Preliminary Announcement
St. James's Place PLC
26 February 2008
PRESS RELEASE
St. James's Place Wealth Management
Preliminary Announcement
26 February 2008
St. James's Place plc, the wealth management group, today announces its annual
results for the year ended 31 December 2007.
The text of the announcement is attached:
Enquiries:
Mike Wilson, Chairman Tel: 020 7514 1907
Andrew Croft, Group Finance Director
Brunswick Tel: 020 7404 5959
Anita Scott
Anna Jones
(1)
ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007
OPERATING PROFIT OF £244.7 MILLION UP 39%
St. James's Place Wealth Management group, announces its annual results for the
year ended 31 December 2007.
Profit - EEV basis
• Operating profit of £244.7 million (2006: £176.0 million) up 39%
• New business profits of £150.9 million (2006: £115.2 million) up 31%
• Net asset value per share 252.5 pence (2006: 222.6 pence) up 13%
- IFRS basis
• Profit before shareholder tax of £96.1 million (2006: £107.6 million)
• Net asset value per share 92.9 pence (2006: 82.4 pence) up 13%
Dividend
• Proposed final dividend of 2.55p per share up 19% making a total dividend
for the year of 4.3p (2006: 3.65p) an increase of 18%.
Other highlights include:
• Funds under management at £18.2 billion up 18%
• New business for the year of £428.6 million (measured on an annual premium
equivalent) up 23%
• Total single investments of £3.4bn up 28%
• Partnership numbers at 1,251 up 8%
Mike Wilson, Chairman, commented:
'We are delighted with the 39% increase in operating profit and the strength of
our financial results.
'For the fourth consecutive year substantial growth has been achieved in
operating profit, new business and funds under management.
'There is an increasing demand for financial advice and our own team of
advisers, the St. James's Place Partnership, is ideally placed to capitalise on
this. The strength, quality and the 8% increase in the size of the Partnership
gives us a major competitive edge in the UK wealth management market.
'New business has grown at a compound rate of 16% per annum over the last 10
years and 23% per annum over the last five years. Whilst 2008 could be a
challenging year in view of current market uncertainty, we remain confident that
we will continue to achieve our objective of growing new business at 15-20% per
annum in the longer term.'
(2)
CHAIRMAN'S STATEMENT
I am delighted to report that 2007 has been the fourth consecutive year of
substantial growth in new business, funds under management and profits for the
Group.
New business from long-term savings and investments (measured on an APE basis,
the standard industry measure of annual premiums plus one tenth of single
premiums) was up 23%, funds under management at £18.2bn were up 18% and European
Embedded Value operating profits increased by 39% to £244.7 million.
Financial Performance
The results have been presented on both an IFRS (International Financial
Reporting Standards) basis and an EEV (European Embedded Value) basis. We
continue to believe that the EEV basis provides a more meaningful measure of the
Group's operating performance.
On the IFRS basis the operating profit, before shareholder tax, was £96.1
million compared with £107.6 million for the prior year. As detailed in the
Financial Commentary the IFRS result is complicated by one off items in both the
current year and the comparative year. Ignoring these one off items, the
operating profit before shareholder tax for the current year would have been
£76.4 million compared with £78.0 million for 2006.
On the EEV basis, the pre-tax operating profit increased by 39% to £244.7
million (2006:£176.0 million). The total pre-tax profit for the year was £230.4
million marginally lower than the £244.0 million for 2006. Shareholders will
recall that total pre-tax profit includes the so called investment variance
which takes account of the investment returns in a particular year. The current
year investment variance is a negative of £14.5 million compared with a positive
£70.8 million in 2006. The figures reflect the respective stock market
conditions over the two years.
The Financial Commentary on pages 7 to 16 provides further details on the
results for the year.
Dividend
In the Interim Report I indicated that, barring unforeseen circumstances,
shareholders could expect a similar rise in the full year dividend to that of
the Interim dividend. Due to the continued strong performance in the second
half of the year, the Board has recommended a 19% increase in the final dividend
to 2.55 pence per share (2006: 2.15 pence per share). This increase provides
for a full year dividend of 4.3 pence per share (2006: 3.65 pence per share) an
increase of 18%.
Over recent years shareholders have been offered an alternative of a scrip
dividend and this offer will continue for the current dividend payment.
Subject to the approval of shareholders at the Annual General Meeting the final
dividend will be paid on 14 May 2008 to those shareholders on the register as at
7 March 2007.
Board changes
On 29 May 2007 David Bellamy was appointed Chief Executive following the
departure of the previous Chief Executive earlier in the year.
As I commented in my Interim statement David's appointment was a reflection of
the Board's confidence in his experience and proven management ability.
On 3rd December 2007 David Lamb, Group Business Development Director, was
appointed as an Executive Director of St. James's Place plc. David has made an
excellent contribution to the success of the Group and his appointment will
further strengthen the Board.
On 5th February 2008 Simon Gulliford resigned from the Board as a non-executive
director in the light of his new appointment to work with Standard Life Group on
their marketing and communication strategy. I would like to thank Simon for his
excellent contribution during his time on the St. James's Place Board.
The Nomination Committee will consider and make their recommendation to the
Board as to a suitable replacement for Simon as an independent non-executive
director.
(3)
Partners and staff
As stated earlier, 2007 has been our fourth year of substantial growth in the
business which is a reflection of the continued enthusiasm, commitment and
dedication at every level of our community.
On behalf of the Board and shareholders I would like to thank the Partnership,
our employees and the staff in our administration centres for their outstanding
contribution to our results last year.
Mike Wilson
25 February 2008
(4)
CHIEF EXECUTIVE'S STATEMENT
This is my first statement to shareholders since being appointed Chief Executive
in May of 2007.
I have been with St. James's Place since the company was founded and it has been
a pleasure to have been involved in the company's growth and to have helped its
evolution to the successful wealth management business it is today.
St. James's Place is a unique business, built around people and with a proven
track record of successfully creating long term relationships with our Partners
and our Clients. The Company has a very distinctive culture built on integrity,
hard work, mutual trust and caring for each other and those less fortunate than
us.
I hope shareholders can see that demonstrated from some of the content in these
report and accounts.
We remain committed to those values and to building long term relationships and
consequently believe we will continue to deliver strong long term returns for
shareholders.
New Business
Our stated aim has been to grow new business by 15-20% p.a. over the longer term
and it is very pleasing to report that over the last 10 years we have achieved
16% p.a. compound growth and an even more impressive 23% over the last 5 years.
In keeping with that sustained track record, 2007 was another record year for
new business with APE increasing by 23% to £428.6 million. The main drivers of
the growth were investment business which was up 27% and pension business which
increased by 23%.
Total single investments were some £3.4bn for the year and the final quarter of
2007 was our largest quarter ever for pension business and our second largest
quarter ever for investment business - this despite the difficult market
conditions in the latter part of the year.
Shareholders may recall that our other new business target is for our own
manufactured products to represent at least 80% new business. As has been the
case over recent years the 87% (2006: 87%) we achieved last year has
significantly exceeded this stated target.
The St. James's Place Partnership
I am also delighted to report growth of 8% in the size of the Partnership in
2007 to 1,251 at the year end, which is our highest annual growth since 1999.
This was achieved through a combination of levels of recruitment and retention
of our existing Partners. The market place for good advisers is very active at
the present time and we are confident we can continue to attract the appropriate
number and quality in line with our objectives. Alongside our traditional
recruitment activity, we are also pleased with the progress of our 'Academy'
initiative. This initiative aims to 'grow our own' advisers to supplement our
recruitment efforts in the medium to long term.
In addition to the increase in the size of the Partnership, in recent years the
growth in new business has been significantly impacted by the substantial
increase in the productivity per Partner. This trend continued in 2007 with
Partner productivity increasing by 14.1% from £312,000 to £356,000. We continue
to see an increase in business from both existing clients and introductions from
them.
