St James's Place Regulatory News (STJ)

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ST. JAMES'S PLACE PLC

27 St. James's Place, London SW1A 1NR

Telephone 020 7493 8111 Facsimile 020 7493 2382

1 August 2018

INTERIM STATEMENT

FOR THE SIX MONTHS TO 30 JUNE 2018

CONTINUED STRONG GROWTH IN NET INFLOWS AND FUNDS UNDER MANAGEMENT REFLECTED IN FINANCIAL RESULT AND INTERIM DIVIDEND INCREASE OF 20%

St. James's Place plc (SJP), the wealth management group, today issues its new business and financial results for the six months ended 30 June 2018.

New Investment and Funds under Management

· Gross inflow of funds of £7.9 billion (2017: £6.9 billion), up 15%.

· Continued strong retention of client funds - 96%.

· Net inflow of funds of £5.2 billion (2017: £4.3 billion), up 21%.

· Group funds under management of £96.6 billion (2017: £83.0 billion), up 16% over the twelve months.

Financial Highlights

· EEV new business profit £437.0 million (2017: £343.0 million), up 27%.

· EEV operating profit £489.6 million (2017: £397.3 million), up 23%.

· Underlying IFRS profit before shareholder tax £115.4 million (2017: £106.3 million), up 9%.

· IFRS profit before shareholder tax £82.5 million (2017: £79.6 million), up 4%.

· Underlying cash result (post-tax) £147.1 million (2017: £123.1 million), up 20%.

· Underlying cash basic earnings per share of 28.0 pence (2017: 23.5 pence per share), up 19%.

· Interim dividend of 18.49 pence per share (2017: 15.41 pence per share), up 20%.

Other Highlights

· Total number of advisers at 3,810, up 4%.

· Successful migration of pensions drawdown business onto Bluedoor.

· Launch of an international Discretionary Fund Management service in Hong Kong.

· New investment manager appointments to Alternative Assets and European equity mandates.

· Launch of a new Diversified Assets Fund.

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Andrew Croft, Chief Executive, commented:

"Following last year's exceptional growth, I am delighted to report continued strong growth across all key areas of our business. Gross inflows grew by 15% during the first half to £7.9 billion, net inflows of £5.2 billion were up 21% reflecting the continued and improving retention - a testament to the Partnership, whilst funds under management closed the half year at just under £97 billion, up 6% since the end of 2017 and 16% higher over the past year.

Naturally, this strong new business performance is reflected in the Group's financial performance, with growth in all our financial KPIs for the half year. Of particular note was the strong growth in the Underlying cash result, up 20% to £147.1 million.

The first half of 2018 has also seen St. James's Place make good progress on other counts. The number of advisers grew by 4% to 3,810 which bodes well for future growth. We have made significant progress on our back-office infrastructure project and continued to broaden our client offering with the addition of a Diversified Assets Fund managed by KKR.

Individuals face considerable challenges when planning for and managing their wealth, both before and after retirement as well as when considering the transfer of wealth to their next generation. Consequently, we continue to see a growing demand for highly personalised and trusted face-to-face financial advice and service. At the same time there are not enough qualified individuals to meet this growing demand and an advice gap exists. With the strength and depth of our technical resources and the Partnership, St. James's Place is well placed to address these needs.

Furthermore, we, and very importantly our Partner businesses, continue to invest in our respective infrastructure and capacity ensuring we are well placed for future growth. We are also investing in our client service, our investment management approach, both our new Asian and DFM businesses and very importantly an increasing investment in our Academy. The Academy will play an important and growing role in developing our next generation of financial advisers thereby supporting Partner succession and aiding the retention of long-term client relationships as well as building intergenerational relationships.

The environment we are operating in, together with these investments, provides us with the confidence that we can continue to achieve our medium-term growth objectives.

Supporting the above, we have a strong balance sheet and the knowledge of a growing income from our existing business both of which underpin the growing return to shareholders as shown by the 20% increase in the interim dividend."

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The details of the announcement are attached.

Enquiries:

Analyst presentation at 10:45am for 11:00am at:

Bank of America Merrill Lynch Financial Centre, 2 King Edward Street, London EC1A 1HQ

(NB Please bring photo ID and allow extra time for security checks)

Alternatively, if you are unable to attend but would like to watch a livestream of the presentation on the day, please click on the link below or via our website

Live and On-demand:

https://www.investis-live.com/st-jamess-place/5b325da9bb5c4c1000a26522/tmwh

There will also be a Dial in:

Conference call dial in details:

United Kingdom (Local): 020 3936 2999

All other locations: +44 20 3936 2999

Participant Access Code: 074093

Once participants have entered this code, name and company details will be taken

 Replay information:

United Kingdom: 020 3936 3001

All other locations: + 44 20 3936 3001

Replay code: 270573

Note: neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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ST. JAMES'S PLACE WEALTH MANAGEMENT

GROSS INFLOWS

FOR THE SIX MONTHS TO 30 JUNE 2018

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INTERIM MANAGEMENT STATEMENT

CHIEF EXECUTIVE'S REPORT

Following an exceptional 2017, I am delighted to report continued strong growth across all key areas of our business.

