Hansard Regulatory News (HSD)

27 Sep 2007 07:02

Hansard Global plc27 September 2007 Hansard Global PLC ("Hansard Global" or the "Company") Preliminary results for the year ended 30 June 2007 Hansard Global plc, the specialist long-term savings provider, today announcesits results for the year ended 30 June 2007. Financial Highlights •Profit after tax for the year was £19.7m, an increase of 11.3% over the previous year (2006: £17.7m) •EEV operating profit for the year was £38.0m, an increase of 20.3% (2006: £31.6m) •EEV operating profit per share was 27.7p, an increase of 20.4% (2006: 23.0p) •EEV of the Group at 30 June 2007 has risen to £218.0m, an increase of 22.1% (30 June 2006: £178.6m) • Assets under administration at 30 June 2007 were £1, 130.4m, an increase of 19.3% (30 June 2006: £947.3m) • Stable New Business Margins of 8.3% (2006: 8.0%) • Final Ordinary dividend of 6.0 pence per share, making full year dividend of 10.0 pence per share for shareholders on the register on the 26 October and payable on the 23 November • Special dividend of 5.0 pence per share to be paid with the final dividend • Current trading: APE of £8.3m for first 12 weeks of year, up 50% year-on-year Operational Highlights • Robust and diversified new business flows, particularly from Europe, Far East, Scandinavia and Latin America • New business initiatives providing growth • Plc status has given Hansard platform to attract and compete for new business from a wider range of Intermediaries • Strengthened team with four new non-executive directors and appointment of Head of Institutional Business • Hansard Online continues to innovate and differentiate Dr Leonard Polonsky, Hansard Global's Chairman, commented: 'This is an excellent set of results. We have continued to grow and develop thebusiness: profits, EEV and new business volumes are all up on the prior year. We have benefited from the scaleability and flexibility of the Group'soperations, allowing us to enter and develop new markets and exploit growthopportunities within our existing markets, without the need for significantfurther investment. The long-term trends in our chosen markets will allow intermediaries with whomwe work to capitalise on these opportunities. Whilst short-term fluctuations inmarket levels may temporarily disturb growth patterns, we remain positive aboutthe Group's growth prospects and are enjoying a strong start to the currentyear. Taking into account the strength of the Group's balance sheet together with ourongoing ability to generate cash I am delighted that the Board has felt able todeclare a special dividend of 5.0p per share taking the overall dividend payoutto 15.0p per share since the IPO last December.' For further information, please contact Hansard Global PlcDr Leonard Polonsky, Executive Chairman Tel: 01624 688 000 Bell Pottinger Corporate and FinancialDan de Belder/ Ben Woodford/ Algy Rowe Tel: 020 7861 3232 Chairman's statement This has been an exceptional year in the history of the Group for a number ofreasons: • the Company was listed on the main market of the London Stock Exchange on 18 December 2006; • the Group achieved a record profit; • New business results for the year maintained the levels of the prior year, which were themselves at record levels, and • Assets under administration exceeded £1 billion. This is the Company's first preliminary results announcement as a listedcompany. It incorporates five and a half months as a privately held company andthe remainder as a public company. In the period since listing we haveexperienced significant changes in our reporting requirements and in the Group'sCorporate Governance frameworks. We have taken the opportunity of providingwithin this Annual Report a number of sections dealing with how we operate inthis new environment. Financial performance The financial results have been presented in accordance with UK GenerallyAccepted Accounting Principles ("UK GAAP"). Additionally, certain informationrelating to embedded value is presented using the European Embedded Value("EEV") methodology. The EEV information, read in conjunction with the otherfinancial information produced by the Group, provides an insight into thefinancial performance of the Group, year on year. I am pleased to report that the strong performance in profits and new businessachieved over the last two years has continued in this financial year. The UKGAAP profit after tax for the year was £19.7 million (US$40m), an increase of11.3% over the profit of £17.7m earned in the previous financial year. Earningsper share are 14.4p (28.9 cents), compared with 12.9p. EEV profit after tax was £44.9m (US$90.2m) (2006: £36.1m) being a return of25.1% on the opening EEV. This return is consistent with the prior year. The EEVof the Group has risen to £218.0m (US$436m), an increase of 22.1% from the valueat 30 June 2006. New business Continued strong new business flows were received particularly from Europe, theFar East, Scandinavia and Latin America. Initiatives to develop intermediaryrelationships in each of those areas were successful and we are confident thatfurther growth in those markets is achievable. Our new business margins remainwell above industry average, principally due to the Group's efficient operatingmodel and our undeviating focus on value and the maintenance of margins. New business flows have contributed to the value of the Group policyholders'funds at 30 June 2007 increasing to £1,130m ($2,270m), an increase of 19.3%since 30 June 2006. The Group's focus on creating market developmentopportunities for Hansard Europe Limited continues to bear fruit. The value ofpolicyholder funds administered by that company increased by over £100m ($200m)during the year. Corporate Governance The Group is committed to maintaining a strong Corporate Governance environment.During the year the Group established an Audit Committee, a NominationsCommittee and a Remuneration Committee of the Board. In preparation for the listing, there were a number of changes in thecomposition of the Board. Four non-executive directors (Bernard Asher, MauriceDyson, Uwe Eymer and Harvey Krueger) joined the Board prior to the listing tobring their considerable expertise and to enable the Company to comply with goodCorporate Governance practice. Significant shareholdings At the date of this report I have the largest beneficial shareholding in theCompany, as a result of my direct holdings and my holdings in Polar Cap Limited("Polar Cap"). Polar Cap was the holding company of the Group at time of listingand is currently the registered holder of 28.8% of the Company's issued sharecapital. Polar Cap intends to complete the reorganisation referred to in ourprospectus by 31 December 2007. As a result of that reorganisation, I will holda direct interest of 43.2% in the Company. The reorganisation will not affectthe number of the Company's shares in issue. We are very pleased with the range and quality of institutional shareholdersthat we now have. Dividends On 4 May 2007 the company paid an interim dividend of 4.0p per share. The Boardintends to pay dividends approximating to 70% of UK GAAP earnings for eachfinancial year. Employees The listing of the Company, coupled with continued growth in profits and newbusiness, could not have been achieved without the on-going commitment anddedication of our employees. The progress that we have made, despite thedisruption to business activities caused by the listing process, is a reflectionof their skill and enthusiasm. On behalf of the Board and shareholders I thankthem all. Strategy and outlook The Group's objective is to grow by attracting new business and positioningitself to adapt rapidly to market trends and conditions. In particular we seethat the institutional relationships present greater opportunities following thelisting. The scaleability and flexibility of the Group's operations allow us toenter and develop new geographic markets and exploit growth opportunities withinour existing markets, without the need for significant further investment. The long-term trends in our chosen markets will allow intermediaries with whomwe work to capitalise on these opportunities. Whilst short-term fluctuations inmarket levels may temporarily disturb growth patterns, we remain positive aboutthe Group's growth prospects. Dr Leonard Polonsky26 September 2007 Business Review Business The Group is a specialist long-term savings provider based on the Isle of Manand the Republic of Ireland. It offers a range of flexible, tax-efficientinvestment products within a life assurance policy wrapper, developed to appealto affluent international investors. The Group has designed its products, distribution methods and cost base with aview to reducing operational and financial risks. The Group's products are distributed, utilisingits low-cost distribution