St James's Place Regulatory News (STJ)

26 Feb 2008 07:00

St. James's Place PLC26 February 2008 PRESS RELEASE St. James's Place Wealth Management Preliminary Announcement 26 February 2008 St. James's Place plc, the wealth management group, today announces its annualresults for the year ended 31 December 2007. The text of the announcement is attached: Enquiries: Mike Wilson, Chairman Tel: 020 7514 1907Andrew Croft, Group Finance Director Brunswick Tel: 020 7404 5959 Anita Scott Anna Jones (1) ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 OPERATING PROFIT OF £244.7 MILLION UP 39% St. James's Place Wealth Management group, announces its annual results for theyear ended 31 December 2007. Profit - EEV basis • Operating profit of £244.7 million (2006: £176.0 million) up 39% • New business profits of £150.9 million (2006: £115.2 million) up 31% • Net asset value per share 252.5 pence (2006: 222.6 pence) up 13% - IFRS basis • Profit before shareholder tax of £96.1 million (2006: £107.6 million) • Net asset value per share 92.9 pence (2006: 82.4 pence) up 13% Dividend • Proposed final dividend of 2.55p per share up 19% making a total dividend for the year of 4.3p (2006: 3.65p) an increase of 18%. Other highlights include: • Funds under management at £18.2 billion up 18% • New business for the year of £428.6 million (measured on an annual premium equivalent) up 23% • Total single investments of £3.4bn up 28% • Partnership numbers at 1,251 up 8% Mike Wilson, Chairman, commented: "We are delighted with the 39% increase in operating profit and the strength ofour financial results. "For the fourth consecutive year substantial growth has been achieved inoperating profit, new business and funds under management. "There is an increasing demand for financial advice and our own team ofadvisers, the St. James's Place Partnership, is ideally placed to capitalise onthis. The strength, quality and the 8% increase in the size of the Partnershipgives us a major competitive edge in the UK wealth management market. "New business has grown at a compound rate of 16% per annum over the last 10years and 23% per annum over the last five years. Whilst 2008 could be achallenging year in view of current market uncertainty, we remain confident thatwe will continue to achieve our objective of growing new business at 15-20% perannum in the longer term." (2) CHAIRMAN'S STATEMENT I am delighted to report that 2007 has been the fourth consecutive year ofsubstantial growth in new business, funds under management and profits for theGroup. New business from long-term savings and investments (measured on an APE basis,the standard industry measure of annual premiums plus one tenth of singlepremiums) was up 23%, funds under management at £18.2bn were up 18% and EuropeanEmbedded Value operating profits increased by 39% to £244.7 million. Financial Performance The results have been presented on both an IFRS (International FinancialReporting Standards) basis and an EEV (European Embedded Value) basis. Wecontinue to believe that the EEV basis provides a more meaningful measure of theGroup's operating performance. On the IFRS basis the operating profit, before shareholder tax, was £96.1million compared with £107.6 million for the prior year. As detailed in theFinancial Commentary the IFRS result is complicated by one off items in both thecurrent year and the comparative year. Ignoring these one off items, theoperating profit before shareholder tax for the current year would have been£76.4 million compared with £78.0 million for 2006. On the EEV basis, the pre-tax operating profit increased by 39% to £244.7million (2006:£176.0 million). The total pre-tax profit for the year was £230.4million marginally lower than the £244.0 million for 2006. Shareholders willrecall that total pre-tax profit includes the so called investment variancewhich takes account of the investment returns in a particular year. The currentyear investment variance is a negative of £14.5 million compared with a positive£70.8 million in 2006. The figures reflect the respective stock marketconditions over the two years. The Financial Commentary on pages 7 to 16 provides further details on theresults for the year. Dividend In the Interim Report I indicated that, barring unforeseen circumstances,shareholders could expect a similar rise in the full year dividend to that ofthe Interim dividend. Due to the continued strong performance in the secondhalf of the year, the Board has recommended a 19% increase in the final dividendto 2.55 pence per share (2006: 2.15 pence per share). This increase providesfor a full year dividend of 4.3 pence per share (2006: 3.65 pence per share) anincrease of 18%. Over recent years shareholders have been offered an alternative of a scripdividend and this offer will continue for the current dividend payment. Subject to the approval of shareholders at the Annual General Meeting the finaldividend will be paid on 14 May 2008 to those shareholders on the register as at7 March 2007. Board changes On 29 May 2007 David Bellamy was appointed Chief Executive following thedeparture of the previous Chief Executive earlier in the year. As I commented in my Interim statement David's appointment was a reflection ofthe Board's confidence in his experience and proven management ability. On 3rd December 2007 David Lamb, Group Business Development Director, wasappointed as an Executive Director of St. James's Place plc. David has made anexcellent contribution to the success of the Group and his appointment willfurther strengthen the Board. On 5th February 2008 Simon Gulliford resigned from the Board as a non-executivedirector in the light of his new appointment to work with Standard Life Group ontheir marketing and communication strategy. I would like to thank Simon for hisexcellent contribution during his time on the St. James's Place Board. The Nomination Committee will consider and make their recommendation to theBoard as to a suitable replacement for Simon as an independent non-executivedirector. (3) Partners and staff As stated earlier, 2007 has been our fourth year of substantial growth in thebusiness which is a reflection of the continued enthusiasm, commitment anddedication at every level of our community. On behalf of the Board and shareholders I would like to thank the Partnership,our employees and the staff in our administration centres for their outstandingcontribution to our results last year. Mike Wilson25 February 2008 (4) CHIEF EXECUTIVE'S STATEMENT This is my first statement to shareholders since being appointed Chief Executivein May of 2007. I have been with St. James's Place since the company was founded and it has beena pleasure to have been involved in the company's growth and to have helped itsevolution to the successful wealth management business it is today. St. James's Place is a unique business, built around people and with a proventrack record of successfully creating long term relationships with our Partnersand our Clients. The Company has a very distinctive culture built on integrity,hard work, mutual trust and caring for each other and those less fortunate thanus. I hope shareholders can see that demonstrated from some of the content in thesereport and accounts. We remain committed to those values and to building long term relationships andconsequently believe we will continue to deliver strong long term returns forshareholders. New Business Our stated aim has been to grow new business by 15-20% p.a. over the longer termand it is very pleasing to report that over the last 10 years we have achieved16% p.a. compound growth and an even more impressive 23% over the last 5 years. In keeping with that sustained track record, 2007 was another record year fornew business with APE increasing by 23% to £428.6 million. The main drivers ofthe growth were investment business which was up 27% and pension business whichincreased by 23%. Total single investments were some £3.4bn for the year and the