The St. James's Place Partnership continued to attract significant numbers of new clients and investments, such that against the strong comparative of the prior year, total gross inflows grew by 15% during the first half to £7.9 billion. The Partnership also serves clients well, which is reflected in the continued high client retention and our being able to report 21% growth in net inflows of £5.2 billion. Funds under management closed the half year at just under £97 billion, up 6% since the end of 2017 and 16% higher over the past year.

Financial Performance & Dividend

Naturally, this strong new business performance is reflected in the Group's financial performance, with growth in all of our financial KPIs for the half year. Of particular note was the strong growth in the Underlying cash result, up 20% to £147.1 million.

Reflecting the first half Underlying cash result, the Board has increased the interim dividend by 20% to 18.49 pence per share. As previously stated, the Board intends to set the full year dividend with an aim of distributing around 80% of the full year Underlying cash result.

The interim dividend will be paid on 28 September to shareholders on the register at the close of business on 31 August 2018. A Dividend Reinvestment Plan (DRP) continues to be available for shareholders.

Clients

Through the Partnership, St. James's Place now has more than 650,000 clients, each with their own personal financial circumstances and therefore, unique demands and expectations of a trusted wealth manager.

In the first half of 2018, we continued to enhance both the depth and breadth of the services we make available to our clients, adding for example, new protection and medical insurers to our panel of approved third-party providers. We have also introduced a new foreign exchange and international payment services facility in association with TorFX and launched an international discretionary fund management service for clients in Hong Kong, with a view to replicating this offering in Singapore and Shanghai in due course. These are just a few examples of the ways in which we enrich the service we provide to clients, and we will continue to do more.

Investment Management

In the six months to the end of June, UK equities returned around 1.7%, with US equities stronger at 4.9%, but here they have benefited from the Pound's weakness in the second quarter, which contributed around half the return. This picture was repeated with global equities where the return for the year-to-date was 2.9%, almost all of this due to currency movement. The first half of 2018 has also seen varied returns across many other major equity and fixed income markets.

Against this backdrop, our range of investment portfolios have performed well during the six months with the majority of the portfolios having outperformed their ARC peer groups. Success, should however, be judged on longer term performance and here our portfolios have fared even better over 1, 3 and 5 years.

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Selecting the best managers lies at the heart of our Investment Management Approach, and in January we announced plans for several manager changes, which have since come into effect. The Balanced Managed fund now has a new blended manager approach, comprising Ben Inker of GMO and Mark Baribeau of Jennison Associates. Wellington Management's Steve Gorman in Boston has been appointed as manager of the Alternative Assets fund, and Ken Hsia of Investec Asset Management has been appointed as manager of the Continental European fund and co-manager of the Greater European Progressive fund.

More recently we announced other developments in our Investment Management Approach: firstly, we have made a change to the management of the Ethical fund. Going forward the fund, renamed the 'Sustainable and Responsible Equity fund', will be managed by Kirsteen Morrison and David Winborne of Impax Asset Management; secondly, we announced the launch of a new Diversified Assets fund, that will be managed by KKR, based in New York, another exclusive strategy for St. James's Place clients, in this case providing them with access to private market assets which to date have typically only been available to institutional investors.

The St. James's Place Partnership

Recruitment activity has been strong during the first half of 2018, with the total number of St. James's Place advisers now standing at 3,810, up 4% since the start of the year.

Our Academy goes from strength to strength, with 95 individuals graduating as advisers in the first half, more than double that of the first of half 2017, and around a third of our gross adviser recruitment in the year to-date. There are currently 329 individuals in the programme, the majority of whom will graduate in the future. Our more traditional recruitment channels also have good momentum as experienced financial advisers recognise the merits of joining the St. James's Place Partnership.

This growth provides us with confidence in our ability to service clients well and attract further investments to St. James's Place in the years ahead.

Board Changes

We announced this morning that David Lamb has informed the Board of his intention to retire in early 2019. David joined the company in February 1992, a few weeks after we opened for business, and was appointed to the Board in 2007. On retirement David will have completed 27 years of service with the Company, and 12 as a main Board Director. He has made an enormous contribution to the success of St. James's Place spanning many areas of the business over the years, but David was particularly instrumental in the development and operation of our Investment Management Approach. Although we will miss David's contribution at the Board I am delighted to say that once he has retired, David has agreed to continue, on a part time basis, to Chair our Investment Committee.