model, exclusively through financial servicesintermediaries, independent financial advisers or the retail operations offinancial institutions (together, ''Intermediaries''), supported by its awardwinning, multi-language internet platform, Hansard OnLine. The Group hasestablished a network of Account Executives providing local language and othersupport services to Intermediaries in a number of areas around the world. The Company's principal office is in Douglas, Isle of Man, and its regulatedlife assurance subsidiaries operate out of the Isle of Man, and Dublin, Republicof Ireland. Its location on the Isle of Man allows the Group freedom to flourishwithin a highly-regarded regulatory framework, with a zero rate of CorporationTax, and with access to an educated workforce and a robust telecommunicationsinfrastructure. The Policyholder Protection legislation enacted by the Isle ofMan Government provides additional security upto 90% of the liability topolicyholders. Our operations in Dublin allow the Group's products access to theEuropean Union marketplace under the "freedom of services" provisions of the EULife Directives. Dividend Policy The Directors intend that the Company will pay dividends of 70% of the Group'sprofit after tax for each financial year. The Directors intend that interimdividends, representing 40% of the total dividend expected to be paid in respectof a financial year, will be paid in May, with a final dividend in respect ofthat year to be paid in November after the financial year end. Key Strengths The Directors believe that the Group's products are attractive to affluentinternational investors and other individuals and institutions. By enablingaccess to a wide range of underlying funds, the Group is able to offer thebenefit of economies of scale to Intermediaries and their clients, who might nototherwise be able to secure access to such a wide range of investmentopportunities in such a convenient and flexible format. The Group's products generally do not include options or guarantees that are notfully priced within the products themselves. All policyholder investment choicesare closely matched. The margins on, and the capital efficiency of, the Group'sproducts mean the Group's operations are both profitable and cash generative. The Group has a dedicated dynamic workforce whose skills have contributed to oursuccess. The senior management team collectively, have an aggregate of over 185 yearsexperience in the long-term savings and the life assurance industry, includingsome 120 years service within the Group. The Group's internet platform, Hansard OnLine, is pivotal to the success of theGroup's business. It allows Intermediaries 24/7/365 access to real-timeinformation relating to the investments of policyholders whom they haveintroduced to the Group and provides them with an additional sales andadministration tool. Hansard OnLine also reduces the Group's cost base. The Group is well capitalised, with capital in excess of 17 times its aggregateminimum solvency requirements as at 30 June 2007. This allows the Group toabsorb financial shocks arising from adverse circumstances whilst enabling it tocontinue to deliver its business strategy and to support its stated dividendpolicy. The Group manages its capital to maintain financial strength to support newbusiness growth, to match the profile of its assets and liabilities, takingaccount of the risks inherent in the business, and to satisfy the requirementsof its policyholders and regulators. The Group's liquid assets are held with a wide-range of deposit institutions andin AAA-rated money market liquidity funds. The Group is monitoring the impact of "Solvency II" and related guidance todetermine the extent of Economic Capital needed to support its activities. The net asset value per share ("NAV") at 30 June 2007, on a UK GAAP basis, is37.2p. This represents an increase of 38.3% from the NAV at 30 June 2006. TheNAV is based upon the consolidated shareholders' funds at the balance sheet datedivided by the number of shares in issue at that date, being 137,281,202ordinary shares. On the EEV basis, the NAV at 30 June 2007 is 158.8p. This represents an increaseof 22.1% from the NAV at 30 June 2006. Strategy The Group continues to operate its existing business model, which is designed toreduce operational and financial risk, and to grow its business through: •doubling the number of Account Executives by December 2012; •developing and enhancing Intermediary relationships; •developing profitable relationships with institutions and other wealth management groups; and •increasing the functionality of Hansard OnLine to continue to meet the needs of Intermediaries and policyholders. Key Performance Indicators The Group has established a range of Key Performance Indicators ("KPIs"), bothfinancial and non-financial, that are designed to ensure that performanceagainst targets and expectations is monitored and variances explained. •Cash - bank balances and significant movements on balances are reported weekly. The Group's liquid funds at the balance sheet date were £70.8m, an increase of 22.3% from 30 June 2006. •Expenses - the Group maintains rigorous focus on expense levels. The objective is to restrain increases in Administrative expenses to the rates of inflation incurred across the Group. •New Business - The Group has developed a measure of calculating new business production, called Compensation Credit, which is designed to indicate the relative value of each piece of new business. The Group's objective is to grow new business at a rate of 10% - 15% per annum over the medium term on this measure. •Risk profile - The factors impacting on the Group's Risk profile are kept under continual review. During the year the Group implemented an Enterprise-wide Risk Management framework. •Business continuity - Maintenance of continual access to data is critical to the Group's operations. At no time during the year was access to data interrupted. Risks relating to the Group The Board believes that the principal risks facing the Group are those relatingto the operation of the Group's business model and to the environment withinwhich the Group operates. There is in place an ongoing process for managingsignificant risks faced by the Company. Business model risks Risks that could adversely affect the Group's business and financial conditionarise as a result of the Group's strategy and methods of operation. Principalrisks arising may be: •The Group may not increase the number of its Account Executives or Intermediaries in line with expectations, as a result of competition in the financial intermediary market. •Changes in policyholder and/or market sentiment may lead to the Group experiencing a significant change in persistency rates. •The Group's life assurance companies could be found liable to compensate policyholders for losses suffered due to negligent investment advice that they are deemed to have given. •Loss of reputation or negative publicity arising in those highly regulated markets in which we operate. Regulatory and External environment risks The regulatory and external environment in which the Group operates is subjectto various degrees of risk. Principal risks arising may be: •Adverse economic, political and market factors, such as a prolonged economic downturn, significant falls in levels of global capital and other markets, and continued weakness of major currencies against sterling. •The regulatory regimes to which the Group's life assurance companies are subject may change. •An adverse change in the Company's or the Group life assurance companies' tax residence, effective tax rate or applicable tax legislation. •A change in the appetite of policyholders, Intermediaries or their clients for risk, or for the Group's product range. •The Group's ability to continue to deliver effectively and to expand Hansard OnLine is reliant, in part, on the growth and continued functioning of the internet. FINANCIAL REVIEW Results The financial results summarised below have been presented in accordance with UKGAAP. Additionally, certain information relating to embedded value is presentedusing the EEV methodology. The Board believes that the EEV information providesmore realistic information on the financial position and performance of theGroup than that provided by UK GAAP reporting alone. The results for the year reflect positive income streams from contracts underadministration, coupled with continued discipline in expense management andincreases in new business production, despite the changes caused by the Group'slisting on the London Stock Exchange and the consequent disruption to ouractivities. Strong positive cashflows being generated from the existing book of businesshave contributed to substantial returns on EEV, have funded new businessproduction, and the payment of a maiden interim dividend. The Group's net asset value, assets under administration, and solvency marginscontinue to increase. 