final quarter of2007 was our largest quarter ever for pension business and our second largestquarter ever for investment business - this despite the difficult marketconditions in the latter part of the year. Shareholders may recall that our other new business target is for our ownmanufactured products to represent at least 80% new business. As has been thecase over recent years the 87% (2006: 87%) we achieved last year hassignificantly exceeded this stated target. The St. James's Place Partnership I am also delighted to report growth of 8% in the size of the Partnership in2007 to 1,251 at the year end, which is our highest annual growth since 1999. This was achieved through a combination of levels of recruitment and retentionof our existing Partners. The market place for good advisers is very active atthe present time and we are confident we can continue to attract the appropriatenumber and quality in line with our objectives. Alongside our traditionalrecruitment activity, we are also pleased with the progress of our 'Academy'initiative. This initiative aims to "grow our own" advisers to supplement ourrecruitment efforts in the medium to long term. In addition to the increase in the size of the Partnership, in recent years thegrowth in new business has been significantly impacted by the substantialincrease in the productivity per Partner. This trend continued in 2007 withPartner productivity increasing by 14.1% from £312,000 to £356,000. We continueto see an increase in business from both existing clients and introductions fromthem. Investment Management Funds under management at the end of the year of £18.2bn (2006: £15.4bn) were up18% over the year. In addition to these direct funds under management we haveplaced a further £1.6bn of funds with our third party service providers forbanking, portfolio management services and cash deposit funds. 2007 was a difficult year for the US, UK and Japanese markets. The FTSE gained3.8%, the more broadly based FTSE All Share index rose just 2.0% with the S&Palso ahead only 1.8% (3.5% on US$ terms) and Japan falling some 6.8%. Europeand the emerging markets performed better, with the FTSE Europe index up nearly9.7% and Asian markets (excluding Japan) up over 25% on the year. (5) Against this backdrop I am pleased to report that our distinctive approach toinvestment management continues to deliver superior investment performance. Twothirds of our funds under management are in the top half of their peer groups in9 out of the last 10 years. The key results for 2007 were: Managed funds: top quartile performance from THSP, Newton, Jupiter andAXA-Framlington. Income funds: top quartile performance from all our income managers. Specialist funds: top quartile results from our new MPC UK Growth Unit Trust andNeil Woodford's UK equity funds. During 2008 we will continue to broaden the range of funds available within ourinvestment management approach. External Recognition In October we were delighted to be informed that St. James's Place had won theinaugural Daily Telegraph Wealth Manager of the Year Award which is a greattestament to the Partnership, the quality of their advice and theirrelationships with their clients. This was immediately followed by our elevation to the top 50 of Britain's 'Management Today's - Most Admired Companies' list for 2007 - a tribute toeveryone's hard work and commitment to St. James's Place. Foundation and Community The St. James's Place Foundation, the Group's charitable trust, plays animportant role within the lives of partners and employees. 2007 has been ourbest fundraising year yet with money raised £2.4 million (2006: £1.9 million)including the Company matching. This brings our cumulative funds raised to some£13 million. With the funds raised we have been able to award grants to almost 200 individualcharities in 2007 whilst maintaining our commitments to the small number oflarger charities with which we have relationships (Hope & Homes, Teenage CancerTrust, Hospice Movement). In addition to our fundraising for the Foundation, SJP also supports charitablework in our local communities through our Employee Volunteering Scheme whichenables staff at all levels to give time, skills and experience to charities intheir local communities. We have also recently linked up with YoungGloucestershire, a leading voluntary youth organisation, delivering programmesfor vulnerable young people. On behalf of the Board I would like to thank all members of St. James's Placeand those suppliers who have generously supported the Foundation by way ofsponsorship, time and donations. Outlook Looking forward, shareholders may be aware that Mike Wilson, our Chairman, is 65in December and his contract is scheduled to end then. However I am delightedto say that the Board and Mike have agreed to extend his contract for a minimumof three years beyond that date. Mike will reduce his hours to equate to threedays a week from 1 January 2009. We have now had four consecutive years of strong growth in new business, fundsunder management and profits. Despite recent economic indicators confirming a slowdown in the economy andcontinued stock market uncertainty, the social and demographic conditions remainpositive for a proven adviser based approach to wealth management. We remainconvinced that there is a growing demand for advice and believe that thestrength, quality and the increase in the size of our team of advisers, gives usa major competitive advantage. Consequently, we are confident about the prospects for continued growth in ourbusiness over the longer term, providing we maintain a clear focus on lookingafter our clients and managing the investments they entrust with us to theirsatisfaction. That's been our focus to date and will continue to be in thefuture. (6) As a result, our longer term growth target for new business remains 15-20% perannum. David Bellamy25 February 2008 (7) FINANCIAL COMMENTARY The Group has delivered a fourth consecutive year of strong profit growth. The financial performance is covered in the first section of this FinancialCommentary, whilst the second section covers other matters of interest toshareholders and investors. Section 1: Commentary on the results Life business differs from most other businesses, in that the expectedshareholder cash flow from a sale of a product emerges over a long period in thefuture. The results are therefore presented not only on an IFRS basis, but also on anEEV basis, which brings into account the net present value of the expectedfuture cash flows. As noted in the Chairman's statement the Board continue to believe that the EEVbasis provides a more meaningful measure of the Group's operating performance. International Financial Reporting Standards (IFRS) The IFRS result is shown on pages 29 to 43. As noted in previous financial commentaries the IFRS result requires the pre-taxprofit of the life business to be 'grossed up' for policyholder tax, with thecorresponding amount then being deducted within the tax charge. The table belowreflects the IFRS result after eliminating this 'gross up' in order to show theshareholder return from the business. Year Ended Year Ended 31 December 2007 31 December 2006 £' Million £' Million Life business 84.4 85.5Unit trust business 15.9 18.0Other (4.2) (2.9) Operating profit 96.1 100.6 LAHC - 7.0 Profit before shareholder tax 96.1 107.6 Policyholder tax 7.1 72.3 Total pre-tax profit 103.2 179.9 Profit after tax 78.1 88.0 Life Business The life IFRS result is complicated by one off items in both the current yearand the comparative year. • Current year one off item - in the half year Financial Commentary Ihighlighted that the profit before shareholder tax was being distorted by theinteraction between policyholder and shareholder tax and that we were exploringan alternative presentation to reduce the distortion. For the full year resultwe have adopted an alternative methodology which has resulted in a one offincrease in pre-tax profit of £19.7 million. This is a presentational changeand profit after tax is unchanged. • 2006 one off item - shareholders will recall that during 2006 weobtained tax relief for prior years unrelieved expenses which gave rise to apositive impact on pre-tax profit of £22.6 million. (8) After eliminating the effect of these one off items the life business pre-taxoperating profit for the current year at £64.7 million was marginally highercompared with £62.9 million for the prior year. This result reflects increased investment management charges from the higherfunds under management. The increase is offset by higher costs associated withthe new business written during the year. Following the change in methodology for presenting tax the results in futureyears should be less complicated. Unit Trust Business The pre-tax operating profit for the unit trust business was £15.9 million, some£2.0 million lower than the comparative year profit of £18.0 million. The netmovement between the deferral of acquisition costs and the deferral of theupfront margin has reduced profit by £5.9 million (2006: £2.4 million). Thisreflects the higher level of new business in the current year. Other Other operations contributed a loss for the year of £4.2 million, compared witha loss of £2.9 million for 2006. Included within this figure is the cost ofexpensing share options at £12.5 million (2006: £7.6 million). The prior yearloss also included the benefit of deferred income of £1.75 million from thetransfer of mortgage advisers to a third party. At the Annual General Meeting in 2005, shareholders approved a Purchase ShareScheme for members of the Partnership. The new scheme was launched in January2008 and is aimed at the top end of the Partnership to further align theirinterests with shareholders and to aid retention. Under accounting rules thedeemed cost of the share scheme is expensed through the profit and loss account.The actual accounting expense will be dependent upon the level of new businessgrowth and we estimate there will be an annual cost of some £5 - 7 million overthe four year period 2008-2011. Operating Profit The total operating profit for the year was £96.1 million (2006: £100.6million). Excluding the effect of the life business one off items described earlier, theoperating profit for 2007 was £76.4 million compared to £78.0 million for 2006. Net Assets The total net assets were £442.5 million (2006: £382.2 million) resulting in anet asset value per share of 92.9 pence (2006: 82.4 pence). European Embedded Value Basis The table below summaries the pre-tax profit of the combined business and thedetailed result is shown on pages 17 to 27. (9) Year Ended Year Ended 31 December 2007 31 December 2006 £' Million £' Million Life business 189.9 139.0Unit trust business 59.0 39.9Other (4.2) (2.9) Operating profit 244.7 176.0 Investment return (14.5) 70.8Economic assumption changes 0.2 (9.8) Profit from core business 230.4 237.0 Profit on sale of LAHC - 7.0 Total pre-tax profits 230.4 244.0 Post tax profit 188.4 184.2 Life Business Operating profit has increased by 37% to £189.9 million from £139.0 million anda full analysis of the result is shown on page 23. The new business profit was up 31% from £87.6 million to £114.5 million. The growth in this figure is a combination of the increased volumes, thefavourable business mix and limiting establishment expense growth. These twopoints mean that not only is there more profit from the higher volumes, but weare also making more profit per pound of APE. Section 2 of this commentaryprovides further detail on the new business margin. The unwind of the discount rate for the year was £59.1 million compared with£50.3 million for the prior year. The additional unwind in 2007 is due to thehigher value of the in-force business at the start of the year. The investment income of £6.9 million represents the income on the free assetsof the life companies and is marginally higher than the £6.1 million in 2006. The experience variance during the year increased operating profit by £12.2million (2006: negative variance of £2.6 million). Shareholders will recallfrom the Financial Commentary at the half year that, following correspondencewith HM Revenue & Customs, we have been able to obtain relief for prior yearsexcess unrelieved foreign withholding tax. This has resulted in a one-offbenefit of £9.7 million in the year. The balance of the experience variancerepresents a number of offsetting factors. There is a small cost of £2.8 million from operating assumption changes (2006:negative £2.4 million) which have been made to the calculation of the embeddedvalue. Unit Trust Business The operating profit has increased by 48% from £39.9 million to £59.0 millionand a full analysis of the unit trust result is shown on page 24. The new business profit has increased by 32% to £36.4 million from £27.6 millionfor the prior year reflecting the stronger new business during the year and asmall amendment to the calculation methodology. The unwind of the discount rate at £18.6 million was higher than the £15.2million for the prior year reflecting the higher opening value of the in-force. (10) There was a positive experience variance for the year of £4.0 million (2006:£0.2 million) reflecting a number of small positive items including expenses andimproved persistency. Other The loss from other operations has previously been commented on in the IFRSsection. Investment Return The average after tax increase in our fund prices during 2007 were some 2 - 3%below the assumed growth rate in the EEV calculation resulting in a negativeinvestment variance of £14.5 million (2006: £70.8 million positive). Economic Assumption The economic assumptions used for the projection of cash flows, together withthe discount rate are based on the yield on 10 year gilts. This yield hasreduced marginally since the start of the year, resulting in an increase in theembedded value of £0.2 million (2006: decrease of £9.8 million). The total pre-tax profit for the year was £230.4 million compared with £244.0million for the prior year. Net Assets The total net assets on an EEV basis were £1,203.3 million (2006: £1,032.7million) resulting in a net asset value per share of 252.5 pence (2006: 222.6pence). Section 2: Other Matters Noted below are a number of issues about the Group that are of interest toshareholders. (i) Expenses This section provides a reminder to shareholders of categories and nature ofexpenditure incurred. Shareholders will recall that "commission, investment expenses and third partyadministration costs" are met from corresponding policy margins. Any variationin these costs flowing from changes in the volumes of new business or the levelof the stock markets does not directly impact the profitability of the Company. The direct expenses of the group which are not met from corresponding policymargins have been categorised as follows: "Other new business related costs", such as sales force incentivisation, varywith the level of sales - determined on our internal measure. As productionrises or falls these costs will move in the corresponding direction. "Establishment costs" are the running costs of the Group's infrastructure andare relatively fixed in nature in the short term, however these will increase asthe infrastructure expands to manage the higher number of existing clients andthe growth in the Partnership. "Contribution from third party product sales" reflects the net income receivedfrom wealth management sales of £6.1 million (2006: £6.6 million), sales ofstakeholder products of £0.6 million (2006: £1.4 million) and sales through theProtection Panel of £7.7 million (2006: £9.7 million). (11) The table below provides the familiar breakdown of expenses. Year Ended Year Ended 31 December 2007 31 December 2006Category £' Million £' Million Paid from policy marginsCommission 191.8 167.2Investment expenses 68.4 55.7Third party administration 24.7 20.9 284.9 243.8Direct expensesOther new