Investment Management
Funds under management at the end of the year of £18.2bn (2006: £15.4bn) were up
18% over the year. In addition to these direct funds under management we have
placed a further £1.6bn of funds with our third party service providers for
banking, portfolio management services and cash deposit funds.
2007 was a difficult year for the US, UK and Japanese markets. The FTSE gained
3.8%, the more broadly based FTSE All Share index rose just 2.0% with the S&P
also ahead only 1.8% (3.5% on US$ terms) and Japan falling some 6.8%. Europe
and the emerging markets performed better, with the FTSE Europe index up nearly
9.7% and Asian markets (excluding Japan) up over 25% on the year.
(5)
Against this backdrop I am pleased to report that our distinctive approach to
investment management continues to deliver superior investment performance. Two
thirds of our funds under management are in the top half of their peer groups in
9 out of the last 10 years. The key results for 2007 were:
Managed funds: top quartile performance from THSP, Newton, Jupiter and
AXA-Framlington.
Income funds: top quartile performance from all our income managers.
Specialist funds: top quartile results from our new MPC UK Growth Unit Trust and
Neil Woodford's UK equity funds.
During 2008 we will continue to broaden the range of funds available within our
investment management approach.
External Recognition
In October we were delighted to be informed that St. James's Place had won the
inaugural Daily Telegraph Wealth Manager of the Year Award which is a great
testament to the Partnership, the quality of their advice and their
relationships with their clients.
This was immediately followed by our elevation to the top 50 of Britain's '
Management Today's - Most Admired Companies' list for 2007 - a tribute to
everyone's hard work and commitment to St. James's Place.
Foundation and Community
The St. James's Place Foundation, the Group's charitable trust, plays an
important role within the lives of partners and employees. 2007 has been our
best fundraising year yet with money raised £2.4 million (2006: £1.9 million)
including the Company matching. This brings our cumulative funds raised to some
£13 million.
With the funds raised we have been able to award grants to almost 200 individual
charities in 2007 whilst maintaining our commitments to the small number of
larger charities with which we have relationships (Hope & Homes, Teenage Cancer
Trust, Hospice Movement).
In addition to our fundraising for the Foundation, SJP also supports charitable
work in our local communities through our Employee Volunteering Scheme which
enables staff at all levels to give time, skills and experience to charities in
their local communities. We have also recently linked up with Young
Gloucestershire, a leading voluntary youth organisation, delivering programmes
for vulnerable young people.
On behalf of the Board 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, time and donations.
Outlook
Looking forward, shareholders may be aware that Mike Wilson, our Chairman, is 65
in December and his contract is scheduled to end then. However I am delighted
to say that the Board and Mike have agreed to extend his contract for a minimum
of three years beyond that date. Mike will reduce his hours to equate to three
days a week from 1 January 2009.
We have now had four consecutive years of strong growth in new business, funds
under management and profits.
Despite recent economic indicators confirming a slowdown in the economy and
continued stock market uncertainty, the social and demographic conditions remain
positive for a proven adviser based approach to wealth management. We remain
convinced that there is a growing demand for advice and believe that the
strength, quality and the increase in the size of our team of advisers, gives us
a major competitive advantage.
Consequently, we are confident about the prospects for continued growth in our
business over the longer term, providing we maintain a clear focus on looking
after our clients and managing the investments they entrust with us to their
satisfaction. That's been our focus to date and will continue to be in the
future.
(6)
As a result, our longer term growth target for new business remains 15-20% per
annum.
David Bellamy
25 February 2008
(7)
FINANCIAL COMMENTARY
The Group has delivered a fourth consecutive year of strong profit growth.
The financial performance is covered in the first section of this Financial
Commentary, whilst the second section covers other matters of interest to
shareholders and investors.
Section 1: Commentary on the results
Life business differs from most other businesses, in that the expected
shareholder cash flow from a sale of a product emerges over a long period in the
future.
The results are therefore presented not only on an IFRS basis, but also on an
EEV basis, which brings into account the net present value of the expected
future cash flows.
As noted in the Chairman's statement the Board continue to believe that the EEV
basis provides a more meaningful measure of the Group's operating performance.
International Financial Reporting Standards (IFRS)
The IFRS result is shown on pages 29 to 43.
As noted in previous financial commentaries the IFRS result requires the pre-tax
profit of the life business to be 'grossed up' for policyholder tax, with the
corresponding amount then being deducted within the tax charge. The table below
reflects the IFRS result after eliminating this 'gross up' in order to show the
shareholder return from the business.
Year Ended Year Ended
31 December 2007 31 December 2006
£' Million £' Million
Life business 84.4 85.5
Unit trust business 15.9 18.0
Other (4.2) (2.9)
Operating profit 96.1 100.6
LAHC - 7.0
Profit before shareholder tax 96.1 107.6
Policyholder tax 7.1 72.3
Total pre-tax profit 103.2 179.9
Profit after tax 78.1 88.0
Life Business
The life IFRS result is complicated by one off items in both the current year
and the comparative year.
• Current year one off item - in the half year Financial Commentary I
highlighted that the profit before shareholder tax was being distorted by the
interaction between policyholder and shareholder tax and that we were exploring
an alternative presentation to reduce the distortion. For the full year result
we have adopted an alternative methodology which has resulted in a one off
increase in pre-tax profit of £19.7 million. This is a presentational change
and profit after tax is unchanged.
• 2006 one off item - shareholders will recall that during 2006 we
obtained tax relief for prior years unrelieved expenses which gave rise to a
positive impact on pre-tax profit of £22.6 million.
(8)
After eliminating the effect of these one off items the life business pre-tax
operating profit for the current year at £64.7 million was marginally higher
compared with £62.9 million for the prior year.
This result reflects increased investment management charges from the higher
funds under management. The increase is offset by higher costs associated with
the new business written during the year.
Following the change in methodology for presenting tax the results in future
years should be less complicated.
Unit Trust Business
The pre-tax operating profit for the unit trust business was £15.9 million, some
£2.0 million lower than the comparative year profit of £18.0 million. The net
movement between the deferral of acquisition costs and the deferral of the
upfront margin has reduced profit by £5.9 million (2006: £2.4 million). This
reflects the higher level of new business in the current year.
Other
Other operations contributed a loss for the year of £4.2 million, compared with
a loss of £2.9 million for 2006. Included within this figure is the cost of
expensing share options at £12.5 million (2006: £7.6 million). The prior year
loss also included the benefit of deferred income of £1.75 million from the
transfer of mortgage advisers to a third party.
At the Annual General Meeting in 2005, shareholders approved a Purchase Share
Scheme for members of the Partnership. The new scheme was launched in January
2008 and is aimed at the top end of the Partnership to further align their
interests with shareholders and to aid retention. Under accounting rules the
deemed cost of the share scheme is expensed through the profit and loss account.
The actual accounting expense will be dependent upon the level of new business
growth and we estimate there will be an annual cost of some £5 - 7 million over
the four year period 2008-2011.
Operating Profit
The total operating profit for the year was £96.1 million (2006: £100.6
million).
Excluding the effect of the life business one off items described earlier, the
operating profit for 2007 was £76.4 million compared to £78.0 million for 2006.
Net Assets
The total net assets were £442.5 million (2006: £382.2 million) resulting in a
net asset value per share of 92.9 pence (2006: 82.4 pence).
European Embedded Value Basis
The table below summaries the pre-tax profit of the combined business and the
detailed result is shown on pages 17 to 27.
(9)
Year Ended Year Ended
31 December 2007 31 December 2006
£' Million £' Million
Life business 189.9 139.0
Unit trust business 59.0 39.9
Other (4.2) (2.9)
Operating profit 244.7 176.0
Investment return (14.5) 70.8
Economic assumption changes 0.2 (9.8)
Profit from core business 230.4 237.0
Profit on sale of LAHC - 7.0
Total pre-tax profits 230.4 244.0
Post tax profit 188.4 184.2
Life Business
Operating profit has increased by 37% to £189.9 million from £139.0 million and
a full analysis of the result is shown on page 23.