1. UK GAAP Results for the year The profit for the year is £19.7 million, compared with a profit for the prioryear of £17.7m. This represents an increase of 11.3%. Earnings per share are14.4p, an increase of 11.6% over the earnings per share of the prior year. All the costs of listing the Company were met by its then holding company, PolarCap. This has had the impact of the Company recovering some £1.47m from itsholding company for services rendered in connection with the listing. Thisamount is included in the income statement for the year. Net of the impact ofall amounts received from Polar Cap in the years under review, the Group'sunderlying profit for the year reflects growth of 4.6% over the profit of theprior year. 1.1 Revenues Fees and commissions for the year are £49.2 million, compared with the prioryear of £44.5m. This represents an increase of 10.6%, caused principally by newbusiness flows in the current year and the impact of fees received fromcontracts that were being administered by the Group at the beginning of theyear. Certain fees and commissions are earned by the Group in foreign currencies.Adverse currency movements throughout the year have restrained the growth inthose amounts, when reported in sterling. The geographical analysis of fees and commissions reflects the growth in revenueattributable to new business issued by Hansard Europe Limited in the Republic ofIreland over the year. This is principally single premium business that hascontributed to a growth in assets under administration by Hansard Europe Limitedof over £100m or 44% since 30 June 2006. 1.2 Expenses New business commissions, together with the directly attributable incrementalcosts incurred on the issue of a policy by the Group, are included withinorigination costs in the consolidated income statement. All other costs arereflected within Administrative and other expenses. A summary of administrative and other expenses is set out below: +---------------------------------------------+--------------+-------------+|Year ended 30 June | 2007| 2006|| | | |+---------------------------------------------+--------------+-------------+| | £m| £m|+---------------------------------------------+--------------+-------------+|Investment management expenses and other fees| 3.2| 2.6|+---------------------------------------------+--------------+-------------+|New business related costs | 3.4| 3.5|+---------------------------------------------+--------------+-------------+|Administrative expenses | 11.4| 10.2|+---------------------------------------------+--------------+-------------+| | £18.0| £16.3m|+---------------------------------------------+--------------+-------------+ Investment management expenses and other fees payable by the Group are met fromcharges deducted from the contracts administered, and do not impact on theprofit for the period. The increase over the previous year reflects continuedgrowth in assets subject to investment management arrangements. New business related costs include all costs of operation of Account Executives,Intermediary incentives and related expenditure. Administrative expenses for the year include amounts totalling £0.6m for theadditional professional fees, insurance and other costs of operating in a listedcompany environment. 1.3 Financial investments Assets under administration at 30 June 2007, at £1,130.4 million, have risen by19.3% since 30 June 2006. The main drivers for this increase have been newbusiness single premium flows and movements in capital markets. A significantproportion of new business premiums is denominated in currencies other thansterling (principally in US$ and •) and, as a result, the value of assets underadministration is sensitive to movements in exchange rates. At the balance sheet date approximately 37% of the Group's financial investmentswere held in dollar-denominated assets; 30% in euro-denominated, and 20% insterling assets. 1.4 Cash Flows Cash flows in the year were strongly positive, allowing the Group to fund itsgrowth in new business from its own resources and providing sufficient funds tomeet the maiden interim dividend paid on 4 May 2007. Cash and cash equivalentbalances at 30 June 2007 stood at £70.8 million, an increase of almost £13msince 30 June 2006. 2. EEV Information EEV is an estimate of the value of the Shareholders' interest in the lifeassurance and related businesses of the Group. The methodology used to derivethe EEV is consistent with the methodology used in relation to the EEVInformation published in the Company's prospectus document. 2.1 EEV Profit The EEV Profit after tax, being the change in EEV over the year adjusted fordividends, is £44.9m or a return of 25.1% on opening EEV. The return isconsistent with the previous year return of 25.3%. The EEV Operating Profit remains strong. The EEV Operating Profit for the yearis £38.0 m, compared with £31.6m in the previous year. The New BusinessContribution ("NBC") for the year is £22.9m (2006: £21.6m). Changes in assumptions were made to reflect the directors' current expectationsabout future levels of expenses, mortality, lapses and other operating matters.These operating assumption changes increased the EEV by £9.7m at 30 June 2007(2006: £0.4m loss). This is largely driven by changes to reflect improving lapseand mortality experience and greater margins from policyholder activity thanpreviously expected. These positive contributions to EEV are partially offset byallowance for greater than previously expected partial withdrawals and higherthan previously assumed expenses (mainly due to the further additional costsassociated with a listed entity). During the year, modelling improvements, primarily regarding the modelling ofsingle premium cases with a premium above £1m, reduced the EEV by £3.0m (2006:Nil). Experience variances arise where the Group's actual experience in areas such asexpenses, policy persistency, mortality and fees from policyholder activitydiffers during the period from the assumptions used to calculate the EEV at theprevious year-end. Experience variances gave rise to an EEV loss of £0.8m in theyear (2006: £4.0m gain). The expected return on Net Worth of £2.1m (2006: £1.2m) reflects the anticipatedincrease in shareholder assets over the period due to the time value of money. Investment return variances contributed to a gain of £6.9m in the year (2006:£5.2m gain). The main elements contributing to the variances are as follows: •Investment performance of policyholder funds and Marketing allowances received from external fund managers during the year were higher than expected, contributing to a gain of £12.8m (2006: £6.8m); •The strengthening of sterling against the US dollar, in particular, during the year resulted in a £6.3m loss (2006: £1.5m loss). Changes to the yields in fixed interest markets caused the risk discount rate toincrease from 4.8% at 30 June 2006 to 5.0% at 30 June 2007, and the projectedunit growth rate to increase from 1.93% to 2.15% over the same period. Thecombined effect of these two opposing changes had little impact on the EEV. In order to better explain the movement in capital flows, the components of EEVprofit for the year are shown separately between the movements in Net Worth andthe present value of in-force business in note 2 to the EEV information. Thisanalysis demonstrates the realisation of projected future profits into Net Worthduring the year. 2.2 EEV balance sheet The EEV as at 30 June 2007 was £218.0 m, representing an increase of 22.1% or£39.4m over the value at 30 June 2006. Throughout the year, new business hasbeen written by the Group at consistently profitable new business margins. Thesefactors have contributed to the growth in the Group's EEV. The table below provides a summarised breakdown of the EEV at the reportingdates. +------------------------------------------+----------------+---------------+| | 30 June 2007| 30 June 2006|+------------------------------------------+----------------+---------------+| | £m| £m|+------------------------------------------+----------------+---------------+|Net Worth | 56.5| 43.3|+------------------------------------------+----------------+---------------+|Value of future profits | 161.5| 135.3|+------------------------------------------+----------------+---------------+|EEV | 218.0| 178.6|+------------------------------------------+----------------+---------------+ Net Worth is the market value of shareholders' funds, adjusted to excludecertain assets such as deferred origination costs and liabilities such asdeferred income reserve. At the balance sheet date the Net Worth of the Group isrepresented by liquid cash balances. 