business related costs 44.4 35.4Establishment costs 91.9 86.2Contribution from third party product sales (14.4) (17.7) 121.9 103.9 406.8 347.7 At the start of the year we set a target of increasing the growth in theestablishment expenses by less than 10%. The establishment expense growth for the year was 7% and importantly the gapbetween the new business growth and the expense growth ended the year at some15%, well above our stated objective. Consequently, as shown below, the newbusiness margin expanded. For 2008 we have set a target of limiting the growth in the establishmentexpenses to around 10%; if we achieve both this target and the new businessgrowth target, then shareholders can expect a further expansion in new businessmargins in the coming year. (ii) New Business margin The insurance sector has historically disclosed new business in terms of AnnualPremium Equivalent (APE). Most commentators would agree that APE no longer hasmuch correlation with the underlying profitability of the new business andconsequently the industry is moving to provide additional disclosure on thepresent value of new business premiums (PVNBP). APE is calculated as the sum of regular premiums plus 1/10th single premiums.PVNBPs are calculated as single premiums plus the present value of expectedpremiums from regular premium business, allowing for lapses and other EEVassumptions. Noted in the table below is the new business margin calculatedboth as a % of APE and PVNBP. (12) 2007 2006Life businessNew business profit (£' m) 114.5 87.6 APE (£'m) 359.1 294.6Margin (%) 31.9 29.7 PVNBP (£'m) 2,661.7 2,124.1Margin (%) 4.3 4.1 Unit trust business New business profit (£' m) 36.4 27.6 APE (£'m) 69.5 54.5Margin (%) 52.4 50.6 PVNBP (£'m) 694.6 534.2Margin (%) 5.2 5.2 Total business New business profit (£' m) 150.9 115.2 APE (£'m) 428.6 349.1Margin (%) 35.2 33.0 PVNBP (£'m) 3,356.3 2,658.3Margin (%) 4.5 4.3 The PVNBP calculation only includes our manufactured business, as we do notapply these principles to the non-manufactured business. The new business margin has been beneficially affected by the rate of growth innew business, the proportion of manufactured business, the underlying businessmix and by maintaining the growth in the level of expenses to well below thegrowth in new business. In respect of the unit trust margin there has also beena small amendment to the calculation methodology. (iii) Cash flow Last year we provided additional disclosure on the underlying cash flow of theGroup. We have further enhanced this disclosure by analysing the cash flowbetween that arising from the opening in-force business and the cash flowarising from new business. As noted last year, to obtain the underlying cash flow of the business it isfirst necessary to adjust the post tax IFRS profits for the 'non- cash' items. (13) The table below sets out these adjustments: 2007 2006 £'million £'million Post tax IFRS result 78.1 88.0 AdjustmentsMovement in deferred acquisitions cost (91.0) (68.6)Movement in deferred income 55.9 42.2Amortisation of purchased VIF 3.3 3.1Movement in financial reassurance balance - (8.9)Release of LAHC provision - (7.0)Share option expense 12.5 7.6Movement in deferred tax asset (41.4) (13.3)Movement in deferred tax liability* 12.8 23.2Other 2.9 (0.9) Adjusted post tax cash flow 33.1 65.4 * excluding amounts in respect of the unit linked funds. Taking account of these non-cash adjustments the Group generated positive cashflow of £33.1 million during 2007 (2006: £65.4 million). The tables andcommentary below provide an indicative analysis of the sources of this cashflow. 2007 Note Arising from Arising from Total business new business in-force at in year 1January 2007 £'million £'million £'million Net annual management fee 1 109.3 13.9 123.2Unwind of surrender penalties 2 (40.2) (4.4) (44.6)Loss arising from new business 3 - (7.7) (7.7)Establishment expenses 4 (6.7) (60.6) (67.3)Investment income 5 10.5 10.5Miscellaneous 6 11.8 11.8Underlying cash flow 84.7 (58.8) 25.9 EUFT 7 7.2 - 7.2 Post tax cash flow 91.9 (58.8) 33.1 (14) 2006 Note Arising from Arising from Total business new business in-force at in year 1 January 2006 £'million £'million £'million Net annual management fee 1 82.8 10.4 93.2Unwind of surrender penalties 2 (29.9) (2.7) (32.6)Profit arising from new business 3 - 1.9 1.9Establishment expenses 4 (6.2) (55.9) (62.1)Investment income 5 9.4 - 9.4Miscellaneous 6 12.1 - 12.1 Underlying cash flow 68.2 (46.3) 21.9 Tax relief on b/fwd expenses 8 22.6 - 22.6FSA reserving change 9 20.9 - 20.9 Post tax cash flow 111.7 (46.3) 65.4 Notes 1. The net annual management fee: this is the income on the funds undermanagement that the group retains after payment of the associated costs.Broadly speaking the group retains around 1% pre-tax of funds under management. 2. Unwind of surrender penalties: this relates to the reservingmethodology applied to the surrender penalties within the charging structure ofthe single premium life bonds. At the outset of the life bond we establish aliability net of the outstanding surrender penalty which would apply if thepolicy were to be encashed. As the surrender penalty reduces to zero so theliability to the policyholder is enhanced by increasing their funds by 1% perannum over the first six years of the product life, to correspond to this 'unwind' of the surrender penalty. In other words there is a cash transfer fromthe shareholder to the policyholder. 3. Profit /loss arising from new business: this is the cash flow arisingin the year after taking into account the directly attributable expenses. Themovement from the small profit in 2006 to a loss in 2007 is due to the change inmix of the new business particularly in respect of pensions business. 4. Establishment expenses: these are the post tax expenses commented on inpoint (i) above and represent the running costs of the Group's infrastructure. 5. Investment income: this is the assumed income accruing on theinvestments and cash held for regulatory purposes together with the interestreceived on the surplus capital held by the Group. 6. Miscellaneous: this represents the cash flow of the business notcovered in any of the other categories. It will include miscellaneous productcharges, reserving changes, experience variances and the income and expensesincluded within the Other operations of the business. 7. EUFT: as noted in Section 1 of the Financial Commentary we have beenable to obtain relief for prior year excess unrelieved foreign withholding tax.This has resulted in a one off post tax benefit of £7.2 million. 8. Tax relief on expenses b/fwd; as shareholders will recall from previousfinancial commentaries the UK life company obtains tax relief for its expensesagainst the tax deductions on the income and capital gains within theunit-linked life funds. At the start of 2006 there was approximately £112.9million of excess unrelieved expenses for which we obtained relief giving riseto a one off positive cash flow of £22.6 million in that year. (15) 9. FSA reserving change: in 2006 the FSA relaxed the reserving methodologyrequired to be followed by life companies. The adoption of these changesresulted in a one off £20.9 million in that year. (iv) Movement in funds under management There has been considerable industry debate concerning the movement of fundsunder management and the apparent high level of outflows being experienced. St. James's Place has not experienced any significant fund outflows and thetable below provides additional disclosure on the movement in our funds undermanagement. Year Ended Year Ended 31 December 31 December 2007 2006 £' billion £'billion Opening funds under management 15.4 12.3 New money invested 3.1 2.4 Investment return 0.9 1.7 19.4 16.4 Regular income withdrawals / maturities (0.3) (0.2) Surrender / part surrenders (0.9) (0.8) Closing funds under management 18.2 15.4 Implied surrender rate as % of average funds undermanagement 5.4% 5.8% The regular income withdrawals