The new business profit was up 31% from £87.6 million to £114.5 million.
The growth in this figure is a combination of the increased volumes, the
favourable business mix and limiting establishment expense growth. These two
points mean that not only is there more profit from the higher volumes, but we
are also making more profit per pound of APE. Section 2 of this commentary
provides further detail on the new business margin.
The unwind of the discount rate for the year was £59.1 million compared with
£50.3 million for the prior year. The additional unwind in 2007 is due to the
higher value of the in-force business at the start of the year.
The investment income of £6.9 million represents the income on the free assets
of the life companies and is marginally higher than the £6.1 million in 2006.
The experience variance during the year increased operating profit by £12.2
million (2006: negative variance of £2.6 million). Shareholders will recall
from the Financial Commentary at the half year that, following correspondence
with HM Revenue & Customs, we have been able to obtain relief for prior years
excess unrelieved foreign withholding tax. This has resulted in a one-off
benefit of £9.7 million in the year. The balance of the experience variance
represents a number of offsetting factors.
There is a small cost of £2.8 million from operating assumption changes (2006:
negative £2.4 million) which have been made to the calculation of the embedded
value.
Unit Trust Business
The operating profit has increased by 48% from £39.9 million to £59.0 million
and a full analysis of the unit trust result is shown on page 24.
The new business profit has increased by 32% to £36.4 million from £27.6 million
for the prior year reflecting the stronger new business during the year and a
small amendment to the calculation methodology.
The unwind of the discount rate at £18.6 million was higher than the £15.2
million for the prior year reflecting the higher opening value of the in-force.
(10)
There was a positive experience variance for the year of £4.0 million (2006:
£0.2 million) reflecting a number of small positive items including expenses and
improved persistency.
Other
The loss from other operations has previously been commented on in the IFRS
section.
Investment Return
The average after tax increase in our fund prices during 2007 were some 2 - 3%
below the assumed growth rate in the EEV calculation resulting in a negative
investment variance of £14.5 million (2006: £70.8 million positive).
Economic Assumption
The economic assumptions used for the projection of cash flows, together with
the discount rate are based on the yield on 10 year gilts. This yield has
reduced marginally since the start of the year, resulting in an increase in the
embedded value of £0.2 million (2006: decrease of £9.8 million).
The total pre-tax profit for the year was £230.4 million compared with £244.0
million for the prior year.
Net Assets
The total net assets on an EEV basis were £1,203.3 million (2006: £1,032.7
million) resulting in a net asset value per share of 252.5 pence (2006: 222.6
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 direct expenses of the group which are not met from corresponding policy
margins have been categorised as follows:
'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, however these will increase as
the infrastructure expands to manage the higher number of existing clients and
the growth in the Partnership.
'Contribution from third party product sales' reflects the net income received
from wealth management sales of £6.1 million (2006: £6.6 million), sales of
stakeholder products of £0.6 million (2006: £1.4 million) and sales through the
Protection Panel of £7.7 million (2006: £9.7 million).
(11)
The table below provides the familiar breakdown of expenses.
Year Ended Year Ended
31 December 2007 31 December 2006
Category £' Million £' Million
Paid from policy margins
Commission 191.8 167.2
Investment expenses 68.4 55.7
Third party administration 24.7 20.9
284.9 243.8
Direct expenses
Other new business related costs 44.4 35.4
Establishment costs 91.9 86.2
Contribution from third party product sales (14.4) (17.7)
121.9 103.9
406.8 347.7
At the start of the year we set a target of increasing the growth in the
establishment expenses by less than 10%.
The establishment expense growth for the year was 7% and importantly the gap
between the new business growth and the expense growth ended the year at some
15%, well above our stated objective. Consequently, as shown below, the new
business margin expanded.
For 2008 we have set a target of limiting the growth in the establishment
expenses to around 10%; if we achieve both this target and the new business
growth target, then shareholders can expect a further expansion in new business
margins in the coming year.
(ii) New Business margin
The insurance sector has historically disclosed new business in terms of Annual
Premium Equivalent (APE). Most commentators would agree that APE no longer has
much correlation with the underlying profitability of the new business and
consequently the industry is moving to provide additional disclosure on the
present value of new business premiums (PVNBP).
APE is calculated as the sum of regular premiums plus 1/10th single premiums.
PVNBPs are calculated as single premiums plus the present value of expected
premiums from regular premium business, allowing for lapses and other EEV
assumptions. Noted in the table below is the new business margin calculated
both as a % of APE and PVNBP.
(12)
2007 2006
Life business
New business profit (£' m) 114.5 87.6
APE (£'m) 359.1 294.6
Margin (%) 31.9 29.7
PVNBP (£'m) 2,661.7 2,124.1
Margin (%) 4.3 4.1
Unit trust business
New business profit (£' m) 36.4 27.6
APE (£'m) 69.5 54.5
Margin (%) 52.4 50.6
PVNBP (£'m) 694.6 534.2
Margin (%) 5.2 5.2
Total business
New business profit (£' m) 150.9 115.2
APE (£'m) 428.6 349.1
Margin (%) 35.2 33.0
PVNBP (£'m) 3,356.3 2,658.3
Margin (%) 4.5 4.3
The PVNBP calculation only includes our manufactured business, as we do not
apply these principles to the non-manufactured business.
The new business margin has been beneficially affected by the rate of growth in
new business, the proportion of manufactured business, the underlying business
mix and by maintaining the growth in the level of expenses to well below the
growth in new business. In respect of the unit trust margin there has also been
a small amendment to the calculation methodology.
(iii) Cash flow
Last year we provided additional disclosure on the underlying cash flow of the
Group. We have further enhanced this disclosure by analysing the cash flow
between that arising from the opening in-force business and the cash flow
arising from new business.
As noted last year, to obtain the underlying cash flow of the business it is
first necessary to adjust the post tax IFRS profits for the 'non- cash' items.
(13)
The table below sets out these adjustments:
2007 2006
£'million £'million
Post tax IFRS result 78.1 88.0
Adjustments
Movement in deferred acquisitions cost (91.0) (68.6)
Movement in deferred income 55.9 42.2
Amortisation of purchased VIF 3.3 3.1
Movement in financial reassurance balance - (8.9)
Release of LAHC provision - (7.0)
Share option expense 12.5 7.6
Movement in deferred tax asset (41.4) (13.3)
Movement in deferred tax liability* 12.8 23.2
Other 2.9 (0.9)
Adjusted post tax cash flow 33.1 65.4
* excluding amounts in respect of the unit linked funds.
Taking account of these non-cash adjustments the Group generated positive cash
flow of £33.1 million during 2007 (2006: £65.4 million). The tables and
commentary below provide an indicative analysis of the sources of this cash
flow.
2007 Note Arising from Arising from Total
business new business
in-force at in year
1January 2007
£'million £'million £'million
Net annual management fee 1 109.3 13.9 123.2
Unwind of surrender penalties 2 (40.2) (4.4) (44.6)
Loss arising from new business 3 - (7.7) (7.7)
Establishment expenses 4 (6.7) (60.6) (67.3)
Investment income 5 10.5 10.5
Miscellaneous 6 11.8 11.8
Underlying cash flow 84.7 (58.8) 25.9
EUFT 7 7.2 - 7.2
Post tax cash flow 91.9 (58.8) 33.1
(14)
2006 Note Arising from Arising from Total
business new business
in-force at in year
1 January 2006
£'million £'million £'million
Net annual management fee 1 82.8 10.4 93.2
Unwind of surrender penalties 2 (29.9) (2.7) (32.6)
Profit arising from new business 3 - 1.9 1.9
Establishment expenses 4 (6.2) (55.9) (62.1)
Investment income 5 9.4 - 9.4
Miscellaneous 6 12.1 - 12.1
Underlying cash flow 68.2 (46.3) 21.9
Tax relief on b/fwd expenses 8 22.6 - 22.6
FSA reserving change 9 20.9 - 20.9
Post tax cash flow 111.7 (46.3) 65.4
Notes
1. The net annual management fee: this is the income on the funds under
management that the group retains after payment of the associated costs.