I am also very pleased to announce that Robert Gardner will be joining St. James's Place in January 2019. Robert will take over from David on the Executive Committee and lead our investment proposition going forward, working closely with David during the handover period.

Robert is 39 years of age and is co-founder of Redington, one of the UK's most respected investment and pensions consultancy businesses. Having worked closely with us for a number of years, Robert comes not only with a wealth of business, pension and asset management experience, but also extensive knowledge of our business as well as knowing many of our Partners and employees. Robert is an important and significant new hire for St. James's Place. I am delighted he has agreed to join us and we look forward to working with him over the coming years.

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Investment for Growth

St. James's Place Asia has enjoyed a good first half of 2018, with gross new funds up 51%, which is ahead of plan, and net funds up 47%. Funds under management now exceed £550 million having increased by 32% during the six months. In addition, we have made enhancements to the proposition we are able to offer clients, with a highlight being the aforementioned introduction of an international discretionary fund management service in Hong Kong.

Rowan Dartington also continues to build scale, with funds under management having almost doubled to £2.31 billion since the business was acquired in 2016, and the number of investment executives having increased from 46 to 51 since the start of the year.

Back-office Infrastructure

We have achieved another significant milestone in our multi-year programme to consolidate our UK back-office administration, having successfully migrated our pensions drawdown book of business onto Bluedoor during May. In addition, ten days ago we successfully piloted a small migration of our pre-retirement pensions clients onto the platform ahead of a significant migration later this year.

We now have some £40 billion of funds under management on the new system and are processing over 70% of new business through Bluedoor. Whilst we have now 'broken the back' of this complex project, we recognise there is still much work to do.

Our Community

I would like to thank the entire St. James's Place community for these results, which are a testament to the ongoing hard work, dedication and commitment of all associated with our Company.

I would also like to particularly single out the various teams working on our back-office programme who have given up numerous weekends both leading up to and on the migrations this year.

The St. James's Place Charitable Foundation

After what was a record year for fundraising in 2017, I am delighted that we have continued to raise significant funds for The St. James's Place Charitable Foundation, taking to £76 million the total raised since inception. Our collective commitment to The Foundation is an integral part of the Group's culture and we take great pride in the fact that more than 85% of Partner practices and employees donate to the Foundation via monthly covenant.

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Outlook

Individuals face considerable challenges when planning for and managing their wealth, both before and after retirement, as well as when considering the transfer of wealth to their next generation. Consequently, we continue to see a growing demand for highly personalised and trusted face-to-face financial advice and service. At the same time there are not enough qualified individuals to meet this growing demand and an advice gap exists. With the strength and depth of our technical resources and the Partnership, St. James's Place is well placed to address these needs.

Furthermore, we, and very importantly our Partner businesses, continue to invest in our respective infrastructure and capacity ensuring we are well placed for future growth. We are also investing in our client service, our investment management approach, both our new Asian and DFM businesses and, very importantly, an increasing investment in our Academy. The Academy will play an important and growing role in developing our next generation of financial advisers thereby supporting Partner succession and aiding the retention of long-term client relationships as well as building intergenerational relationships.

The environment we are operating in, together with these investments, provides us with the confidence that we can continue to achieve our medium-term growth objectives.

Supporting the above, we have a strong balance sheet and the knowledge of a growing income from our existing business, both of which underpin the growing return to shareholders as shown by the 20% increase in the interim dividend.

Andrew Croft

Chief Executive

31 July 2018

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INTERIM MANAGEMENT STATEMENT

CHIEF FINANCIAL OFFICER'S REPORT

As already stated in the Chief Executive's Report, Gross and Net Inflows in the period grew by 15% and 21% respectively and at the end of the period funds under management totalled £96.6 billion, growth of 16% compared to 30 June 2017.

Our financial business model remains straightforward and unchanged. We attract and then retain funds under management on which we receive an annual management fee. The continued strong growth in funds under management is therefore a significant positive indicator, particularly in combination with surrender rates under 5%.

During the period, as in previous years, we have also continued to invest in the future of the business. This investment is reflected in our results and is expected to enable continued medium and long-term growth together with more efficient administration systems and processes.