3. New Business The Group has achieved sustained growth in new business at margins consistentlyabove those of the Group's competitors. The growth of new business reported insterling has been restricted during the year by a combination of adversecurrency movements, timing of new single premium business flows, and the Group'sdesire to maintain those new business margins. Continued strong new business flows in the year were received particularly fromEurope, the Far East, Scandinavia and Latin America. Initiatives to developIntermediary relationships in each of those areas were successful, and we areconfident that further growth in those markets is achievable. New business inEurope was, however, restrained by a combination of regulatory intervention inproduct design and competitor activity in certain markets. Initiatives todevelop the Polish market, so far, have borne limited fruit. We have replacedthe country manager with a local Account Executive, who is well known in thismarket. The Middle East office will be headed by an experienced AccountExecutive, who will bring to the area increased levels of knowledge and hands-onvigorous activity. The value of Regular new business premiums has represented the driver forgrowth, with Annualised Premium Equivalent ("APE") having increased by £2.1m or12.6% year-on-year on a constant currency basis. The core Single premiumbusiness performed well, but was impacted by unevenness in the timing of issueof cases at the top end of the premium range. In Q4 of this year, reported newbusiness suffered in comparison with a very strong comparative period in whichone EU case alone represented £2m of APE. A significant proportion of the Group's new business premiums is denominated incurrencies other than sterling. Approximately 50% of new business on an APEbasis in the year was received in US dollars (2006: 42%), with new businesspremium flows in Euros and Norwegian Krone providing 22% (2006: 33%) and 13%(2006: 8%) respectively. The continued growth in APE despite the adversecurrency movements throughout the year against sterling shows the benefits ofthe Group having a well-diversified portfolio of new business as shown above. At the balance sheet date, the Group employed 15 Account Executives to providelocal language and other support services to intermediaries in Eastern Europe,the Far East, Latin America, Scandinavia, South Africa and Western Europe. Weintend to develop local presence further in target areas over the next fewyears, with a view to doubling the number of Account Executives by December2012. Immediately following the end of the financial year we recruited an experiencedmanager with an impressive track record with a major competitor, to lead ourteam to build institutional relationships, an area that presents greateropportunities for the Group following the listing. In the period since 1 July, new business premiums have continued to flow atlevels significantly in excess of the results achieved in the comparable periodof the previous financial year. 3.1 New Business Volumes New business sales volumes are reported to the market on two bases: APE and thePresent Value of future New Business Premiums ("PVNBP"). The calculation of APEis in accordance with the life assurance industry convention of adding newregular premiums and one tenth of single premiums. The calculation of PVNBP isequal to total single premium sales in the year plus the discounted value ofregular premiums expected to be received over the term of new regular premiumpolicies, and is calculated at the point of sale. The Group has developed a measure of calculating New Business production that isdesigned to indicate the relative value of each piece of New Business. Thismeasure is called Compensation Credit. The application of this model incalculations of origination costs protects the Group's margins. The Boardbelieves that this internal metric is a better representation of New Businessvalue than APE, or PVNBP. 3.1.1 APE New business premiums on an APE basis in sterling terms were £35.5m,representing an increase of 5.3% compared with £33.7m for the prior yearcalculated on a constant currency basis. The continued strengthening of sterling against the US Dollar and other majorcurrencies has the effect of depressing new business figures reported insterling. The presentation of these figures on a constant currency basisprovides an appropriate representation of the activities of the Intermediarieswho introduce business to the Group. New business APE in the previous year, onthe basis of actual exchange rates experienced in that financial year, was£35.2m. The following tables provide a summarised breakdown of New Business APE on aconstant currency basis, analysed between single and regular premium cases, andalso by residence of policyholder. Year ended 30 June 2007 2006 £m £mAnnualised regular premiums 18.8 16.7Single premiums 16.7 17.0 35.5 33.7 New business premiums on an APE basis by residence of policyholderYear ended 30 June 2007 2006 £m £mEU and EEA 13.2 16.3Rest of world 22.3 17.4 35.5 33.7 3.1.2 PVNBP New Business premiums on a PVNBP basis were £277.1m compared with £270.2m forthe prior year, an increase of 2.6%. 3.1.3 Compensation Credit On this internal metric, New Business production for the year ended 30 June 2007was £18.1 million (2006: £17.7m). 3.2 New business profitability and margin New Business Margin is the contribution from New Business issued during the year(NBC) expressed as a percentage of PVNBP. Throughout the year under review new business has been written by the Group onprofitable terms and has contributed to significant growth in the Group's EEV.The New Business margin, in sterling terms, was 8.3% for the year as compared to8.0% in the previous year. This margin is well above industry average,principally due to the Group's efficient operating model and our focus on themaintenance of the margin. Regular premium business is more profitable than single premium business. Thechange in the mix of new business compared with the previous year had the impactof increasing the Group's New Business Margin by 0.6%. The combined impact ofchanges in the level of expenses, mortality and other assumptions has been toreduce the margin by 0.3%. +----------------------------------------------------------------------------+|Consolidated income statement |+----------------------------------------------------------------------------+| |+------------------------+------+--------+--------+-------+--------+---------+|For the year ended 30 | | | | | 2007| 2006||June | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | Notes | | £m| £m|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | |+-------------------------------+--------+--------+-------+--------+---------+|Fees and commissions | | 4 | | 49.2| 44.5|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Investment income | | | 5 | | 130.8| 102.6|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Other operating income | | | 6 | | 2.2| 0.8|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | 182.2| 147.9|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Investment contract benefits | | |(128.2) | (99.3)|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Origination costs | | | | |(16.3) | (14.6)|+------------------------+------+--------+--------+-------+--------+---------+|Administrative and other expenses | | |(18.0) | (16.3)|+------------------------+------+--------+--------+-------+--------+---------+| | | | | |(162.5) | (130.2)|+------------------------+------+--------+--------+-------+--------+---------+| | | | | |+----------------------------------------+--------+-------+--------+---------+|Profit on ordinary activities before | 7 | | 19.7| 17.7||taxation | | | | |+----------------------------------------+--------+-------+--------+---------+| | | | | |+----------------------------------------+--------+-------+--------+---------+|Taxation on profit on ordinary | 9 | | -| - ||activities | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Profit for the year | | | | | 19.7| 17.7|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+ All of the activities of the Group are continuing. The Group has no recognised gains or losses other than those included in theprofits above; therefore no separate statement of total recognised gains andlosses has been prepared. +--------------------------------------------------------------------------+|Earnings per share |+-----------------------+------+-------+--------+-------+--------+---------+| | | | | | | |+-----------------------+------+-------+--------+-------+--------+---------+| | | | | | 2007| 2006|+-----------------------+------+-------+--------+-------+--------+---------+| | | | Note | | (p)| (p)|+-----------------------+------+-------+--------+-------+--------+---------+| | | | | | | |+-----------------------+------+-------+--------+-------+--------+---------+|Basic | | | 10 | | 14.4| 12.9|+-----------------------+------+-------+--------+-------+--------+---------+| | | | | | | |+-----------------------+------+-------+--------+-------+--------+---------+|Diluted | | | 10 | | 14.4| 12.9|+-----------------------+------+-------+--------+-------+--------+---------+| | | | | | | |+-----------------------+------+-------+--------+-------+--------+---------+ +---------------------------------------------------------------------------+|Reconciliation of movements in consolidated shareholders' funds |+--------------------------+----+-------------------------+-------+---------+| | | | | |+--------------------------+----+-------+-------+---------+-------+---------+| | | | | | 2007| 2006|+--------------------------+----+-------+-------+---------+-------+---------+| | | | Notes | | £m| £m|+--------------------------+----+-------+-------+---------+-------+---------+| | | | | | | |+--------------------------+----+-------+-------+---------+-------+---------+|Profit for the year | | | | | 19.7| 17.7|| | | | | | | |+--------------------------+----+-------+-------+---------+-------+---------+| | | | | | | || | | | | | | |+--------------------------+----+-------+-------+---------+-------+---------+|Less: Interim dividend paid | 11| | (5.5)| -|+--------------------------+----+-------+-------+---------+-------+---------+| | | | | | | |+--------------------------+----+-------+-------+---------+-------+---------+|Net increase in consolidated | | | 14.2| 17.7||shareholders' funds | | | | |+--------------------------+----+-------+-------+---------+-------+---------+| | | | | | | |+--------------------------+----+-------+-------+---------+-------+---------+|Opening consolidated shareholders' | | | 36.9| 19.2||funds | | | | |+---------------------------------------+-------+---------+-------+---------+|Closing consolidated shareholders' | | | 51.1| 36.9||funds | | | | |+-----------------------+-------+-------+-------+---------+-------+---------+| | | | | | | |+-----------------------+--+----+-------+-------+---------+-------+---------++-----------------------+--+----+-------+-------+---------+-------+---------+ +----------------------------------------------------------------------------+|Consolidated balance sheet |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|At 30 June 2007 | | | | | 2007| 2006|+------------------------+------+--------+--------+-------+--------+---------+| | | | Notes | | £m| £m|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Assets | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Tangible assets | | | 12 | | 0.8| 0.6|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Financial investments | | | 13 | | 1,130.4| 947.3|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Deferred origination costs | 14 | | 94.6| 86.6|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Other receivables | | | 15 | | 11.9| 11.7|+------------------------+------+--------+--------+-------+--------+---------+| | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Cash and cash | | | 16 | | 70.8| 57.9||equivalents | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Total assets | | | | | 1,308.5| 1,104.1|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | || | | | | ||Liabilities | | | | || | | | | || | | | | || | | | | || | | | | || | | | | ||Financial liabilities under investment | 17 | | 1,130.2| 947.2 ||contracts | | | | |+----------------------------------------+--------+-------+--------+---------+| | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Amounts due to | | | | | 12.4| 10.2||investment contract | | | | | | ||holders | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Deferred income reserve | | | | | 109.9| 103.0|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Other payables | 18 | | 4.9| 6.8|+------------------------+------+--------+--------+-------+--------+---------+|Total liabilities | | | | | 1,257.4| 1,067.2|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | || | | | | | | ||Net assets | | | | | 51.1| 36.9|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Shareholders' equity | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Called up share capital | | | 19 | | 68.6| 68.6|+------------------------+------+--------+--------+-------+--------+---------+|Other reserves | | | 20 | | (48.5)|(48.5) |+------------------------+------+--------+--------+-------+--------+---------+|Retained earnings | | | 21 | | 31.0| 16.8|+------------------------+------+--------+--------+-------+--------+---------+| | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+|Total shareholders' | | | | | 51.1| 36.9||equity | | | | | | |+------------------------+------+--------+--------+-------+--------+---------+ The financial statements were approved by the Board on 26 September 2007 andsigned on its behalf by: R E G Hall G S MarrDirector Director +------------------------------------------------------------------------------+|Consolidated cash flow statement |+------------------------+------+--------------------------+-------------------+| | | | |+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Year ended 30 June 2007 | | | | | 2007| 2006|+------------------------+------+--------+--------+--------+---------+---------+| | | | Notes | | £m| £m|+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Net cash inflow from operating | 22 | | 16.4| 14.4||activities | | | | |+----------------------------------------+--------+--------+---------+---------+| | | | | |+----------------------------------------+--------+--------+---------+---------+|Returns on investments and servicing of | | | | ||finance | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Interest on investments | | | | | 4.0| 2.6|+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Capital expenditure | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Purchase of tangible | | | | | (0.6)| (0.2)||assets | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+| | | | | | 19.8| 16.8|+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Dividend paid | | | | | (5.5| -|+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+|Net cash inflow | | | | | 14.3| 16.8|+------------------------+------+--------+--------+--------+---------+---------+| | | | | | | |+------------------------+------+--------+--------+--------+---------+---------+ Cash flows were invested as follows: Increase in cash holdings 14.2 16.9Net portfolio investments 0.1 (0.1) 14.3 16.8 In accordance with Financial Reporting Standard No.1 the cash flow statementexcludes cash flows relating to the long-term assurance businesses of the Group. Notes to the financial statements 1. Segmental information In the opinion of the directors, the Group operates in a single businesssegment, that of the distribution and servicing of long-term investment productsthrough the Group's life assurance subsidiaries. i) Fees and commissions analysed by type Year ended 30 June 2007 2006 £m £mContract fee income 34.5 31.5Fund management charges 10.5 9.1Commission receivable 4.2 3.9 49.2 44.5 ii) Geographical analysis of fees and commissions by origin Year ended 30 June 2007 2006 £m £mIsle of Man 39.9 37.6Republic of Ireland 9.3 6.9 49.2 44.5 iii) Geographical analysis of profit before taxation Year ended 30 June 2007 2006 £m £mIsle of Man 18.1 16.8Republic of Ireland 1.6 0.9 19.7 17.7 iv) Geographical analysis of financial investments At 30 June 2007 2006 £m £mIsle of Man 773.0 698.8Republic of Ireland 357.4 248.5 1,130.4 947.3 The geographical analysis of financial liabilities under investment contracts isconsistent with the analysis of financial investments v) Geographical analysis of net assets At 30 June 2007 2006 £m £mIsle of Man 41.6 30.0Republic of Ireland 9.5 6.9 51.1 36.9 The following information is provided in relation to new business premiumsreceived on investment contracts. The application of the Group's accountingpolicies require that premiums received on investment contracts are not includedin the income statement but are reported as deposits to investment contractliabilities in the balance sheet and reflected within note 14. New business premium income is measured on the basis of Annualised PremiumEquivalent ("APE"). APE reflects the value of annualised new regular premiumsand one-tenth of single premiums received during the year. vi) New business premiums on an APE basis by residence of policyholder Year ended 30 June 2007 2006 £m £mEU and EEA 13.2 16.6Rest of world 22.3 18.6Annualised premium equivalent 35.5 35.2 2 Fees and commissions Year ended 30 June 2007 2006 £m £mFees from investment contracts 45.0 40.6Commissions receivable 4.2 3.9 49.2 44.5 3 Investment income Year ended 30 June 2007 2006 £m £mInterest and dividend income receivable 10.1 7.0Gains on realisation of investments 54.2 54.3Unrealised gains 66.5 41.3 130.8 102.6 4 Other operating income Included within other operating income are amounts totalling £1.57m receivedfrom Polar Cap Limited for services rendered by the Group in relation to thelisting of the Company on the London Stock Exchange on 18 December 2006, andother services. Amounts totalling £0.38m received from Polar Cap Limited forsoftware development services are reflected within other operating income in theprevious year. This amount was not classified as other operating income in theconsolidated income statement for the year ended 30 June 2006 and was insteadshown as a reduction in "Administrative and other expenses". The comparativefigures have been restated to provide more accurate disclosure. 