represent those amounts, selected by clients atthe plan outset, which are paid out by way of periodic income. The withdrawalshave been assumed in the calculation of the embedded value new business profit. Maturities are those sums paid out where the plan has reached the selectedmaturity date (e.g. retirement date). The expected maturities have been assumedin the calculation of the embedded value new business profit. Surrenders and part surrenders are those amounts where clients have chosen towithdraw money from their plan. Surrenders are assumed to occur in thecalculation of the embedded value new business profit based on actualexperience, updated on an annual basis, by plan duration and the age of theclient. The implied surrender rate shown in the table above is very much asimple average and it should not be assumed that small movements in this ratewill result in a change to the embedded value assumptions. (16) (v) Analysis of the Embedded Value The table below provides a summarised breakdown of the Embedded Value positionat the reporting dates: Year Ended Year Ended 31 December 2007 31 December 2006 £' Million £' Million Value of in-force - Life 746.2 590.8 - Unit trust 199.7 171.5Solvency assets 257.4 270.4 Total embedded value 1,203.3 1,032.7 (vi) Share options maturity Options outstanding under the various share option schemes at 31 December 2007amount to 35.0 million (31 December 2006: 46.2 million). The total number of options including those in the SJP Employee Trust, togetherwith their anticipated proceeds, are set out in the table below: Average Number of Anticipated exercise price Share options proceedsEarliest date of exercise outstanding £ No. £' Million Prior to 1 Jan 2008 1.72 14,140,719 24.3Jan - Jun 2008 1.05 2,292,404 2.4Jul - Dec 2008 1.83 421,648 0.8Jan - Jun 2009 2.23 1,038,143 2.3Jul - Dec 2009 2.75 16,191,862 44.5Jan - Jun 2010 2.84 716,226 2.0Jul - Dec 2010 2.59 177,742 0.5Jan - Jun 2011 2.42 3,334 0.1 34,982,078 76.9 Of those options with an earliest date of exercise prior to 1 January 2008, 0.9million options require further performance conditions to be met before vestingunconditionally. Andrew Croft25 February 2008 (17) EUROPEAN EMBEDDED VALUE BASIS The following supplementary information shows the result for the Group adoptinga European Embedded Value (EEV) basis for reporting the results of its whollyowned life and unit trust businesses. CONSOLIDATED INCOME STATEMENT Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million Life business 189.9 139.0Unit trust business 59.0 39.9Other (4.2) (2.9)Operating profit 244.7 176.0 Investment return variances (14.5) 70.8Economic assumption changes 0.2 (9.8)Profit from core business 230.4 237.0 Profit from other businessProfit on sale of LAHC - 7.0EEV profit on ordinary activities before tax 230.4 244.0 TaxationLife business (44.8) (46.5)Unit trust business (15.3) (19.4)Other (2.0) 6.1LAHC - -Tax rate change 20.1 (42.0) (59.8) EEV profit on ordinary activities after tax 188.4 184.2 (18) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionOpening equity shareholders' funds on anEEV basis 1,032.7 828.8 Post tax profit for the year 188.4 184.2 Dividends (47.7) (15.1) Issue of share capital 26.7 30.3 Consideration paid for own shares (10.3) (5.4) P&L reserve credit in respect of share option charges 12.5 7.6P & L reserve credit in respect of proceeds from exercise ofshare options of shares held in trust 1.0 2.3 Closing equity shareholders' funds on an EEV basis 1,203.3 1,032.7 (19) CONSOLIDATED BALANCE SHEET 31 December 31 December 2007 2006 £' Million £' MillionAssetsIntangible assets Deferred acquisition costs 484.6 393.6 Value of long-term business in-force - long-term insurance 605.1 524.1 - unit trusts 199.7 171.5 1,289.4 1,089.2Property & equipment 10.4 6.3Deferred tax assets 125.2 83.8Investment property 642.5 568.2Investments 12,599.9 10,573.8Reinsurance assets 32.9 28.3Insurance and investment contract receivables 18.0 11.5Income tax assets 19.5 9.7Other receivables 160.2 87.1Cash & cash equivalents 1,929.2 1,606.9 Total assets 16,827.2 14,064.8 LiabilitiesInsurance contract liabilities 405.4 374.3Other provisions 5.3 3.1Financial liabilities 14,155.4 11,833.0Deferred tax liabilities 251.2 258.4Insurance and investment contract payables 21.8 18.5Deferred income 347.8 291.9Income tax liabilities 50.0 19.9Other payables 119.4 100.5Net asset value attributable to unit holders 267.6 132.5 Total liabilities 15,623.9 13,032.1 Net assets 1,203.3 1,032.7 Shareholders' equityShare capital 71.5 69.6Share premium 82.2 57.4Other reserves 1,049.6 905.7 Total shareholders' equity 1,203.3 1,032.7 Pence Pence Net assets per share 252.5 222.6 (20) NOTES TO THE EUROPEAN EMBEDDED VALUE BASIS I. BASIS OF PREPARATION The supplementary information on pages 17 to 27 shows the Group's results asmeasured on a European Embedded Value (EEV) basis. This includes results forthe life, pension and investment business, including unit trust business. Thevaluation is undertaken on a basis determined in accordance with the EEVPrinciples issued in May 2004 by the Chief Financial Officers Forum, a group ofchief financial officers from 19 major European insurers, as supplemented by theAdditional Guidance on EEV Disclosures issued in October 2005 (together "the EEVPrinciples"). The treatment of all other transactions and balances is unchangedfrom the primary financial statements on an IFRS basis. The objective of theEEV basis is to provide shareholders with more realistic information on thefinancial position and performance of the Group than that provided by the IFRSbasis. Under the EEV methodology, profit is recognised as it is earned over the life ofthe products within the covered business. The embedded value of the coveredbusiness is the sum of the shareholders' net worth in respect of the coveredbusiness and the present value of the projected profit stream. II. METHODOLOGY (a) Covered business The covered business is the life, pension and investment business, includingunit trust business, undertaken by the Group. (b) Calculation of EEV on existing business Profit from existing business comprises the expected return on the value ofin-force business at the start of the year plus the impact of any changes in theassumptions regarding future operating experience, plus changes in reservingbasis (other than economic assumption changes), plus profits and losses causedby differences between the actual experience for the period and the assumptionsused to calculate the embedded value at the end of the period. (c) Allowance for risk The allowance for risk in the shareholder cash flows is a key feature of the EEVPrinciples. The EEV Principles set out three main areas of allowance for riskin the embedded value: • the risk discount rate;• the allowance for the cost of financial options and guarantees; and• the cost of holding both prudential reserves and any additional capital required. The reported EEV allows for risk via a risk discount rate based on a bottom-upmarket-consistent approach, plus an appropriate additional margin for non-marketrisk. The Group does not offer products that carry any significant financialguarantees or options. (d) Non-market risk Best estimate assumptions have been established based on available informationand when used within the market consistent calculations provide the primaryevaluation of the impact of non-market risk. However, some non-marketoperational risks are not symmetric, with adverse experience having a higherimpact on the EEV than favourable experience. Allowance has been made for thisby increasing the risk discount rate by 0.8%. (21) (e) The risk discount rate A market-consistent embedded value for each product class has been calculated. In principle, each cash flow is valued using the discount rate applied to such acash flow in the capital markets. However in practice, where cash flows areeither independent or move linearly with market movement, it is possible toapply