Financial Results

Whilst our financial business model remains straightforward, the impact of having a significant life insurance company at the heart of the Group results in accounting complexity under IFRS. For this reason we continue, in our Financial Review on pages 12 to 42, to supplement IFRS information with EEV information as well as further detail on the way in which cash emerges within the business. The Financial Review shows strong results on every measure but there are a number of factors that merit emphasis: 

1. Our contribution to the Financial Services Compensation Scheme for the six months to 30 June 2018 pre-tax was £15.4 million (six months to 30 June 2017: £19.8 million). This expense impacted post-tax results for the Group by £12.4 million in the period (six months to 30 June 2017: £16.0 million). The reduced charge follows a decision by the FSCS to align the compensation levy period with the FSCS's financial year, which means that as a one-off, there are only nine months of levy expense recognised in the six months to 30 June 2018. The underlying cost of the FSCS levy remains at prior year levels.

2. We continue to invest in growing the Partnership and the number of advisers within it. In particular we invested £4.2 million post-tax in our Academy and Next Generation Academy (six months to 30 June 2017: £3.3 million) and saw 95 qualified advisers graduate during the period.

3. Our Asia and DFM operations are medium to long-term investments and are developing well. During the period, investment in these areas of future growth amounted to £10.5 million post-tax (six months to 30 June 2017: £10.3 million).

4. Our back-office infrastructure initiative has been a multi-year project. In 2018 we increased the level of new business written on the Bluedoor system to over 70% and successfully migrated our Drawdown portfolio. By 30 June 2018, 39% of all funds under management were recorded on the new platform (30 June 2017: 28%, 31 December 2017: 31%). Costs in the period were £15.2 million post-tax (six months to 30 June 2017: £8.2 million).

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IFRS Result

The IFRS profit after tax was £69.0 million (six months to 30 June 2017: £61.9 million). The results continue to be impacted by IFRS requirements to defer income and costs associated with new business and the significant excess of income over expense subject to this deferral continues to result in a net reduction to IFRS profit. Nonetheless, the IFRS profit after tax has increased as a result of the increase in funds under management which is the long-term driver of profit.

The Underlying profit before shareholder tax was £115.4 million (six months to 30 June 2017: £106.3 million). This measure excludes the impact of the deferral accounting explained above and is therefore more sensitive to new business. The result for 2018 is underpinned by increased funds under management but also reflects a 15% increase in gross inflows for the period.

Cash Result (presented post-tax)

The Operating cash result for the period was £164.3 million (six months to 30 June 2017: £139.0 million), growth of 18%. This result reflects the positive impact of continued growth in funds under management and also increased expenses incurred to both support and grow the business.

Operating cash is then used for investment in the Academy, our Asian operations, our new DFM offering and other strategic investments. The total post-tax investment during the period was £17.2 million (six months to 30 June 2017: £15.9 million) resulting in the Underlying cash result of £147.1 million (six months to 30 June 2017: £123.1 million), growth of 20%.

The Cash result was £128.7 million (six months to 30 June 2017: £111.3 million) represented by the Underlying cash result principally adjusted for back-office infrastructure costs.

It is important to note that the Cash, Operating cash and Underlying cash results should not be confused with the IFRS condensed consolidated statement of cash flows which is prepared in accordance with IAS 7 and disclosed on page 48.

EEV Result

The EEV new business contribution for the period was £437.0 million (six months to 30 June 2017: £343.0 million) growth of 27%. This reflects the increase in new business together with operational economies of scale achieved as fixed costs are spread across more business and the changes to persistency assumptions at the 2017 year end, not least the slightly different contractual terms associated with the Retirement Account.

The EEV operating profit for the period was £489.6 million (six months to 30 June 2017: £397.3 million), growth of 23%. This principally reflects the strong growth in EEV new business contribution above.

Flat stockmarket performance over the period resulted in a negative investment return variance of £(32.5) million contrasting with the strong positive variance of £214.1 million in the prior period.

Total EEV profit before tax for the period was therefore £463.1 million compared with £622.9 million for the prior period. The net asset value per share on an EEV basis at the end of the period was 1,115.0 pence (30 June 2017: 976.7 pence, 31 December 2017: 1,067.5 pence).

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Dividend

Given the continued strong performance of the business during the first half of 2018, the Board has recommended an interim dividend of 18.49 pence per share, which will consume £97.9 million. This represents a growth in the interim dividend of 20% compared to 2017 which is consistent with the growth in the Underlying cash result.

We intend to set the full year dividend with the aim of distributing around 80% of the Underlying cash result.

Capital and Solvency

We continue to manage the balance sheet prudently to ensure the Group's solvency is maintained safely. This is important not only for the safeguarding of our clients' assets, but also to ensure we can maintain returns to shareholders.