Broadly speaking the group retains around 1% pre-tax of funds under management.
2. Unwind of surrender penalties: this relates to the reserving
methodology applied to the surrender penalties within the charging structure of
the single premium life bonds. At the outset of the life bond we establish a
liability net of the outstanding surrender penalty which would apply if the
policy were to be encashed. As the surrender penalty reduces to zero so the
liability to the policyholder is enhanced by increasing their funds by 1% per
annum over the first six years of the product life, to correspond to this '
unwind' of the surrender penalty. In other words there is a cash transfer from
the shareholder to the policyholder.
3. Profit /loss arising from new business: this is the cash flow arising
in the year after taking into account the directly attributable expenses. The
movement from the small profit in 2006 to a loss in 2007 is due to the change in
mix of the new business particularly in respect of pensions business.
4. Establishment expenses: these are the post tax expenses commented on in
point (i) above and represent the running costs of the Group's infrastructure.
5. Investment income: this is the assumed income accruing on the
investments and cash held for regulatory purposes together with the interest
received on the surplus capital held by the Group.
6. Miscellaneous: this represents the cash flow of the business not
covered in any of the other categories. It will include miscellaneous product
charges, reserving changes, experience variances and the income and expenses
included within the Other operations of the business.
7. EUFT: as noted in Section 1 of the Financial Commentary we have been
able to obtain relief for prior year excess unrelieved foreign withholding tax.
This has resulted in a one off post tax benefit of £7.2 million.
8. Tax relief on expenses b/fwd; as shareholders will recall from previous
financial commentaries the UK life company obtains tax relief for its expenses
against the tax deductions on the income and capital gains within the
unit-linked life funds. At the start of 2006 there was approximately £112.9
million of excess unrelieved expenses for which we obtained relief giving rise
to a one off positive cash flow of £22.6 million in that year.
(15)
9. FSA reserving change: in 2006 the FSA relaxed the reserving methodology
required to be followed by life companies. The adoption of these changes
resulted in a one off £20.9 million in that year.
(iv) Movement in funds under management
There has been considerable industry debate concerning the movement of funds
under management and the apparent high level of outflows being experienced.
St. James's Place has not experienced any significant fund outflows and the
table below provides additional disclosure on the movement in our funds under
management.
Year Ended Year Ended
31 December 31 December
2007 2006
£' billion £'billion
Opening funds under management 15.4 12.3
New money invested 3.1 2.4
Investment return 0.9 1.7
19.4 16.4
Regular income withdrawals / maturities (0.3) (0.2)
Surrender / part surrenders (0.9) (0.8)
Closing funds under management 18.2 15.4
Implied surrender rate as % of average funds under
management 5.4% 5.8%
The regular income withdrawals represent those amounts, selected by clients at
the plan outset, which are paid out by way of periodic income. The withdrawals
have been assumed in the calculation of the embedded value new business profit.
Maturities are those sums paid out where the plan has reached the selected
maturity date (e.g. retirement date). The expected maturities have been assumed
in the calculation of the embedded value new business profit.
Surrenders and part surrenders are those amounts where clients have chosen to
withdraw money from their plan. Surrenders are assumed to occur in the
calculation of the embedded value new business profit based on actual
experience, updated on an annual basis, by plan duration and the age of the
client. The implied surrender rate shown in the table above is very much a
simple average and it should not be assumed that small movements in this rate
will result in a change to the embedded value assumptions.
(16)
(v) Analysis of the Embedded Value
The table below provides a summarised breakdown of the Embedded Value position
at the reporting dates:
Year Ended Year Ended
31 December 2007 31 December 2006
£' Million £' Million
Value of in-force
- Life 746.2 590.8
- Unit trust 199.7 171.5
Solvency assets 257.4 270.4
Total embedded value 1,203.3 1,032.7
(vi) Share options maturity
Options outstanding under the various share option schemes at 31 December 2007
amount to 35.0 million (31 December 2006: 46.2 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:
Average Number of Anticipated
exercise price Share options proceeds
Earliest date of exercise outstanding
£ No. £' Million
Prior to 1 Jan 2008 1.72 14,140,719 24.3
Jan - Jun 2008 1.05 2,292,404 2.4
Jul - Dec 2008 1.83 421,648 0.8
Jan - Jun 2009 2.23 1,038,143 2.3
Jul - Dec 2009 2.75 16,191,862 44.5
Jan - Jun 2010 2.84 716,226 2.0
Jul - Dec 2010 2.59 177,742 0.5
Jan - Jun 2011 2.42 3,334 0.1
34,982,078 76.9
Of those options with an earliest date of exercise prior to 1 January 2008, 0.9
million options require further performance conditions to be met before vesting
unconditionally.
Andrew Croft
25 February 2008
(17)
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
2007 2006
£' Million £' Million
Life business 189.9 139.0
Unit trust business 59.0 39.9
Other (4.2) (2.9)
Operating profit 244.7 176.0
Investment return variances (14.5) 70.8
Economic assumption changes 0.2 (9.8)
Profit from core business 230.4 237.0
Profit from other business
Profit on sale of LAHC - 7.0
EEV profit on ordinary activities before tax 230.4 244.0
Taxation
Life business (44.8) (46.5)
Unit trust business (15.3) (19.4)
Other (2.0) 6.1
LAHC - -
Tax rate change 20.1
(42.0) (59.8)
EEV profit on ordinary activities after tax 188.4 184.2
(18)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Opening equity shareholders' funds on an
EEV basis 1,032.7 828.8
Post tax profit for the year 188.4 184.2
Dividends (47.7) (15.1)
Issue of share capital 26.7 30.3
Consideration paid for own shares (10.3) (5.4)
P&L reserve credit in respect of share option charges 12.5 7.6
P & L reserve credit in respect of proceeds from exercise of
share options of shares held in trust 1.0 2.3
Closing equity shareholders' funds on an EEV basis 1,203.3 1,032.7
(19)
CONSOLIDATED BALANCE SHEET
31 December 31 December
2007 2006
£' Million £' Million
Assets
Intangible assets
Deferred acquisition costs 484.6 393.6
Value of long-term business in-force
- long-term insurance 605.1 524.1
- unit trusts 199.7 171.5
1,289.4 1,089.2
Property & equipment 10.4 6.3
Deferred tax assets 125.2 83.8
Investment property 642.5 568.2
Investments 12,599.9 10,573.8
Reinsurance assets 32.9 28.3
Insurance and investment contract receivables 18.0 11.5
Income tax assets 19.5 9.7
Other receivables 160.2 87.1
Cash & cash equivalents 1,929.2 1,606.9
Total assets 16,827.2 14,064.8
Liabilities
Insurance contract liabilities 405.4 374.3
Other provisions 5.3 3.1
Financial liabilities 14,155.4 11,833.0
Deferred tax liabilities 251.2 258.4
Insurance and investment contract payables 21.8 18.5
Deferred income 347.8 291.9
Income tax liabilities 50.0 19.9
Other payables 119.4 100.5
Net asset value attributable to unit holders 267.6 132.5
Total liabilities 15,623.9 13,032.1
Net assets 1,203.3 1,032.7
Shareholders' equity
Share capital 71.5 69.6
Share premium 82.2 57.4
Other reserves 1,049.6 905.7
Total shareholders' equity 1,203.3 1,032.7
Pence Pence
Net assets per share 252.5 222.6
(20)
NOTES TO THE EUROPEAN EMBEDDED VALUE BASIS
I. BASIS OF PREPARATION
The supplementary information on pages 17 to 27 shows the Group's results as
measured on a European Embedded Value (EEV) basis. This includes results for
the life, pension and investment business, including unit trust business. The
valuation is undertaken on a basis determined in accordance with the EEV
Principles issued in May 2004 by the Chief Financial Officers Forum, a group of
chief financial officers from 19 major European insurers, as supplemented by the
Additional Guidance on EEV Disclosures issued in October 2005 (together 'the EEV
Principles'). The treatment of all other transactions and balances is unchanged
from the primary financial statements on an IFRS basis. The objective of the
EEV basis is to provide shareholders with more realistic information on the
financial position and performance of the Group than that provided by the IFRS
basis.