a simplified method known as the "certainty equivalent" approach. Underthis approach all assets are assumed to earn the risk free rate and arediscounted using that risk free rate. A market-consistent cost of holding therequired capital has also been calculated. As part of this approach, an appropriate adjustment has been made to reflect thefact that the value of tax relief on expenses does not move linearly with marketmovements. Finally, an additional allowance for non-market risk has been madeby increasing the discount rate by 0.8%. For presentational purposes, a risk discount rate has then been calculated whichunder the EEV basis gives the same value determined above. This provides anaverage risk discount rate for the EEV and is described in relation to the riskfree rate. This average risk discount rate has also been used to calculate thepublished value of new business. (f) Cost of required capital In light of the results of internal analysis, the Directors consider that theminimum regulatory capital provides adequate capital cover for the risksinherent in the covered business. The required capital for the EEV calculationshas therefore been set to the minimum regulatory capital. The EEV includes a reduction for the cost of holding the required capital. Noallowance has been made for any potential adjustment that the investors mayapply because they do not have direct control over their capital. Any suchadjustment would be subjective, as different investors will have different viewsof what, if any, adjustment should be made. (g) New business The new business contribution arising from reported new business premiums hasbeen calculated using the same assumptions as used in the EEV at the end of thefinancial year. The value of contractual incremental premiums to existingbusiness is treated as new business in the year of the increment, rather than atthe outset of the policy. This approach better reflects the way the Groupmanages its business. The value of new business has been established at the end of the reportingperiod and has been calculated using actual acquisition costs. (h) Taxation The EEV includes the present value of tax relief on life assurance expensescalculated on a market-consistent basis. This calculation takes into accountall expense and income amounts projected for the in-force business (includingany carried forward unutilised relief on expenses). (22) In determining the market-consistent value an appropriate allowance is made toreflect the fact that the value of tax relief on expenses does not move linearlywith market movements. The impact of this is assessed using a stochasticsimulation model that is regularly calibrated to market conditions. When calculating the value of new business, priority is given to relieving theexpenses relating to that business. III. Assumptions (a) Economic Assumptions The principal economic assumptions used within the cash flows at 31 December2007 are set out below: Year Ended Year Ended 31 December 31 December 2007 2006 Risk free rate 4.7% 4.9%Inflation rate 3.1% 3.0% Risk discount rate (net of tax) 7.8% 8.0% Future investment returns: - Gilts 4.7% 4.9% - Equities 7.7% 7.9% - Unit linked funds - Capital growth 3.9% 4.5% - Dividend income 3.2% 2.8% - Total 7.1% 7.3% Expense inflation 3.8% 3.6%Indexation of capital gains 2.2% 2.2% The risk free rate is set by reference to the yield on 10 year gilts. Otherinvestment returns are set by reference to the risk free rate. The inflation rate is derived from the implicit inflation in the valuation of 10year index-linked gilts. This rate is increased to reflect higher increases inearnings related expenses. The inflation rate is reduced by 10% to derive theindexation of capital gains for the proportion of the fund invested in equities. (b) Experience Assumptions The principal experience assumptions have been set on a best estimate basis.They are reviewed regularly. The persistency assumptions are derived from the Group's own experience, orwhere insufficient data exists, from external industry experience. The expense assumptions include allowance for both the costs charged by therelevant third party administrators for acquisition and maintenance, and thecorporate costs incurred in respect of covered business. The corporate costshave been apportioned so that the total maintenance costs represent theanticipated ongoing expenses, including systems development costs, which areexpected to arise in future years in meeting the policy servicing requirementsof the in-force business. (23) Mortality and morbidity assumptions have been set by reference to the Group'sown experience, published industry data and the rates set by the Group'sreassurers. (c) Taxation Future taxation has been determined assuming a continuation of the current taxlegislation. The EEV result has been calculated on an after-tax basis and hasbeen grossed up to a pre-tax level for presentation in the profit and lossaccount. The corporation tax rate used for this grossing up is 26% for UK lifeand pensions business, 12.5% for Irish life and pensions business and 28% forunit trust business. These tax rates reflect the change in the rate ofcorporation tax from 30% to 28% with effect from 1 April 2008, as includedwithin the 2007 Finance Act. IV. COMPONENTS OF EEV PROFIT (a) Life Business Note Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million New business contribution 1 114.5 87.6Profit from existing business Unwind of discount rate 59.1 50.3 Experience variances 12.2 (2.6) Operating assumption changes (2.8) (2.4)Investment income 6.9 6.1 Operating profit before tax 189.9 139.0 Investment return variances (9.5) 46.8Economic assumption changes (0.3) (10.6) Profit before tax 180.1 175.2 Attributed tax (44.8) (46.5)Tax rate change 15.8 - Profit after tax 151.1 128.7 Note 1: New business contribution after tax is £86.3 million (2006: £63.9million) (24) (b) Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million New business contribution 1 36.4 27.6Profit from existing business Unwind of discount rate 18.6 15.2 Experience variances 4.0 0.2 Operating assumption changes - (3.1) Operating profit before tax 59.0 39.9 Investment return variances (5.0) 24.0Economic assumption changes 0.5 0.8 Profit before tax 54.5 64.7 Attributed tax (15.3) (19.4)Tax rate change 4.3 - Profit after tax 43.5 45.3 Note 1: New business contribution after tax is £26.2 million (2006: £19.3million) (c) Combined Life and Unit Trust Business Note Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million New business contribution 1 150.9 115.2Profit from existing business: Unwind of discount rate 77.7 65.5 Experience variances 16.2 (2.4) Operating assumption changes (2.8) (5.5)Investment income 6.9 6.1 Operating profit before tax 248.9 178.9 Investment return variances (14.5) 70.8Economic assumption changes 0.2 (9.8) Profit before tax 234.6 239.9 Attributed tax (60.1) (65.9)Tax rate change 20.1 - Profit after tax 194.6 174.0 Note 1: New business contribution after tax is £112.5 million (2006: £83.2million). (25) (d) Detailed Analysis In order to better explain the movement in capital flows, the components of theEEV profit for the year ended 31 December 2007 are shown separately between themovement in IFRS net assets and the present value of the in-force business(PVIF) in the table below. All figures are shown net of tax. Movement Movement Movement in IFRS in PVIF in EEV Net Assets £' Million £' Million £' Million New business contribution (54.6) 167.1 112.5Profit from existing business 95.4 (95.4) - Unwind of discount rate - 57.8 57.8 Experience variances 28.4 (16.8) 11.6 Operating assumption changes 5.4 12.6 18.0Investment return 5.5 - 5.5Investment return variances (1.1) (9.9) (11.0)Economic assumption changes (0.6) 0.8 0.2Miscellaneous (0.3) (5.9) (6.2) Profit after tax 78.1 110.3 188.4 The main component of the experience variances derives from the change inapproach to deferred tax, which reduces the VIF and increases the net assets. The