We provide information on our Solvency II position on page 35. Our solvency ratio at 30 June 2018, prior to the payment of the proposed interim dividend, is 137% (30 June 2017: 144%, 31 December 2017: 139%) which demonstrates the financial strength of our low-risk business.

Concluding Remarks

The business fundamentals and financials remain in very good shape. Our funds in gestation, coupled with strong persistency, provide for resilience and the Cash result is expected to continue to grow, even alongside the significant investment in future growth within our expense base. Our business is long-term in nature with emergence of shareholder value over time. The growth we have reported on all fronts therefore bodes well for the future.

Craig Gentle

Chief Financial Officer

31 July 2018

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INTERIM MANAGEMENT STATEMENT

FINANCIAL REVIEW

The Financial Model

The Group's strategy is to attract and retain retail funds under management (FUM) on which we receive an annual management fee for as long as the clients remain invested. This is the principal source of income for the Group out of which we meet the overheads of the business, invest in growing the Partnership and invest in attracting new FUM.

The level of income is dependent on the level of client funds and the level of asset values. In addition, since 50 - 60% of our business does not generate net cash result in the first six years, the level of income will increase as a result of new business from six years ago becoming cash generative. This deferral of cash generation means the business always has six years' worth of funds in the 'gestation' period. More information about our fees on funds under management can be found in Section 1 on page 16.

Group expenditure is carefully managed with clear targets set for growth in Establishment expenses in the year. Many other expenses increase with business levels and are met from margins in the products. The Group also invests in ensuring the quality of our proposition for clients and Partners, through investment in new client services and existing IT systems. Finally, we are also looking to the future, with investment in our back-office infrastructure programme and strategic initiatives, including the Academy, Asia and DFM. More information about our expenses can be found in Section 2 on page 18.

A small proportion of Group expenditure is required to support management of existing funds, but the majority of expenditure is investment in growing the Partnership and acquiring new funds together with investment in future back-office and administrative capabilities.

Given the importance of FUM to profit generation by the business, we provide an analysis of the FUM make-up and development in Section 1. Section 2 covers Expenses, which is the other significant driver of profits, with Sections 3-5 reporting on the performance of the business on the IFRS, Cash and EEV result bases, and providing commentary on solvency and liquidity.

Performance Measurement

In line with statutory reporting requirements we report profits assessed on an International Financial Reporting Standards (IFRS) basis. However, given the long-term nature of the business and the high level of investment in new business generation each year, we believe the IFRS result does not provide an easy guide to the cash likely to emerge in future years, nor does it reflect the total economic value of the business. Therefore, consistent with last year, we complement IFRS reporting with additional disclosure on various alternative performance measures (APMs).

APMs are not defined by the relevant financial reporting framework (which for the Group is IFRS), but we use them to provide greater insight to the financial performance, financial position and cash flows of the Group and the way it is managed. A complete Glossary of Alternative Performance Measures is set out on pages 86 to 90, in which we define each APM and explain why it is used and, if applicable, how the measure can be reconciled to the IFRS condensed consolidated half year financial statements.

Related Party Transactions

The related party transactions during the six-month period to 30 June 2018 are set out in Note 15 to the condensed consolidated half year financial statements.

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SECTION 1: FUNDS UNDER MANAGEMENT

This section starts with analysis of the movement in the funds under management of the Group. This is followed by information about the income the Group earns from managing these funds, together with the profile of these earnings, and a geographical and segmental analysis of the funds under management.

Movement in funds under management

During the first half of 2018 we have seen gross new funds of £7.92 billion (2017: £6.87 billion), growth of 15%, and a net inflow of funds under management of £5.21 billion (2017: £4.30 billion), growth of 21%. The investment return contributed £0.65 billion (2017: £3.70 billion) to funds under management during the period reflecting the stock market performance. Given the strong net inflow, and the modest market gains, funds under management increased to £96.61 billion (2017: £83.04 billion).

Analysis of the development of the funds under management is provided in the following tables:

Included within "UT/ISA & DFM" are closing funds under management of £2.31 billion, gross inflows of £0.27 billion and outflows of £0.05 billion in relation to the Rowan Dartington Group funds under management.

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Included within "UT/ISA & DFM" are closing funds under management of £1.83 billion, gross inflows of £0.23 billion and outflows of £0.05 billion in relation to the Rowan Dartington Group funds under management.

Included within "UT/ISA & DFM" are closing funds under management of £2.10 billion, gross inflows of £0.49 billion and outflows of £0.10 billion in relation to the Rowan Dartington Group funds under management.

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Geographical and investment type analysis of funds under management

The table below provides a geographical and segmental analysis of funds under management at the end of each period.