5 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is after charging / (crediting)the following:Year ended 30 June 2007 2006 £m £m Auditors' remuneration:- Fees payable to the Company's auditor for the audit of the Company's annual accounts 0.1 0.1- Fees payable to the Company's auditor andits associates for other services:- Fees payable for the audit of the company's subsidiaries pursuant tolegislation 0.2 0.1- Other services provided to the company's subsidiaries 0.1 . Depreciation of tangible assets 0.4 0.4Operating lease rentals 0.6 0.4Foreign exchange losses/(gains) 1.3 (0.2) 6 Taxation The Group's profits arising from its Isle of Man-based operations are taxable atzero percent. No corporation tax liabilities have attached to the Republic ofIreland-based operations due to tax losses incurred in prior years. Tax lossesincurred and available to offset future profits at the rate of 12.5% at 30 June2007 total £1.1m (30 June 2006 - £1.7m). Charges for taxation reflected in the income statements of a number of minorsubsidiary companies are immaterial to an understanding of the Group's taxationposition for the year. There is no material difference between the current tax charge in the incomestatement and the current tax charge that would result from applying standardrates of tax to the profit before tax. 7 Earnings per share The earnings per share is based upon the profit for the year after taxationdivided by the average number of shares in issue throughout the year. There isno difference between basic and diluted earnings per share. Year ended 30 June 2007 2006Profit after tax (£m) 19.7 17.7Weighted average number of shares in issue 137,281,202 137,281,202Earnings per share in pence 14.4 12.9 8 Interim dividend A dividend of £5.5m (4.0 pence per share) was paid to shareholders on 4 May 2007representing an interim dividend out of the profits of the year under review(2006:£nil). 9 Tangible assetsFixtures and fittings, computer equipment and software 2007 2006 £m £mCostAt 1 July 4.1 3.9Additions 0.6 0.2 Total 4.7 4.1DepreciationAt 1 July 3.5 3.1Charge for year 0.4 0.4 Total 3.9 3.5 Net book value30 June 2007 0.8 0.630 June 2006 0.6 0.8 Included in the additional assets acquired during the year are amounts totalling£0.3m relating to fixtures, fittings and equipment for new premises occupied byHansard Europe Limited in April 2007. 10 Financial investments 2007 2006 £m £mEquity securities 73.8 106.8Investment in collective investment schemes 945.5 737.0Fixed income securities 32.0 28.6Outstanding trades 8.8 12.8Accrued investment income 0.2 0.2Cash and cash equivalents 70.1 61.9 1,130.4 947.3 +-----------------------------------+------+--+------+----------+-------+|Included above are shareholders' | | | | 0.2| 0.1||assets of | | | | | |+-----------------------------------+------+--+------+----------+-------+ 11 Deferred origination costs 2007 2006Carrying value £m £mAt 1 July 86.6 76.8Origination costs deferred during the year 24.3 24.4Origination costs amortized during the year (16.3) (14.6)At 30 June 94.6 86.6 12 Other receivables 2007 2006 £m £mCommission and fees 9.3 8.8Other debtors 2.6 2.9 11.9 11.7 Due to the short-term nature of these receivables the carrying value isconsidered to reflect fair value. 13 Cash and cash equivalents 2007 2006 £m £mMoney market funds 29.7 17.8Deposits with credit 41.1 40.1institutions 70.8 57.9 14 Financial liabilities under investment contracts +--------------------------+---+---------+----------+---------+----------+| | | | | 2007| 2006|+--------------------------+---+---------+----------+---------+----------+| | | | | £m| £m|+--------------------------+---+---------+----------+---------+----------+|At 1 July | | | | 947.2| 771.2|+--------------------------+---+---------+----------+---------+----------+|Deposits to investment | | | 185.4| 196.1||contracts | | | | |+------------------------------+---------+----------+---------+----------+|Benefits paid | | | (130.6)| (119.4)|+------------------------------+---------+----------+---------+----------+|Investment contract benefits | | | 128.2| 99.3|+--------------------------+---+---------+----------+---------+----------+|At 30 June | | | | 1,130.2| 947.2|+--------------------------+---+---------+----------+---------+----------+ +-------------------------------------+--+-------+---+---------+----------+| | | | | | |+-------------------------------------+--+-------+---+---------+----------+|Expected to be settled within 12 | | | | 16.4| 14.8||months | | | | | |+-------------------------------------+--+-------+---+---------+----------+| | | | | | |+-------------------------------------+--+-------+---+---------+----------+|Expected to be settled after 12 months | | 1,113.8| 932.4|+------------------------------------------------+---+---------+----------+| | | 1,130.2| 947.2|+------------------------------------------------+---+---------+----------+ The value of these financial liabilities is determined by the fair value of thelinked assets at the balance sheet date. +--------------------------+-----------------------+----------+----------+| | | 2007| 2006|+--------------------------+-----------------------+----------+----------+| | | £m| £m|+--------------------------+-----------------------+----------+----------+|Commission payable | | 1.7| 1.6|+--------------------------+-----------------------+----------+----------+|Taxation and social | | 1.0| 0.7||security | | | |+--------------------------+-----------------------+----------+----------+|Other creditors and | | 2.2| 2.3||accruals | | | |+--------------------------+-----------------------+----------+----------+|Amount due to parent | | -| 2.2||company | | | |+--------------------------+-----------------------+----------+----------+| | | 4.9| 6.8|+--------------------------+-----------------------+----------+----------+ 15 Other payables Due to the short-term nature of these payables the carrying value is consideredto reflect fair value. 16 Called up share capital+------------------------------+--------------------+----------+----------+| | | 2007| 2006|+---+--------------------------+--------------------+----------+----------+| | | | £m| £m|+---+--------------------------+--------------------+----------+----------+| |Authorised: | | | |+---+--------------------------+--------------------+----------+----------+| |200,000,000 ordinary shares of 50p | 100| 100|+---+--------------------------+--------------------+----------+----------+| |Issued and fully paid: | | | |+---+--------------------------+--------------------+----------+----------+| |137,281,202 ordinary | | 68.6| 68.6|| |shares of 50p | | | |+---+--------------------------+--------------------+----------+----------++---+--------------------------+--------------------+----------+----------+ The authorised and issued share capital was sub-divided into ordinary shares of50p each by resolution passed on 13 September 2006. 