comparative figures for 2006 are as follows: Movement Movement Movement in IFRS in PVIF in EEV Net Assets £' Million £' Million £' Million New business contribution (52.9) 136.1 83.2Profit from existing business 83.2 (83.2) - Unwind of discount rate - 47.5 47.5 Experience variances 13.2 (14.5) (1.3) Operating assumption changes 20.4 (24.4) (4.0)Investment return 4.6 0.1 4.7Investment return variances 3.9 47.2 51.1Economic assumption changes (1.1) (6.1) (7.2)Profit on sale of LAHC 7.0 - 7.0Miscellaneous 9.7 (6.5) 3.2 Profit after tax 88.0 96.2 184.2 (26) V. EUROPEAN EMBEDDED VALUE SENSITIVITIES The table below shows the estimated impact on the combined life and unit trustreported value of new business and EEV to changes in various assumptions. Ineach case, only the indicated item is varied relative to the restated values. Change in new business Change in contribution European Embedded Value Note Pre-tax Post-tax Post-tax £' Million £' Million £' Million Value at 31 December 2007 150.9 112.5 1,203.3 100bp reduction in risk discount rate 1 20.6 15.3 73.5 100bp reduction in risk free rates, withcorresponding change in fixed interest assetvalues (1.6) (1.1) (5.0) 10% reduction in withdrawal rates 12.3 9.2 50.9 10% reduction in expenses 3.4 2.5 13.3 10% reduction in market value of equity assets - - (99.7) 5% reduction in mortality and morbidity 2 0.0 0.0 0.6 100bp increase in equity expected returns 3 - - - Note 1: Although not directly relevant under a market-consistent valuationwhere the risk discount rate is a derived disclosure only, this sensitivityshows the level of adjustment which would be required to reflect differinginvestor views of risk. Note 2: Assumes the benefit of lower experience is passed on to clients andreassurers at the earliest opportunity. Note 3: As a market-consistent approach is used, equity expected returns onlyaffect the derived discount rates and not the embedded value or contribution toprofit from new business. (27) VI. RECONCILIATION OF IFRS AND EEV PROFIT BEFORE TAX AND NET ASSETS Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million IFRS profit before tax 103.2 179.9Movement in life value of in-force 88.6 17.4Movement in unit trust value of in-force 38.6 46.7 Total EEV profit before tax 230.4 244.0 Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million IFRS net assets 442.5 382.2Less: acquired value of in-force (61.0) (64.3)Add: deferred tax on acquired value of in-force 17.0 19.2Add: life value of in-force 605.1 524.1Add: unit trust value of in-force 199.7 171.5 EEV net assets 1,203.3 1,032.7 VII. RECONCILIATION OF LIFE COMPANY FREE ASSETS TO CONSOLIDATED GROUP EQUITY AND ANALYSIS OF MOVEMENT IN FREE ASSETS Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million Life company free assets 100.5 105.4Required life company solvency capital 39.5 33.0Other subsidiaries, consolidation and IFRS adjustments 302.5 243.8 IFRS net assets 442.5 382.2 Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million Life company free assets at 1 January 105.4 65.0Investment in new business (55.6) (54.2)Profit from existing business 51.8 91.0Investment return 5.4 4.6Movement in required solvency capital (6.5) (1.0) Life company free assets at 31 December 100.5 105.4 (28) RESULTS UNDER UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (29) CONSOLIDATED INCOME STATEMENT Year Ended Year Ended 31 December 31 December Note 2007 2006 £' Million £' Million Insurance premium revenue 97.2 101.2Less premiums ceded to reinsurers (27.3) (33.8) Net insurance premium revenue 69.9 67.4 Fee and commission income 83.8 87.6 Profit on sale of investment in Life Assurance Holding Corporation - 7.0Other investment return 1,088.8 1,519.3 Total investment income 1,088.8 1,526.3 Other operating income 2.5 1.8 Net revenue 4 1,245.0 1,683.1 Policy claims and benefits Gross amount (50.7) (58.2) Reinsurers' share 18.2 23.1 Net policyholder claims and benefits incurred (32.5) (35.1) Change in insurance contract liabilities Gross amount (31.0) 62.0 Reinsurers' share 4.6 (41.0) Net change in insurance contract liabilities (26.4) 21.0 Investment contract benefits (697.1) (1,139.3) Fees, commission and other acquisition costs (269.9) (260.6)Administration expenses (112.6) (86.1)Other operating expenses (3.3) (3.1) (385.8) (349.8) Operating profit and profit before tax 103.2 179.9 Tax on policyholders' return 5 (7.1) (72.3)Tax on shareholders' return 5 (18.0) (19.6) Total tax expense 5 (25.1) (91.9) Profit for period attributable to shareholders 78.1 88.0 Pence PenceBasic earnings per share 6 16.8 19.4Diluted earnings per share 6 16.1 18.4 (30) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' Million Opening equity shareholders' funds 382.2 274.5 Profit for the financial period, being total recognised income forthe financial period 78.1 88.0 Dividends (47.7) (15.1) Issue of share capital Scrip dividend 10.7 11.1 Exercise of share options 16.0 19.2 Consideration paid for own shares (10.3) (5.4) P & L reserve credit in respect of share option charges 12.5 7.6 P & L reserve credit in respect of proceeds from exercise of shareoptions of shares held in trust 1.0 2.3 Net increase to shareholders' funds 60.3 107.7 Closing equity shareholders' funds 442.5 382.2 (31) CONSOLIDATED BALANCE SHEET AT 31 DECEMBER Note 2007 2006 £' Million £' MillionAssetsIntangible assets Deferred acquisition costs 484.6 393.6 Acquired value of in force business 61.0 64.3 545.6 457.9Property & equipment 10.4 6.3Deferred tax assets 125.2 83.8Investment property 642.5 568.2Investments Equities 10,780.4 9,014.5 Fixed income securities 720.7 595.2 Investment in Collective Investment Schemes 1,098.8 963.9 Currency forwards - 0.2Reinsurance assets 32.9 28.3Insurance and investment contract receivables 18.0 11.5Income tax assets 19.5 9.7Other receivables 160.2 87.1Cash & cash equivalents 1,929.2 1,606.9 Total assets 16,083.4 13,433.5 LiabilitiesInsurance contract liabilities 8 405.4 374.3Other provisions 9 5.3 3.1Financial liabilities Investment contracts 14,144.0 11,819.8 Borrowings 11.2 13.1 Currency forwards 0.2 0.1Deferred tax liabilities 268.2 277.6Insurance and investment contract payables 21.8 18.5Deferred income 347.8 291.9Income tax liabilities 50.0 19.9Other payables 119.4 100.5Net asset value attributable to unit holders 267.6 132.5 Total liabilities 15,640.9 13,051.3 Net assets 442.5 382.2 Shareholders' equityShare capital 10 71.5 69.6Share premium 11 82.2 57.4Other reserves 11 (15.9) (8.4)Retained earnings 11 304.7 263.6 Total shareholders' equity 442.5 382.2 Pence Pence Net assets per share 92.9 82.4 (32) CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionCash flows from operating activitiesProfit before tax for the period 103.2 179.9Adjustments for:Depreciation 2.2 2.5Amortisation of acquired value of in-force business 3.3 3.1Fair value gains on non-operating investments - (0.1)Share based payment charge 12.5 7.6Profit on sale of investment - (7.0)Changes in operating assets and liabilitiesIncrease in deferred acquisition costs (91.0) (68.6)Increase in investment property (74.3) (248.8)Increase in investments (2,026.1) (2,100.2)(Increase) / decrease in reassurance assets (4.6) 49.6(Increase) / decrease in insurance and investment contract receivables (6.5) 3.6Increase in other receivables (75.8) (3.5)Increase / (decrease) in insurance contract liabilities 31.1 (56.3)Increase in provisions (excluding LAHC) 2.2 0.5Increase in financial liabilities (excluding borrowings) 2,319.0 2,408.0Decrease in reinsurance liabilities - (8.9)Increase / (decrease) in insurance and investment contract payables 3.3 (1.0)Increase in deferred income 55.9 42.2Increase in other payables 18.9 29.1Increase in net assets attributable to unit holders 135.1 40.2 Cash generated from operations 408.4 271.9 Income taxes paid (52.8) (9.3) Net cash from operating activities 355.6 262.6 Cash flows from investing activitiesAcquisition of property & equipment (6.5) (3.0)Proceeds from sale of