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Fees on Funds Under Management

As noted at the start of this Financial Review, our financial model is to attract and retain retail FUM on which we receive an annual management fee.

The average net annual management fee retained by the Group (net of investment advisory fees and Partner remuneration) is c.0.77% post-tax. However, due to our product structure, investment and pension business does not generate net cash result (after the initial margin) during the first six years. Consequently, the level of cash result reflected in these results is not fully representative of the expected earnings from the funds we are managing, and will increase as a result of the new business from six years ago becoming net cash result generative. This deferral of cash result generation means there is always six years' worth of business in the 'gestation' period.

The table below provides an estimated current value, for illustrative purposes, of the funds under management in the gestation period.

This £33.1 billion of funds under management in the gestation period represents approximately a third of the total funds under management. If all the business reached the end of the gestation period, it would then contribute some £254.9 million to the annual post-tax cash result, calculated using the Group's average net annual management fee of 0.77% (post-tax).

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The business case for continued investment in growth in FUM

The Group invests in order to:

· Continue building capacity and attract new funds;

· Enhance the Group's future capability to grow; and

· Develop administration systems and processes that will accommodate growth, contribute to future improvements in Partner and client experience and reduce the cost of processing.

Building capacity and attracting new funds

The Group has continued to invest in expanding high quality adviser capacity, with total adviser numbers growing by 8% from 3,540 at 30 June 2017 to 3,810 at 30 June 2018. At the same time gross inflows increased by 15% compared to the six months ended 30 June 2017, which contributed to an overall net increase in funds under management of £13.6 billion (16% between 30 June 2017 and 30 June 2018).

This activity requires significant investment by the business, but the product design ensures coverage of the cost on a Cash result basis, albeit with uneven phasing over the year due to the timing of recognition of the FSCS levy. The emergence of this positive Cash result takes time to be reflected within IFRS profit as a result of the action of the DIR, and is only a proportion of the total future value embedded within the business.

On an EEV post-tax basis, the expected present value of this new business is £360.1 million (30 June 2017: £282.3 million, 31 December 2017: £642.0 million).

Investing in the Group's future capability to grow

Academy

Investment in our Academy and Next Generation Academy is in anticipation of medium and long-term pay-back. We have now categorised the associated costs as investment related for over 5 years on the basis that it would take a certain amount of time for individuals starting their training to be productive. In the six months to 30 June 2018, 95 individuals graduated from the Academy and Next Generation Academy, and there are 329 individuals currently in the programmes. By the end of 2018, we expect to have approaching 500 Academy and Next Generation Academy graduates active as advisers, and so, reflecting the fact that this is core to our operations, we will include the cost of our Academy within our new business Operating cash result at the end of this year.

Rowan Dartington

Our DFM business now has £2.31 billion of funds under management, and is growing strongly (£2.10 billion at 31 December 2017). We continue to invest in operational, regulatory and IT infrastructure to provide the business with a robust platform for growth in the future, and we expect funds under management will grow at a similar rate over the next few years. We anticipate reclassifying DFM from investment to business as usual by 2020.

Asia

Our investment in Hong Kong, Singapore and Shanghai is long-term in nature and we now have 122 advisers on board, and a fully licensed and operational Life Company in Hong Kong to complement our branch in Singapore. The business is growing strongly and will contribute a positive EEV in the next few years.

Investing in next generation administration systems and processes

The most significant investment in this category is in a new back-office infrastructure which represents a multi-year programme to ensure our future systems and processes can support our overall business goals. We now administer our Unit Trust (UT) and ISA propositions using the Bluedoor platform and also most of our new pensions business through the Retirement Account. During the period we were pleased to migrate a further block of Drawdown business onto the platform, and plans are now far advanced for migration of the majority of our remaining pension book. We hope to have completed this process safely by year-end, at which stage over 80% of new business, and nearly two thirds of FUM will be administered on the new platform.

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SECTION 2: EXPENSES

Management Expenses

The table below provides a breakdown of the management expenditure (before tax):

Notes

1. Establishment costs are the running costs of the Group's infrastructure. Although these costs are relatively fixed in nature, they will inevitably increase with inflation and as the infrastructure expands to manage higher numbers of clients, growing numbers of advisers and increasing business volumes. Growth of establishment costs in 2018 continues to be in line with expectation.

2. Other performance related costs, for both Partners and employees, vary with the level of new business and operating profit performance of the business.

3. Operational development costs represent business as usual expenditure to support the business, such as the ongoing development of our investment proposition and our technology, including focus on cyber security. As the business grows we expect these costs to increase.

4. As a growth business we are constantly looking to new opportunities and expect to incur a small level of ongoing expense associated with pursuing other strategic developments. We will continue to explore opportunities and undertake appropriate initiatives.