17 Other reserves Other reserves comprise the merger reserve arising on the acquisition by theCompany of its subsidiary companies on 1 July 2005. The merger reserverepresents the difference between the par value of shares issued by the Companyfor the acquisition of the former subsidiaries of Polar Cap Limited, compared tothe par value of the share capital and the share premium of those companies atthe date of acquisition. +------------------------------+---------------+----------+----------+| | | 2007| 2006|+------------------------------+---------------+----------+----------+| | | £m| £m|+------------------------------+---------------+----------+----------+|Shares issued in consideration| | 68.6| 68.6||of acquisition | | | |+------------------------------+---------------+----------+----------+|Share capital of subsidiaries | | (12.3)| (12.3)||acquired | | | |+------------------------------+---------------+----------+----------+|Share premium of subsidiaries | | (7.8)| (7.8)||acquired | | | |+------------------------------+---------------+----------+----------+| | | 48.5| 48.5|+------------------------------+---------------+----------+----------+ 18 Retained earnings 2007 2006 £m £m Profit for the financial year 19.7 17.7Dividend paid (5.5) -Net increase in retained earnings 14.2 17.7 At 1 July 16.8 (0.9)At 30 June 31.0 16.8 19 Notes to the consolidated cash flow statement (i) Reconciliation of profit on ordinary activities before taxation to net cashinflow from operating activities +----------------------------------+--+------------+--------+--------+|Year ended 30 June | | | 2007| 2006|+----------------------------------+--+------------+--------+--------+| | | | £m| £m|+----------------------------------+--+------------+--------+--------+| | | | | |+----------------------------------+--+------------+--------+--------+|Profit on ordinary activities | | | 19.7| 17.7||before taxation | | | | |+----------------------------------+--+------------+--------+--------+|Depreciation | | | 0.4| 0.4|+----------------------------------+--+------------+--------+--------+|Interest on investments | | | (4.0)| (2.6)|+----------------------------------+--+------------+--------+--------+|Foreign exchange differences | | | 1.3| (0.2)|+----------------------------------+--+------------+--------+--------+|Increase in debtors | | | (0.2)| (4.5)|+----------------------------------+--+------------+--------+--------+|Increase in deferred origination costs | (8.0)| (9.8)|+----------------------------------+--+------------+--------+--------+|Increase in deferred income | | | 6.9| 8.5||reserve | | | | |+----------------------------------+--+------------+--------+--------+|Increase in creditors | | 0.3| 4.9|+-------------------------------------+------------+--------+--------+|Net cash inflow from operating activities | 16.4| 14.4|+--------------------------------------------------+--------+--------+ (ii) Movement in opening and closing portfolio investments+---------------------+--------+-------------------+--------+--------+| | | | 2007| 2006|+---------------------+--------+-------------------+--------+--------+| | | | £m| £m|+---------------------+--------+-------------------+--------+--------+| | | | | |+---------------------+--------+-------------------+--------+--------+|Cash at bank | | | | |+---------------------+--------+-------------------+--------+--------+|At 1 July | | | 57.9| 40.8|+---------------------+--------+-------------------+--------+--------+|Foreign exchange differences | (1.3)| 0.2|+---------------------+--------+-------------------+--------+--------+|Cash flow | | | 14.2| 16.9|+---------------------+--------+-------------------+--------+--------+|At 30 June | | | 70.8| 57.9|+---------------------+--------+-------------------+--------+--------+ +---------------------+--------+-------------------+--------+--------+| | | | 2007| 2006|+---------------------+--------+-------------------+--------+--------+| | | | £m| £m|+---------------------+--------+-------------------+--------+--------+|Shareholder | | | | ||investments | | | | |+---------------------+--------+-------------------+--------+--------+|At 1 July | | | 0.1| 0.2|+---------------------+--------+-------------------+--------+--------+|Purchases | 0.1| 0.1|+--------------------------------------------------+--------+--------+|Sales | -| (0.2)|+---------------------+--------+-------------------+--------+--------+|At 30 June | | | 0.2| 0.1|+---------------------+--------+-------------------+--------+--------+ 20 Capital position statement The capital position statement sets out the financial strength relating to thebusinesses of the Group, measured on the basis of the presentation within thefinancial statements of the Company's life assurance subsidiaries. These arelocated in the Isle of Man and the Republic of Ireland. As both entities provideunit-linked contracts only, the majority of surplus can be distributed toshareholders subject to meeting the capital and other requirements of eachbusiness. Management policy is to hold surplus funds in excess of the minimumregulatory requirements of each of the life assurance entities. The capital held within the shareholders' funds is available to meet theregulatory capital requirements without any restrictions. +-----------------------------------------+--+------+--------+-------+| | | | 2007| 2006|+-----------------------------------------+--+------+--------+-------+| | | | £m| £m|+-----------------------------------------+--+------+--------+-------+|Consolidated shareholders' funds | | | 51.1| 36.9|+-----------------------------------------+--+------+--------+-------+|Adjustment arising from adoption of FRS | | | 20.9| 21.6||26* | | | | |+-----------------------------------------+--+------+--------+-------+| | | | 72.0| 58.5|+-----------------------------------------+--+------+--------+-------+| | | | | |+-----------------------------------------+--+------+--------+-------+|Comprising shareholders' funds of: | | | | |+-----------------------------------------+--+------+--------+-------+|Non-life assurance subsidiary companies | | | 21.1| 9.7|+-----------------------------------------+--+------+--------+-------+|Life assurance subsidiary companies | | | 50.9| 48.8|+-----------------------------------------+--+------+--------+-------+|Adjustments for admissibility restrictions | -| -|+---------------------------------------------------+--------+-------+|Total capital available to meet regulatory capital | 72.0| 58.5||requirements | | |+---------------------------------------------------+--------+-------+ * The consolidated financial statements have been compiled in accordance withthe requirements of FRS 26. The regulatory capital of the life assurancesubsidiaries is calculated based on financial statements that do not comply withFRS 26 as they are not required to do so. Regulatory Minimum Solvency Margin For both the Isle of Man and the Irish businesses, the relevant capitalrequirement is the required minimum margin under the locally applicableregulatory regimes. In practice, both regulators expect a surplus over thestatutory minimum margin to be maintained by regulated entities. The requiredminimum margins of the regulated entities at each balance sheet date were as setout below. +---------------------+----------------------------+--------+--------+| | | 2007| 2006|+---------------------+----------------------------+--------+--------+| | | £m| £m|+---------------------+----------------------------+--------+--------+|Aggregate minimum | | 4.1| 4.0||margin | | | |+---------------------+----------------------------+--------+--------+ As the financial liabilities for unit-linked business held by the Company'ssubsidiary companies are based on the fair value of the unit funds backing thosecontracts, unit-linked business assets and liabilities move together in linewith changes in investment market conditions. Other assets held are largely cash and so are not subject to changes ininvestment market conditions. Capital management The Group's objectives in managing its capital are to: • match the profile of its assets and liabilities, taking account of the risks inherent in the business; • maintain financial strength to support new business growth; • satisfy the requirements of its policyholders and regulators; and • retain financial flexibility by maintaining strong liquidity and access to a range of capital markets. 21 Financial risk management The Group's operations expose it to a variety of financial risks. The Group'sobjective in the management of financial risk is to minimise, where practicable,its exposure to such risk. Overall responsibility for the management of the Group's exposure to risk isvested in the Board. To support it in this role, an enterprise-wide riskmanagement framework is in place comprising identification, risk assessment,control and reporting processes. Additionally, the Board and the Boards ofsubsidiary companies have established a number of Committees with defined termsof reference. These are the Audit, Actuarial Review, Credit Control, Executive,Investment and the Risk and Compliance Committees. The framework providesassurance that risks are being appropriately identified and managed. Under the unit-linked investment contracts which are written by the Group,policyholders bear the financial risks relating to the financial assets andliabilities arising from such contracts. Such risks are therefore excluded fromthis assessment of risks affecting the Group's business. However, an overallchange in the market value of the unit-linked funds would affect the annualmanagement charges accruing to the Group since these charges, which aretypically 1% pa, are based on the market value of funds under management. Theapproximate impact of a 10% change in fund values on shareholder profits andequity is £1.4m (2006: £1.3m). Other financial risks to which the Group is exposed are set out below. For eachcategory of risk, the Group determines its risk appetite and sets itsinvestment, treasury and associated policies accordingly. Risk policy