at 31 December 2004 (Â£1.0 million at 1 January 2004). (iii) Revaluation of Owner Occupied Property The Group has elected to value owner occupied property at the date of transition to IFRS (1 January 2004) and apply this fair value as the deemed cost at that date. Revaluation adjustments made in the year ended 31 December 2004 have therefore been reversed, decreasing profit after tax for the year by Â£0.2 million. Similarly, shareholders' equity has decreased by Â£0.2 million at 31 December 2004 (Â£ nil at 1 January 2004). (g) Other Adjustments - Nil Impact on Shareholders' Equity IFRS also require a number of gross up adjustments and balance sheet reclassifications, none of which affect profit after tax or shareholders'equity. Further details are shown below: (i) Policyholder and Shareholder Tax The Group discloses policyholders' and shareholders' tax separately within the income statement. For the purposes of mapping the UK GAAP accounts under the IFRS format the tax on the long-term business fund was treated as policyholder tax. Under IFRS, however, the Group is treating the tax paid by the unit-linked funds to relevant tax authorities as policyholder tax, with all other tax being treated as shareholder tax. This has resulted in the reclassification of certain non unit-linked tax items out of policyholder tax into shareholder tax. The overall impact of the adjustment is to increase policyholder tax by Â£12.6 million and decrease shareholder tax by Â£12.6 million in the year ended 31 December 2004. There is no impact on the balance sheet as a result of these adjustments. (ii) Acquired value of in force business Under UK GAAP the acquired value of in-force business was disclosed net of tax. The asset has been grossed up for deferred tax under IFRS, both increasing the acquired value of in-force business and the deferred tax liability by Â£21.0 million at 31 December 2004 (Â£21.8 million at 1 January 2004). This adjustment has also given rise to an increase of Â£0.8 million in the cost of amortisation and a similar decrease in the tax expense in the income statement for the year ended 31 December 2004. (iii) Income Expense Gross Up Within the primary statements of the UK GAAP accounts the expenses of the unit trust business and other operations were netted off again their respective income streams. These expenses, which totalled Â£56.4 million in the year ended 31 December 2004, have been grossed up under IFRS. There is no balance sheet impact as a result of this adjustment. (iv) Deferred Tax Gross Up The Â£7.3 million deferred tax asset (Â£ nil at 1 January 2004) in respect of unrelieved expenses, which had previously been netted off against deferred tax liability under UK GAAP, has been grossed up under IFRS for presentational purposes. There is no impact on the income statement. (v) Reclassification Adjustment Monies held for the longer term in unitised money market funds (Â£76.1 million at 31 December 2004, Â£25.4 million at 1 January 2004) have been reclassified as investment in collective investment schemes. This adjustment has no impact on the income statement. (h) Cash Flow Statement Under IFRS the Group's consolidated cash flow statement includes all cash flows of the Group, including those relating to the long-term fund. Under UK GAAP the cash flows of the long term fund are explicitly excluded, except to the extent that funds are transferred to or from the shareholder. The inclusion of cash and cash equivalents held within the unit linked funds (as referred to in note 12 para (d) (i)) and the unit trusts subject to consolidation (as disclosed within note 12 para (e)), offset by the reclassification of monies held for the longer term in unitised money market funds (as set out in note 12 para (g) (v)), has increased the overall amount disclosed under cash and cash equivalents by Â£737.4 million as at 31 December 2004 (Â£838.1 million at 1 January 2004). 13. NON-STATUTORY ACCOUNTS The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2004 or 2005. Statutory accounts for 2004 have been delivered to the registrar of companies and those for 2005 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. 14. ANNUAL REPORT The Company's annual report and accounts for the year ended 31 December 2005 is expected to be posted to shareholders by 5 April 2006. 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. This information is provided by RNS The company news service from the London Stock Exchange

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