5. The Academy is an important strategic investment for the future and we are continuing to grow our investment in this programme. Costs have increased in recent years as we have increased the number of students within the programme and launched more regional academies.

Our investment in the Academy is on track with expected total cost in 2018 of some £10 million.

6. Our expansion into Asia through operations in Singapore, Hong Kong and Shanghai is intended to provide diversification of our growth model through exporting our successful wealth management proposition to new markets, starting with the UK expat market. Costs reflect both the ongoing operational costs, but also the development costs associated with growing these businesses to achieve sustainable scale.

As noted previously, we are continuing to invest, and we expect expenses in 2018 to increase by between £2 million and £3 million, but we still expect the level of investment reflected in the Cash result will be similar to 2017 as a result of offsetting increases in Asia income.

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7. Our DFM operation, which became part of the SJP proposition in March 2016 following the Rowan Dartington acquisition, continues to grow quickly. Investment is required to support this growth, and expenses in 2018 are on track to be between £6 million and £7 million higher than 2017. The additional funds generated as a result of this investment result in higher income, but this can be subject to market variation, and the level of investment reflected in the Cash result at the end of the year may be slightly higher than in 2017.

8. Our back-office infrastructure programme is a multi-year initiative to upgrade our administration so it can support our future business goals. In 2018 we have successfully migrated our drawdown business on to the new Bluedoor platform, and good progress has been made towards migrating the majority of our pension business before the end of the year. With the final key migrations being planned, we expect heightened activity levels through the rest of 2018 and into 2019 in order to complete the project, and reflecting increasing levels of dual-running cost as more business is migrated.

9. The costs of operating in a regulated sector include fees charged by the regulators and our contribution to the Financial Services Compensation Scheme (FSCS). Our position as a market-leading provider of advice means we make a very substantial contribution to supporting the industry compensation scheme, the FSCS, thereby providing protection for clients of other businesses in the sector that fail. Over the last few years, the levy has been at an elevated level but we remain hopeful that it will return to a more normalised level in future.

For the 2018/19 funding year the FSCS shortened the compensation levy period from 12 months to nine months, which aligns the compensation levy period with the FSCS's financial year. As a result, the levy expense of £15.4 million recognised in the six months to 30 June 2018 reflects the levy for a nine month period, whereas the £19.8 million levy expense recognised in the six months to 30 June 2017 was in respect of a 12 month period. From the 2019/20 funding year onwards, the compensation levy period will again be 12 months.

The FSCS levy is met by our various regulated companies and is split £12.4 million (six months to 30 June 2017: £17.5 million, year to 31 December 2017: £18.9 million) via the Distribution business and £3.0 million (six months to 30 June 2017 and year to 31 December 2017: £2.3 million) via the Life and Unit Trust regulated business.

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Group Expenses

The table below provides a reconciliation from the management expenses above to the total Group expenses included in the IFRS condensed consolidated statement of comprehensive income on page 45.

Notes

1. These costs are met from corresponding margins and any variation in them from changes in the volumes of new business or the level of the stock markets does not directly impact the profitability of the Group.

2. Costs in 2017 reflect double matching of contributions in the period in recognition of the Group's 25th Anniversary.

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SECTION 3: INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

IFRS reporting is a statutory requirement, and although the level of non-cash accounting adjustments are such that it does not reflect the pattern of cash emergence in the Group, its statutory importance means that there are two key measures used that are based upon it. These are:

· Profit before shareholder tax

This is a profit measure based on IFRS which removes the impact of policyholder tax.

· Underlying profit

This is profit before shareholder tax adjusted to remove the impact of accounting for DAC, DIR and PVIF.

Of these two measures, Underlying profit is considered to be the more helpful for assessing operating performance given its greater similarity with the way in which cash emerges within the Group. Further information on these IFRS-based alternative performance measures can be found on page 89.

IFRS profit before tax

The following table demonstrates the way in which profit before shareholder tax is presented in the IFRS condensed consolidated statement of comprehensive income on page 45:

Policyholder tax is accounted for as part of the Group's own corporation tax arrangements. The amount to be accounted for is a reflection of investment return in the underlying funds. The significant reduction in policyholder tax in 2018 is matched by an equivalent reduction in policyholder fund tax deductions that are credited to fee and commission income within the IFRS condensed consolidated statement of comprehensive income, and hence IFRS profit before policyholder tax. Tax and fund deductions are offsetting and therefore do not contribute to the performance of the business and for this reason profit after policyholder tax (i.e. Profit before shareholder tax) is the measure used.