Under the EEV methodology, profit is recognised as it is earned over the life of
the products within the covered business. The embedded value of the covered
business is the sum of the shareholders' net worth in respect of the covered
business and the present value of the projected profit stream.
II. METHODOLOGY
(a) Covered business
The covered business is the life, pension and investment business, including
unit trust business, undertaken by the Group.
(b) Calculation of EEV on existing business
Profit from existing business comprises the expected return on the value of
in-force business at the start of the year plus the impact of any changes in the
assumptions regarding future operating experience, plus changes in reserving
basis (other than economic assumption changes), plus profits and losses caused
by differences between the actual experience for the period and the assumptions
used to calculate the embedded value at the end of the period.
(c) Allowance for risk
The allowance for risk in the shareholder cash flows is a key feature of the EEV
Principles. The EEV Principles set out three main areas of allowance for risk
in the embedded value:
• the risk discount rate;
• the allowance for the cost of financial options and guarantees; and
• the cost of holding both prudential reserves and any additional capital
required.
The reported EEV allows for risk via a risk discount rate based on a bottom-up
market-consistent approach, plus an appropriate additional margin for non-market
risk. The Group does not offer products that carry any significant financial
guarantees or options.
(d) 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%.
(21)
(e) 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 and is described in relation to the risk
free rate. This average risk discount rate has also been used to calculate the
published value of new business.
(f) Cost of required capital
In light of the results of internal analysis, the Directors consider that the
minimum regulatory capital provides adequate capital cover for the risks
inherent in the covered business. The required capital for the EEV calculations
has therefore been set to the minimum regulatory capital.
The EEV includes a reduction for the cost of holding the required capital. No
allowance has been made for any potential adjustment that the investors may
apply because they do not have direct control over their capital. Any such
adjustment would be subjective, as different investors will have different views
of what, if any, adjustment should be made.
(g) New business
The new business contribution arising from reported new business premiums has
been calculated using the same assumptions as used in the EEV at the end of the
financial year. The value of contractual incremental premiums to existing
business is treated as new business in the year of the increment, rather than at
the outset of the policy. This approach better reflects the way the Group
manages its business.
The value of new business has been established at the end of the reporting
period and has been calculated using actual acquisition costs.
(h) Taxation
The EEV includes the present value of tax relief on life assurance expenses
calculated on a market-consistent basis. This calculation takes into account
all expense and income amounts projected for the in-force business (including
any carried forward unutilised relief on expenses).
(22)
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
2007 are set out below:
Year Ended Year Ended
31 December 31 December
2007 2006
Risk free rate 4.7% 4.9%
Inflation rate 3.1% 3.0%
Risk discount rate (net of tax) 7.8% 8.0%
Future investment returns:
- Gilts 4.7% 4.9%
- Equities 7.7% 7.9%
- Unit linked funds
- Capital growth 3.9% 4.5%
- Dividend income 3.2% 2.8%
- Total 7.1% 7.3%
Expense inflation 3.8% 3.6%
Indexation of capital gains 2.2% 2.2%
The risk free rate is set by reference to the yield on 10 year gilts. Other
investment returns are set by reference to the risk free rate.
The inflation rate is derived from the implicit inflation in the valuation of 10
year index-linked gilts. This rate is increased to reflect higher increases in
earnings related expenses. The inflation rate is reduced by 10% to derive the
indexation of capital gains for the proportion of the fund invested in equities.
(b) Experience Assumptions
The principal experience assumptions have been set on a best estimate basis.
They are reviewed regularly.
The persistency assumptions are derived from the Group's own experience, or
where insufficient data exists, from external industry experience.
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.
(23)
Mortality and morbidity assumptions have been set by reference to the Group's
own experience, published industry data and the rates set by the Group's
reassurers.
(c) Taxation
Future taxation has been determined assuming a continuation of the current tax
legislation. The EEV result has been calculated on an after-tax basis and has
been grossed up to a pre-tax level for presentation in the profit and loss
account. The corporation tax rate used for this grossing up is 26% for UK life
and pensions business, 12.5% for Irish life and pensions business and 28% for
unit trust business. These tax rates reflect the change in the rate of
corporation tax from 30% to 28% with effect from 1 April 2008, as included
within the 2007 Finance Act.
IV. COMPONENTS OF EEV PROFIT
(a) Life Business
Note Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
New business contribution 1 114.5 87.6
Profit from existing business
Unwind of discount rate 59.1 50.3
Experience variances 12.2 (2.6)
Operating assumption changes (2.8) (2.4)
Investment income 6.9 6.1
Operating profit before tax 189.9 139.0
Investment return variances (9.5) 46.8
Economic assumption changes (0.3) (10.6)
Profit before tax 180.1 175.2
Attributed tax (44.8) (46.5)
Tax rate change 15.8 -
Profit after tax 151.1 128.7
Note 1: New business contribution after tax is £86.3 million (2006: £63.9
million)
(24)
(b) Unit Trust Business
Note Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
New business contribution 1 36.4 27.6
Profit from existing business
Unwind of discount rate 18.6 15.2
Experience variances 4.0 0.2
Operating assumption changes - (3.1)
Operating profit before tax 59.0 39.9
Investment return variances (5.0) 24.0
Economic assumption changes 0.5 0.8
Profit before tax 54.5 64.7
Attributed tax (15.3) (19.4)
Tax rate change 4.3 -
Profit after tax 43.5 45.3
Note 1: New business contribution after tax is £26.2 million (2006: £19.3
million)
(c) Combined Life and Unit Trust Business
Note Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
New business contribution 1 150.9 115.2
Profit from existing business:
Unwind of discount rate 77.7 65.5
Experience variances 16.2 (2.4)
Operating assumption changes (2.8) (5.5)
Investment income 6.9 6.1
Operating profit before tax 248.9 178.9
Investment return variances (14.5) 70.8
Economic assumption changes 0.2 (9.8)
Profit before tax 234.6 239.9
Attributed tax (60.1) (65.9)
Tax rate change 20.1 -
Profit after tax 194.6 174.0
Note 1: New business contribution after tax is £112.5 million (2006: £83.2
million).
(25)
(d) Detailed Analysis
In order to better explain the movement in capital flows, the components of the
EEV profit for the year ended 31 December 2007 are shown separately between the
movement in IFRS net assets and the present value of the in-force business
(PVIF) in the table below. All figures are shown net of tax.
Movement Movement Movement
in IFRS in PVIF in EEV
Net Assets
£' Million £' Million £' Million
New business contribution (54.6) 167.1 112.5
Profit from existing business 95.4 (95.4) -
Unwind of discount rate - 57.8 57.8
Experience variances 28.4 (16.8) 11.6
Operating assumption changes 5.4 12.6 18.0
Investment return 5.5 - 5.5
Investment return variances (1.1) (9.9) (11.0)
Economic assumption changes (0.6) 0.8 0.2
Miscellaneous (0.3) (5.9) (6.2)
Profit after tax 78.1 110.3 188.4
The main component of the experience variances derives from the change in
approach to deferred tax, which reduces the VIF and increases the net assets.
The comparative figures for 2006 are as follows:
Movement Movement Movement
in IFRS in PVIF in EEV
Net Assets
£' Million £' Million £' Million
New business contribution (52.9) 136.1 83.2
Profit from existing business 83.2 (83.2) -
Unwind of discount rate - 47.5 47.5
Experience variances 13.2 (14.5) (1.3)
Operating assumption changes 20.4 (24.4) (4.0)
Investment return 4.6 0.1 4.7
Investment return variances 3.9 47.2 51.1
Economic assumption changes (1.1) (6.1) (7.2)
Profit on sale of LAHC 7.0 - 7.0
Miscellaneous 9.7 (6.5) 3.2
Profit after tax 88.0 96.2 184.2
(26)
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 assumptions. In
each case, only the indicated item is varied relative to the restated values.