isdocumented for each category of risk, including the actions to mitigate thoserisks. (a) Interest rate risk Interest rate risk is the risk that the Group is exposed to lower returns orloss as a direct or indirect result of fluctuations in the value of, or incomefrom, specific assets arising from changes in underlying interest rates. The Group is primarily exposed to interest rate risk on the cash balances thatit holds. The Group controls its exposure to interest rate risk by managing itstreasury balances on a short-term basis. (b) Currency risk Currency risk is the risk that the Group is exposed to lower returns or loss asa direct or indirect result of fluctuations in the value of, or income from,specific assets arising from changes in underlying exchange rates. (b)(i) The Group is exposed to currency risk on the foreign currency denominated bankbalances and other liquid assets that it holds to the extent that they do notmatch liabilities in those currencies. The impact of the Group's currency riskis minimized by repatriation of excess foreign currency funds to sterling. Atthe balance sheet date the Group had exposures in the following currencies: 2007 2007 2006 2006 US$m •m US$m •mGross assets 11.7 24.0 8.1 20.5Matching currency liabilities (9.4) (4.7) (5.6) (7.3)Net currency exposure 2.3 19.3 2.5 13.2 Amounts totalling €18.5m held at the balance sheet date (2006: €18.5m) representthe share capital of Hansard Europe Limited. Disclosures have been enhanced toinclude related currency assets and liabilities in the previous financial year. (b)(ii) Certain fees and commissions are earned by the Group in foreign currencies,based on the value of financial investments held in currency from time to time.At the balance sheet date approximately 37% of investments were indollar-denominated assets; 30% in euro-denominated, and 20% in sterling assets. (c) Credit risk Credit risk is the risk that the Group is exposed to lower returns or loss ifanother party fails to perform its financial obligations to the Group. The Group's main exposure to credit risk is in relation to deposits with creditinstitutions. Deposits are made, in accordance with established policy, withcredit institutions having a short-term rating of at least F1 and P1 from FitchIBCA and Moody's respectively and a long term rating of at least A and A3.Additionally funds are invested in AAA rated unitized money market funds. At thebalance sheet date, an analysis of the Group's cash and cash equivalent balanceswas as follows: 2007 2006 £m £mDeposits with institutions 41.1 40.1Money market funds 29.7 17.8 70.8 57.9 Maximum counterparty exposure limits are set both at an individual subsidiarycompany level and on a Group wide basis. There are no significant concentrationsof credit risk at the balance sheet date. (d) Liquidity risk Liquidity risk is the risk that the Group, though solvent, does not havesufficient financial resources to enable it to meet its obligations as they falldue, or can only secure them at excessive cost. The Group's objective is to ensure that there is sufficient liquidity overshort- (up to one year) and medium-term time horizons to meet the needs of thebusiness. This includes liquidity to cover, amongst other things, new businesscosts, planned strategic activities, servicing of equity capital as well asworking capital to fund day-to-day cash flow requirements. Liquidity risk is principally managed in the following ways: • Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term; • Assets of a suitable marketability are held to meet policyholder liabilities as they fall due. The Group's exposure to liquidity risk is considered to be low since itmaintains a high level of liquid assets to meet its liabilities. 22 Financial commitments At the balance sheet date the Group had annual commitments under non-cancellableoperating leases in respect of office accommodation as follows: +-------------------------+-------------------+---------+----------+| | | 2007| 2006|+-------------------------+-------------------+---------+----------+| | | £m| £m|+-------------------------+-------------------+---------+----------+|Operating leases which expire: | | |+-------------------------+-------------------+---------+----------+|Within one year | | -| 0.2|+-------------------------+-------------------+---------+----------+|Between one and five | | -| -||years | | | |+-------------------------+-------------------+---------+----------+|After five years | | 0.5| 0.3|+-------------------------+-------------------+---------+----------+| | | 0.5| 0.5|+-------------------------+-------------------+---------+----------+ 23 Related party transactions i) intra-group transactions Various subsidiary companies within the Group perform services for other Groupcompanies in the normal course of business. The financial results of theseactivities are eliminated in the consolidated financial statements.The following balances existed between the Group and Polar Cap, a company controlled by Dr L S Polonsky. +----------------+--------------+-----------------+-----------+----------+| | | | 30 June| 30 June|+---+------------+--------------+-----------------+-----------+----------+| | | | | 2007| 2006|+---+-+----------+--------------+-----------------+-----------+----------+| | | | | £m| £m|+-----+----------+--------------+-----------------+-----------+----------+|Amounts due to related party | --| 2.2|+---+-+----------+--------------+-----------------+-----------+----------++---+-+----------+--------------+-----------------+-----------+----------+ ii) other There were no material transactions between directors or key managers and the Group. All transactions between the Group, its directors and key managers are oncommercial terms at rates which are no more favourable than those available to staff in general. 24 Ultimate controlling party Throughout the year the ultimate controlling party of the Group was Dr LeonardPolonsky, a director of the company. 25 Foreign exchange rates The closing exchange rates used by the Group for the conversion of balance sheetitems from US$ and • to sterling were US$2.01 and €1.48, respectively at 30 June2007 and US$1.84 and €1.44, respectively, at 30 June 2006. EUROPEAN EMBEDDED VALUE ("EEV") Information 1. Components of EEV profit Year ended 30 June 2007 2006 % of % of £m Opening EEV £m Opening EEV New business contribution 22.9 21.6Expected return on existing business 7.1 5.2Experience variances (0.8) 4.0Operating assumption & model changes 6.7 (0.4)Expected return on Net Worth 2.1 1.2EEV operating profit 38.0 21.3% 31.6 22.2%Investment return variances 6.9 5.2Economic assumption changes 0.0 (0.7)EEV profit 44.9 25.1% 36.1 25.3%Dividend paid (5.5) 0.0Total change in EEV 39.4 22.1% 36.1 25.3% 2. Detailed analysis of EEV profit The EEV comprises the value of in-force business (VIF) and the Net Worth of theGroup as at the relevant valuation date, and is calculated net of corporationtax. The analysis shows the sources of change in VIF and Net Worth. This is anew requirement, which helps to demonstrate the realisation of projected futureprofits into Net Worth during the financial year. As in prior periods, the majorsources of EEV profit are from new business, release of margins in operatingassumptions and from investment performance. Year ended 30 June 2007 2006 Movement in Movement in EEV VIF Net EEV VIF Net Worth Worth £m £m £m £m £m £mNew business contribution 22.9 22.9 0.0 21.6 21.6 0.0Expected return on existing business 7.1 (11.3) 18.4 5.2 (7.9) 13.1Experience variances (0.8) 1.7 (2.5) 4.0 5.4 (1.4)Operating assumption & model changes 6.7 6.7 0.0 (0.4) (0.4) 0.0Expected return on Net Worth 2.1 0.0 2.1 1.2 0.0 1.2EEV operating profit 38.0 20.0 18.0 31.6 18.7 12.9 Investment return variances 6.9 6.2 0.7 5.2 4.2 1.0Economic assumption changes 0.0 0.0 0.0 (0.7) (0.7) 0.0EEV profit 44.9 26.2 18.7 36.1 22.2 13.9 Dividend paid (5.5) 0.0 (5.5) 0.0 0.0 0.0Total change in EEV 39.4 26.2 13.2 36.1 22.2 13.9 3. New business profitability and margin New business margin is defined as New Business Contribution (NBC) divided byPresent Value of New Business Premiums (PVNBP). The calculation of PVNBP isequal to total single premium sales in the year plus the discounted value ofregular premiums expected to be received over the term of new regular premiumpolicies, and is calculated at the point of sale. Year ended 30 June 2007 2006 £m £mPVNBP 277.1 270.2NBC 22.9 21.6New business margin (PVNBP basis) 8.3% 8.0% 4. EEV balance sheet At 30 June 2007 2006 £m £mFree Surplus 51.2 38.3Required Capital 5.3 5.0Net Worth 56.5 43.3 Value of in-force business 166.8 140.6Cost of Required Capital (0.3) (0.3)Reduction for operational risk (5.0) (5.0)Value of future profits 161.5 135.3EEV 218.0 178.6 This information is provided by RNS The company news service from the London Stock Exchange