IFRS profit after tax

Shareholder tax reflects the tax charge attributable to shareholders and is closely related to the performance of the business. Further analysis of shareholder tax can be found in Note 6 on page 63.

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The following table demonstrates the way in which IFRS profit and Underlying profit reconcile to the Cash result presented in Section 4:

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The following table shows an analysis of Underlying profit before shareholder tax by activity:

Funds management business

The Underlying profit for the period to 30 June 2018, which excludes DAC, DIR and PVIF movements for the period, was £188.9 million, which was 7% higher than the prior period (2017: £175.9 million). Increase in fee income from higher funds under management and gross inflows during the period has been offset by development costs and investment in the business.

Distribution business

An analysis of the distribution result shown above is as follows:

The result for the Distribution business reflects continued significant investment in future growth, investment in our new businesses in Asia, and the impact of the FSCS costs which continue to run at elevated rates. As noted on page 19, the FSCS costs have reduced in the six months to 30 June 2018 due to the FSCS shortening the compensation levy period for the 2018/19 funding year from 12 months to nine months, which aligns the compensation levy period with the FSCS's financial year.

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Other

Items categorised within other are as follows:

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DAC, DIR and PVIF

The following table sets out the impact of IFRS accounting for DAC, DIR and PVIF:

Income and expense deferral

The effect of our IFRS accounting policies is that substantially all income deferred is amortised over a 6 year period and substantially all expense deferred is amortised over a 14 year period.

One of the impacts of RDR in 2013 was that under IFRS, from that point on, fewer expenses would qualify for deferral. This has resulted in a period of transition where the continued amortisation of expenses previously deferred will significantly outweigh new expenses deferred. Although this position will eventually reverse, it results in a net negative impact on IFRS profits until the reversal takes place.

Impact of the continued growth in new business

Continued growth in new business has the effect of increasing the amount of income deferred in each accounting period and the corresponding DIR amortisation over the following 6 years.

With growth in new business comes an increase in costs required to be deferred. These are then amortised over 14 years but as can be seen above, the amount of expense that qualifies for deferral is significantly exceeded by the amount of income required to be deferred. This will result in a continued net deferral of emergence of IFRS profits and the net amortisation impact will grow in line with the long-term business growth rate.

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Analysis of IFRS Assets and Net Assets per Share

The table below provides a summarised breakdown of the IFRS position at the reporting dates:

(1) Net of deferred tax

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SECTION 4: CASH RESULT DERIVED FROM IFRS AND SOLVENCY II NET ASSETS BALANCE SHEETS

This section sets out the Cash result for the period and the way in which the Solvency II net assets balance sheet, from which it is derived, is prepared using the IFRS balance sheet as a source. Further analysis on the Cash result basis is presented in the Supplementary Information on pages 92 to 100.

Solvency II Net Assets Balance Sheet

The Group's condensed consolidated IFRS balance sheet is largely dominated by a number of material balances that reflect policyholder interests in unit linked liabilities together with the underlying assets that are held to match them.

To determine the Solvency II net assets balance sheet, policyholder interests in unit-linked assets and liabilities, plus a number of other items including intangible assets and certain 'accounting' balances such as DIR, DAC and associated deferred tax, are removed. Given the relevance of the resulting Solvency II net assets balance sheet to shareholders, we believe it is helpful to show how it is calculated and how the Cash result has contributed to its year on year movement.

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Adjustments:

1. Nets out the policyholder interest in unit-linked assets and liabilities.

2. Adjustments to the IFRS condensed consolidated statement of financial position in line with Solvency II requirements, including removal of DAC, DIR, PVIF and their associated deferred tax balances, goodwill and other intangibles.

Movement in Solvency II Net Assets

The following table sets out the period on period movement in Solvency II net assets. As well as highlighting the Cash result, it also shows other movements such as dividend payments and non-cash movements such as deferred tax.

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Cash result

Although the Cash result should not be confused with the IAS 7 condensed consolidated statement of cash flows, we believe that it provides a helpful alternative view of the way in which cash is generated and emerges within the Group.

The Cash result is derived from the movement in the IFRS Balance Sheet and the Solvency II Net Assets balance sheet within it as shown on page 27.

The following table shows an analysis of the Cash result using the following measures:

· Operating cash result

This measure represents the regular emergence of cash from day-to-day business operations.

· Underlying cash result

This measure is the Operating cash result adjusted for the expense of a number of strategic investments which are being incurred and expensed in year but which are expected to create long-term benefit.

· Cash result

This measure is the Underlying cash result adjusted for certain one-off items together with the short-term costs associated with the back-office infrastructure project.

(1) Academy costs will be included in the Operating cash result for reporting at 31 December 2018.