Change in new business Change in
contribution European
Embedded
Value
Note Pre-tax Post-tax Post-tax
£' Million £' Million £' Million
Value at 31 December 2007 150.9 112.5 1,203.3
100bp reduction in risk discount rate 1 20.6 15.3 73.5
100bp reduction in risk free rates, with
corresponding change in fixed interest asset
values (1.6) (1.1) (5.0)
10% reduction in withdrawal rates 12.3 9.2 50.9
10% reduction in expenses 3.4 2.5 13.3
10% reduction in market value of equity assets - - (99.7)
5% reduction in mortality and morbidity 2 0.0 0.0 0.6
100bp increase in equity expected returns 3 - - -
Note 1: Although not directly relevant under a market-consistent valuation
where the risk discount rate is a derived disclosure only, this sensitivity
shows the level of adjustment which would be required to reflect differing
investor views of risk.
Note 2: Assumes the benefit of lower experience is passed on to clients and
reassurers at the earliest opportunity.
Note 3: As a market-consistent approach is used, equity expected returns only
affect the derived discount rates and not the embedded value or contribution to
profit from new business.
(27)
VI. RECONCILIATION OF IFRS AND EEV PROFIT BEFORE TAX AND NET ASSETS
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
IFRS profit before tax 103.2 179.9
Movement in life value of in-force 88.6 17.4
Movement in unit trust value of in-force 38.6 46.7
Total EEV profit before tax 230.4 244.0
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
IFRS net assets 442.5 382.2
Less: acquired value of in-force (61.0) (64.3)
Add: deferred tax on acquired value of in-force 17.0 19.2
Add: life value of in-force 605.1 524.1
Add: unit trust value of in-force 199.7 171.5
EEV net assets 1,203.3 1,032.7
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
2007 2006
£' Million £' Million
Life company free assets 100.5 105.4
Required life company solvency capital 39.5 33.0
Other subsidiaries, consolidation and IFRS adjustments 302.5 243.8
IFRS net assets 442.5 382.2
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Life company free assets at 1 January 105.4 65.0
Investment in new business (55.6) (54.2)
Profit from existing business 51.8 91.0
Investment return 5.4 4.6
Movement in required solvency capital (6.5) (1.0)
Life company free assets at 31 December 100.5 105.4
(28)
RESULTS UNDER UNDER
INTERNATIONAL FINANCIAL REPORTING STANDARDS
(29)
CONSOLIDATED INCOME STATEMENT
Year Ended Year Ended
31 December 31 December
Note 2007 2006
£' Million £' Million
Insurance premium revenue 97.2 101.2
Less premiums ceded to reinsurers (27.3) (33.8)
Net insurance premium revenue 69.9 67.4
Fee and commission income 83.8 87.6
Profit on sale of investment in Life Assurance Holding Corporation - 7.0
Other investment return 1,088.8 1,519.3
Total investment income 1,088.8 1,526.3
Other operating income 2.5 1.8
Net revenue 4 1,245.0 1,683.1
Policy claims and benefits
Gross amount (50.7) (58.2)
Reinsurers' share 18.2 23.1
Net policyholder claims and benefits incurred (32.5) (35.1)
Change in insurance contract liabilities
Gross amount (31.0) 62.0
Reinsurers' share 4.6 (41.0)
Net change in insurance contract liabilities (26.4) 21.0
Investment contract benefits (697.1) (1,139.3)
Fees, commission and other acquisition costs (269.9) (260.6)
Administration expenses (112.6) (86.1)
Other operating expenses (3.3) (3.1)
(385.8) (349.8)
Operating profit and profit before tax 103.2 179.9
Tax on policyholders' return 5 (7.1) (72.3)
Tax on shareholders' return 5 (18.0) (19.6)
Total tax expense 5 (25.1) (91.9)
Profit for period attributable to shareholders 78.1 88.0
Pence Pence
Basic earnings per share 6 16.8 19.4
Diluted earnings per share 6 16.1 18.4
(30)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Opening equity shareholders' funds 382.2 274.5
Profit for the financial period, being total recognised income for
the financial period 78.1 88.0
Dividends (47.7) (15.1)
Issue of share capital
Scrip dividend 10.7 11.1
Exercise of share options 16.0 19.2
Consideration paid for own shares (10.3) (5.4)
P & L reserve credit in respect of share option charges 12.5 7.6
P & L reserve credit in respect of proceeds from exercise of share
options of shares held in trust 1.0 2.3
Net increase to shareholders' funds 60.3 107.7
Closing equity shareholders' funds 442.5 382.2
(31)
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER
Note 2007 2006
£' Million £' Million
Assets
Intangible assets
Deferred acquisition costs 484.6 393.6
Acquired value of in force business 61.0 64.3
545.6 457.9
Property & equipment 10.4 6.3
Deferred tax assets 125.2 83.8
Investment property 642.5 568.2
Investments
Equities 10,780.4 9,014.5
Fixed income securities 720.7 595.2
Investment in Collective Investment
Schemes 1,098.8 963.9
Currency forwards - 0.2
Reinsurance assets 32.9 28.3
Insurance and investment contract receivables 18.0 11.5
Income tax assets 19.5 9.7
Other receivables 160.2 87.1
Cash & cash equivalents 1,929.2 1,606.9
Total assets 16,083.4 13,433.5
Liabilities
Insurance contract liabilities 8 405.4 374.3
Other provisions 9 5.3 3.1
Financial liabilities
Investment contracts 14,144.0 11,819.8
Borrowings 11.2 13.1
Currency forwards 0.2 0.1
Deferred tax liabilities 268.2 277.6
Insurance and investment contract payables 21.8 18.5
Deferred income 347.8 291.9
Income tax liabilities 50.0 19.9
Other payables 119.4 100.5
Net asset value attributable to unit holders 267.6 132.5
Total liabilities 15,640.9 13,051.3
Net assets 442.5 382.2
Shareholders' equity
Share capital 10 71.5 69.6
Share premium 11 82.2 57.4
Other reserves 11 (15.9) (8.4)
Retained earnings 11 304.7 263.6
Total shareholders' equity 442.5 382.2
Pence Pence
Net assets per share 92.9 82.4
(32)
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Cash flows from operating activities
Profit before tax for the period 103.2 179.9
Adjustments for:
Depreciation 2.2 2.5
Amortisation of acquired value of in-force business 3.3 3.1
Fair value gains on non-operating investments - (0.1)
Share based payment charge 12.5 7.6
Profit on sale of investment - (7.0)
Changes in operating assets and liabilities
Increase in deferred acquisition costs (91.0) (68.6)
Increase in investment property (74.3) (248.8)
Increase in investments (2,026.1) (2,100.2)
(Increase) / decrease in reassurance assets (4.6) 49.6
(Increase) / decrease in insurance and investment contract receivables (6.5) 3.6
Increase in other receivables (75.8) (3.5)
Increase / (decrease) in insurance contract liabilities 31.1 (56.3)
Increase in provisions (excluding LAHC) 2.2 0.5
Increase in financial liabilities (excluding borrowings) 2,319.0 2,408.0
Decrease in reinsurance liabilities - (8.9)
Increase / (decrease) in insurance and investment contract payables 3.3 (1.0)
Increase in deferred income 55.9 42.2
Increase in other payables 18.9 29.1
Increase in net assets attributable to unit holders 135.1 40.2
Cash generated from operations 408.4 271.9
Income taxes paid (52.8) (9.3)
Net cash from operating activities 355.6 262.6
Cash flows from investing activities
Acquisition of property & equipment (6.5) (3.0)
Proceeds from sale of plant and equipment 0.1 0.2
Proceeds from sale of LAHC - 3.9
Net cash from investing activities (6.4) 1.1
Cash flows from financing activities
Proceeds from the issue of share capital 26.7 30.3
Consideration paid for own shares (10.3) (5.4)
Proceeds from exercise of options over shares held in trust 1.0 2.3
Repayment of borrowings (1.9) (4.1)
Dividends paid (47.7) (15.1)
Net cash from financing activities (32.2) 8.0
Net increase in cash & cash equivalents 317.0 271.7
Cash & cash equivalents at 1 January 1,606.9 1,337.7
Effect of exchange rate fluctuations on cash held 5.3 (2.5)
Cash & cash equivalents at 31 December 1,929.2 1,606.9
(33)
NOTES TO THE CONSOLIDATED ACCOUNTS UNDER
INTERNATIONAL FINANCIAL REPORTING STANDARDS
1. BASIS OF PREPARATION
St. James's Place plc ('the Company') is a company incorporated and domiciled in
England and Wales.
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
excluding IFRS 8 Operating Segments. The effective date for IFRS 8 is for
accounting periods commencing 1 January 2009 and it is likely that further
disclosures will be required when the standard is applied. During 2007, the
Group has applied for the first time, the following:
• Amendments to IAS 1 Presentation of Financial Statements (Capital
Disclosures)
• IFRS 7 Financial Instruments: Disclosures
The group financial statements also comply with the revised Statement of
Recommended Practice issued by the Association of British Insurers in December
2005 in so far as these requirements do not contradict IFRS requirements.
2. OTHER ACCOUNTING POLICIES
The other accounting policies used by the Group in preparing the results are
also consistent with those applied in preparing statutory accounts for the year
ended 31 December 2006.
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING
POLICIES
Judgements
The primary area in which the Group has applied judgement in applying accounting
policies lies in the classification and unbundling of contracts between
insurance and investment business. Contracts with a significant degree of
insurance risk are treated as insurance; pension contracts in general have been
treated as investment contracts and, where they contain a significant degree of
insurance risk, the insurance and investment components have been unbundled.
All other contracts are treated as investment contracts. The Group has also
elected to treat all assets backing linked and non unit linked contracts as fair
value through profit or loss although some of the assets in question may
ultimately be held to maturity.
Estimates
The principal areas in which the Group applies accounting estimates are:
• determining the value of insurance contract liabilities;
• deciding the amount of management expenses that are treated as
acquisition expenses;
• amortisation and recoverability of deferred acquisition costs and
deferred income; and
• determining the fair value, amortisation and recoverability of acquired
in-force business.
Estimates are also applied in determining the amount of deferred tax asset
recognised on unrelieved expenses and the value of other provisions. The basis
of estimation has changed during the year.
(34)
Measurement of insurance contract liabilities
The assumptions used in the calculation of insurance contract liabilities that
have a significant effect on the income statement of the Group are:
• the lapse assumption, which is set prudently based on an investigation
of experience during the year;
• the level of expenses, which is based on actual expenses in 2007 and
expected long term rates;
• the mortality and morbidity rates, which are based on the results of an
investigation of experience during the year; and
• the assumed rate of investment return, which is based on current gilt
rates.
Acquisition expenses
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.
Amortisation and recoverability of DAC and DIR
Deferred acquisition costs and income on investment contracts are amortised on a
straight-line basis over the average lifetime of the underlying contracts. The
average lifetime of the contracts has been estimated from the experienced
termination rates and the average age of clients at inception and maturity.
Deferred acquisition costs and income on insurance contracts are amortised over
the period during which the costs are expected to be recoverable in accordance
with the projected emergence of future margins.
Deferred acquisition costs relating to insurance and investment contracts are
tested annually for recoverability by reference to expected future income
levels.
Acquired in-force business
There have been no new business combinations during the year. The acquired
value of the in-force business is 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.
The acquired value of in-force business relating to insurance and investment
contracts is tested annually for recoverability by reference to expected future
income levels.
4. SEGMENT REPORTING
The Group segments its operations into three lines of business:
1. Life business - offering pensions, protection and investment products
through the Group's life assurance subsidiaries;
2. Unit trust business - offering unit trust investment products,
including ISAs and PEPs, through the St. James's Place Unit Trust Group; and
3. Other - offering financial products such as annuities, mortgages and
stakeholder pensions, from third party providers.
(35)
The income and results of these segments are as follows:
Year Ended Year Ended
31 December 31 December
Net Revenue 2007 2006
£' Million £' Million
Life business
Net insurance premium income 69.9 67.4
Net movement on deferred income (30.5) (23.3)
Investment income - unit linked policyholders 1,063.9 1,503.9
Segment revenue 1,103.3 1,548.0
Unit trust business
Fee income (excluding deferred income) 85.4 67.7
Net movement on deferred income (25.4) (18.9)
Segment revenue 60.0 48.8
Other business
Commission income 54.3 62.1
Investment income - sale of investment in LAHC - 7.0
Investment income - other shareholders 11.6 6.7
Investment income - other(1) 13.3 8.7
Other operating income 2.5 1.8
Segment revenue 81.7 86.3
Total net revenue(2) 1,245.0 1,683.1
(1) Investment income - other relates to investment income on third party
holdings in the St. James's Place unit trusts which are subject to consolidation
(the third party holdings are disclosed as 'net asset value attributable to unit
holders' within the balance sheet).
This income is offset by a change in investment contract benefits within the
income statement.
(2) All revenue is generated from external transactions.
(36)
Year Ended Year Ended
Segment Result 31 December 31 December
2007 2006
£' Million £' Million
Life business
Shareholder 84.4 85.5
Policyholder tax gross up 7.1 72.3
Unit trust business 15.9 18.0
Profit on sale of investment - LAHC - 7.0
Other loss (4.2) (2.9)
Total other business (4.2) 4.1
Total operating profit and profit before tax 103.2 179.9
Income taxes
Policyholder tax (7.1) (72.3)
Shareholder tax (18.0) (19.6)
Profit after tax 78.1 88.0
Other Segmental Information
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Segment Assets
Life business 15,385.0 12,963.5
Unit trust business 150.6 103.3
Other business 300.5 303.9
Unallocated assets 144.7 93.5
Consolidation adjustments 102.6 (30.7)
Total Assets 16,083.4 13,433.5
Segment Liabilities
Life business 14,879.7 12,481.8
Unit trust business 130.1 94.0
Other business 76.1 69.4
Unallocated liabilities 318.2 297.5
Consolidation adjustments 236.8 108.6
Total Liabilities 15,640.9 13,051.3
Capital expenditure
Other business 6.5 3.0
Depreciation Expense
Other business 2.2 2.5
Amortisation Expense
Life business - DAC 38.6 35.0
Life business - acquired value of in-force
business 3.3 3.1
Unit trust business - DAC 6.8 5.2
(37)
5. INCOME TAXES
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Policyholder tax
Overseas withholding taxes 12.4 9.2
Deferred tax on unrelieved expenses
- Current year credit (7.5) -
- Prior year credit (30.4) -
Deferred tax on unrealised gains in unit linked funds (23.2) 41.8
UK corporation tax 55.8 21.3
Total policyholder tax charge for the year 7.1 72.3
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Shareholder tax
UK corporation tax
Current year charge 4.6 8.7
Prior year charge 1.0 0.1
Overseas taxes 2.2 0.9
7.8 9.7
Deferred tax charge / (credit)
On unrelieved expenses - (1.1)
Other 10.2 11.0
Total shareholder tax charge for the year 18.0 19.6
The prior year credit for deferred tax on unrelieved expenses relates to the
change in basis of valuation for tax relief from a market consistent stochastic
model to the recognition of deferred tax on the entire balance of unrelieved
expenses. In addition, where deferred tax balances represent future adjustments
at the policyholder rate, these are now recognised as policyholder items.
The change in the corporation tax rate from 30% to 28% effective from 1 April
2008 included in the 2007 Finance Act has been incorporated into the deferred
tax balances.
6. EARNINGS PER SHARE
Year Ended Year Ended
31 December 31 December
2007 2006
Pence Pence
Basic earnings per share 16.8 19.4
Adjustments - disposal of LAHC - (1.5)
Basic adjusted earnings per share 16.8 17.9
Diluted earnings per share 16.1 18.4
Adjustments - disposal of LAHC - (1.5)
Diluted adjusted earnings per share 16.1 16.9
(38)
The earnings per share (EPS) calculations are based on the following figures:
Year Ended Year Ended
31 December 31 December
2007 2006
£' Million £' Million
Earnings
Profit after tax (for both basic and diluted EPS) 78.1 88.0
Adjustments - disposal of LAHC - (7.0)
Adjusted profit (for both basic and diluted EPS) 78.1 81.0
Weighted average number of shares
Weighted average number of ordinary shares in issue (for basic EPS) 465.6 452.8
Adjustments for outstanding share options 20.4 25.8
Weighted average number of ordinary shares (for diluted EPS) 486.0 478.6
7. 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
2007 2006 2007 2006
Pence per Pence per £' Million £' Million
share share
Final dividend in respect of previous
financial year 2.15 1.85 10.0 8.3
Special dividend in respect of
previous financial year 6.35 - 29.4 -
Interim dividend in respect of
current financial year 1.75 1.50 8.3 6.8
Total 10.25 3.35 47.7 15.1
The Directors have recommended a final dividend of 2.55 pence per share (2006:
2.15 pence). This amounts to £12.2 million (2006: £10.0 million) and will,
subject to shareholder approval at the Annual General Meeting, be paid on 14 May
2008 to those shareholders on the register as at 7 March 2008.
(39)
8. INSURANCE LIABILITIES
2007 2006
£' Million £' Million
Balance at 1 January 374.3 430.6
Movement in unit linked liabilities 26.3 32.9
Movement in non-unit linked liabilities
New business (2.6) (2.9)
Existing business 3.4 2.9
Effect of PS06/14 - (43.7)
Other assumption changes (6.0) (29.4)
Claims reserve reclassification - (14.9)
Experience variance 10.0 (1.2)
Total movement in non-unit linked liabilities 4.8 (89.2)
Balance at 31 December 405.4 374.3
Unit linked 333.8 307.5
Non-unit linked 71.6 66.8
405.4 374.3
Current 56.4 52.5
Non current 349.0 321.8
405.4 374.3
Assumptions used in the calculation of liabilities
The principal assumptions used in the calculation of the liabilities are:
Assumption Description
Interest rate The valuation interest rate is calculated by reference to the long term
gilt yield at 31 December 2007 and the specific gilts backing the
liabilities. The specific rates used are between 3.2% and 4.6% depending
on the tax regime (3.2% and 4.5% at 31 December 2006).
Mortality Mortality is based on company experience and is set at 72% of the TM/F92
tables with an additional loading for smokers. There has been no change
since 2006.
Morbidity - CI Morbidity is based on company experience. The shape and level are
unchanged since last year. Sample annual rates per £ for a male
non-smoker are:
Age Rate
25 0.000703
35 0.001235
45 0.002953
(40)
Morbidity - PHI Morbidity is based on company experience. Sample annual rates per £ income benefit
p.a. for a male non-smoker are:
Rate
Age 2007 2006
25 0.00510 0.00586
35 0.01345 0.01547
45 0.02918 0.03356
Expenses Contract liabilities are calculated allowing for the actual costs of administration
of the business. The assumption has been increased to allow for inflation but is
otherwise unchanged.
Annual cost
Product 2007 2006
Investment bonds £20.65 £19.63
Pension business £40.48 £39.07
Protection business £32.38 £31.28
Persistency Allowance is made for a prudent level of lapses within the calculation of the
liabilities. There has been no change in the allowance for lapses since 2006.
Sample annual lapse rates include:
Product 1 - 5 years 6 + years
Bond 3% 5%
Protection 14% 11%
Single premium
pensions 2% 8%
Note: the lapse assumptions for single premium pension business vary by age rather
than duration. The rates included in the table above are in respect of a plan
commencing at age 55.
Sensitivity analysis
The table below sets out the sensitivity of the profit and net assets to key
assumptions. The analysis reflects 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.
(41)
Sensitivity analysis Change in Change in
profit before profit before Change in Change in
Change in tax tax net assets net assets
assumption 2007 2006 2007 2006
% £' Million £' Million £' Million £' Million
Withdrawal rates -10% (2.3) (1.4) (1.9) (1.0)
Expense assumptions -10% 1.3 2.1 1.0 1.8
Mortality / morbidity -5% 0.8 0.2 0.6 0.2
A change in interest rates will have no material impact on insurance profit
or net assets.
9. OTHER PROVISIONS
Endowments Office Other Total
Restructuring Provisions
£' Million £' Million £' Million £' Million
At 1 January 2007 0.8 2.1 0.2 3.1
Charged to the consolidated
income statement (0.3) (1.3) - (1.6)
Additional provisions - 2.9 1.1 4.0
Unused amounts released - - (0.2) (0.2)
At 31 December 2007 0.5 3.7 1.1 5.3
Current 0.4 2.9 1.1 4.4
Non current 0.1 0.8 - 0.9
0.5 3.7 1.1 5.3
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, the average cost of redress and the estimated
timing of settlement.
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 and making appropriate allowance for the time value of money.
Other provisions refer to sundry miscellaneous items.
(42)
10. SHARE CAPITAL
Number of
Ordinary Shares Share Capital
£' Million
At 1 January 2006 447,431,123 67.1
Scrip dividend 3,553,044 0.5
Exercise of options 12,874,781 2.0
At 31 December 2006 463,858,948 69.6
Scrip dividend 2,422,538 0.4
Exercise of options 10,204,367 1.5
At 31 December 2007 476,485,853 71.5
The total authorised number of ordinary shares is 605 million (2006: 605
million), with a par value of 15 pence per share (2006: 15 pence per share).
All issued shares are fully paid.
11. RESERVES
Share Treasury Profit and Miscellaneous Total
Premium Shares Loss Reserves
Reserve Reserve
£' Million £' Million £' Million £' Million £' Million
At 1 January 2006 29.6 (11.0) 186.5 2.3 207.4
Profit for the year 88.0 88.0
Dividends (15.1) (15.1)
Issue of share capital
Scrip dividend 10.6 10.6
Exercise of options 17.2 17.2
Consideration paid for own shares (5.4) (5.4)
Own shares vesting charge 5.7 (5.7) -
P & L reserve credit in respect of
proceeds from exercise of share options
of shares held in trust 2.3 2.3
P & L reserve credit in respect of share
option charges 7.6 7.6
At 31 December 2006 57.4 (10.7) 263.6 2.3 312.6
Profit for the year 78.1 78.1
Dividends (47.7) (47.7)
Issue of share capital
Scrip dividend 10.3 10.3
Exercise of options 14.5 14.5
Consideration paid for own shares (10.3) (10.3)
Own shares vesting charge 2.8 (2.8) -
P & L reserve credit in respect of
proceeds from exercise of share options
of shares held in trust 1.0 1.0
P & L reserve credit in respect of share
option charges 12.5 12.5
At 31 December 2007 82.2 (18.2) 304.7 2.3 371.0
Miscellaneous reserves represent other non-distributable reserves.
(43)
12. NON STATUTORY ACCOUNTS
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2007 or 2006 but is derived
from those accounts. Statutory accounts for 2006 have been delivered to the
registrar of companies, and those for 2007 will be delivered in due course. The
auditors have reported on those accounts; their report was (i) unqualified, (ii)
did not include a reference to any matters to which the auditors drew attention
by way of emphasis without qualifying their report and (iii) did not contain a
statement under section 237 (2) or (3) of the Companies Act 1985.
13. ANNUAL REPORT
The Company's annual report and accounts for the year ended 31 December 2007 is
expected to be posted to shareholders by 31 March 2008. Copies of both this
announcement and the annual report and accounts will be available to the public
at the Company's registered office at St. James's Place House, Dollar Street,
Cirencester GL7 2AQ and through the Company's website at www.sjp.co.uk.
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