plant and equipment 0.1 0.2Proceeds from sale of LAHC - 3.9 Net cash from investing activities (6.4) 1.1 Cash flows from financing activitiesProceeds from the issue of share capital 26.7 30.3Consideration paid for own shares (10.3) (5.4)Proceeds from exercise of options over shares held in trust 1.0 2.3Repayment of borrowings (1.9) (4.1)Dividends paid (47.7) (15.1) Net cash from financing activities (32.2) 8.0 Net increase in cash & cash equivalents 317.0 271.7 Cash & cash equivalents at 1 January 1,606.9 1,337.7Effect of exchange rate fluctuations on cash held 5.3 (2.5) Cash & cash equivalents at 31 December 1,929.2 1,606.9 (33) NOTES TO THE CONSOLIDATED ACCOUNTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS 1. BASIS OF PREPARATION St. James's Place plc ("the Company") is a company incorporated and domiciled inEngland and Wales. The group financial statements consolidate those of the Company and itssubsidiaries (together referred to as the "Group"). The group financialstatements have been prepared and approved by the Directors in accordance withInternational Financial Reporting Standards as adopted by the EU ("adopted IFRSs"). The Group has applied all IFRSs and interpretations adopted by the EUexcluding IFRS 8 Operating Segments. The effective date for IFRS 8 is foraccounting periods commencing 1 January 2009 and it is likely that furtherdisclosures will be required when the standard is applied. During 2007, theGroup has applied for the first time, the following: • Amendments to IAS 1 Presentation of Financial Statements (CapitalDisclosures) • IFRS 7 Financial Instruments: Disclosures The group financial statements also comply with the revised Statement ofRecommended Practice issued by the Association of British Insurers in December2005 in so far as these requirements do not contradict IFRS requirements. 2. OTHER ACCOUNTING POLICIES The other accounting policies used by the Group in preparing the results arealso consistent with those applied in preparing statutory accounts for the yearended 31 December 2006. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTINGPOLICIES Judgements The primary area in which the Group has applied judgement in applying accountingpolicies lies in the classification and unbundling of contracts betweeninsurance and investment business. Contracts with a significant degree ofinsurance risk are treated as insurance; pension contracts in general have beentreated as investment contracts and, where they contain a significant degree ofinsurance risk, the insurance and investment components have been unbundled.All other contracts are treated as investment contracts. The Group has alsoelected to treat all assets backing linked and non unit linked contracts as fairvalue through profit or loss although some of the assets in question mayultimately be held to maturity. Estimates The principal areas in which the Group applies accounting estimates are: • determining the value of insurance contract liabilities; • deciding the amount of management expenses that are treated asacquisition expenses; • amortisation and recoverability of deferred acquisition costs anddeferred income; and • determining the fair value, amortisation and recoverability of acquiredin-force business. Estimates are also applied in determining the amount of deferred tax assetrecognised on unrelieved expenses and the value of other provisions. The basisof estimation has changed during the year. (34) Measurement of insurance contract liabilities The assumptions used in the calculation of insurance contract liabilities thathave a significant effect on the income statement of the Group are: • the lapse assumption, which is set prudently based on an investigationof experience during the year; • the level of expenses, which is based on actual expenses in 2007 andexpected long term rates; • the mortality and morbidity rates, which are based on the results of aninvestigation of experience during the year; and • the assumed rate of investment return, which is based on current giltrates. Acquisition expenses Certain management expenses vary with the level of sales and have been treatedas acquisition costs. Each line of costs has been reviewed and its variabilityto sales volumes estimated on the basis of the level of costs that would beincurred if sales ceased. Amortisation and recoverability of DAC and DIR Deferred acquisition costs and income on investment contracts are amortised on astraight-line basis over the average lifetime of the underlying contracts. Theaverage lifetime of the contracts has been estimated from the experiencedtermination rates and the average age of clients at inception and maturity. Deferred acquisition costs and income on insurance contracts are amortised overthe period during which the costs are expected to be recoverable in accordancewith the projected emergence of future margins. Deferred acquisition costs relating to insurance and investment contracts aretested annually for recoverability by reference to expected future incomelevels. Acquired in-force business There have been no new business combinations during the year. The acquiredvalue of the in-force business is amortised on a basis that reflects theexpected profit stream arising from the business acquired at the date ofacquisition. This profit stream is estimated from the experienced terminationrates, expenses of management and age of the clients under the individualcontracts as well as global estimates of investment growth, based on recentexperience at the date of acquisition. The acquired value of in-force business relating to insurance and investmentcontracts is tested annually for recoverability by reference to expected futureincome levels. 4. SEGMENT REPORTING The Group segments its operations into three lines of business: 1. Life business - offering pensions, protection and investment productsthrough the Group's life assurance subsidiaries; 2. Unit trust business - offering unit trust investment products,including ISAs and PEPs, through the St. James's Place Unit Trust Group; and 3. Other - offering financial products such as annuities, mortgages andstakeholder pensions, from third party providers. (35) The income and results of these segments are as follows: Year Ended Year Ended 31 December 31 DecemberNet Revenue 2007 2006 £' Million £' Million Life business Net insurance premium income 69.9 67.4 Net movement on deferred income (30.5) (23.3) Investment income - unit linked policyholders 1,063.9 1,503.9 Segment revenue 1,103.3 1,548.0 Unit trust business Fee income (excluding deferred income) 85.4 67.7 Net movement on deferred income (25.4) (18.9) Segment revenue 60.0 48.8 Other business Commission income 54.3 62.1 Investment income - sale of investment in LAHC - 7.0 Investment income - other shareholders 11.6 6.7 Investment income - other(1) 13.3 8.7 Other operating income 2.5 1.8 Segment revenue 81.7 86.3 Total net revenue(2) 1,245.0 1,683.1 (1) Investment income - other relates to investment income on third partyholdings in the St. James's Place unit trusts which are subject to consolidation (the third party holdings are disclosed as "net asset value attributable to unit holders" within the balance sheet). This income is offset by a change in investment contract benefits within theincome statement. (2) All revenue is generated from external transactions. (36) Year Ended Year EndedSegment Result 31 December 31 December 2007 2006 £' Million £' Million Life business Shareholder 84.4 85.5 Policyholder tax gross up 7.1 72.3Unit trust business 15.9 18.0 Profit on sale of investment - LAHC - 7.0Other loss (4.2) (2.9) Total other business (4.2) 4.1 Total operating profit and profit before tax 103.2 179.9 Income taxes Policyholder tax (7.1) (72.3) Shareholder tax (18.0) (19.6) Profit after tax 78.1 88.0 Other Segmental Information Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionSegment Assets Life business 15,385.0 12,963.5 Unit trust business 150.6 103.3 Other business 300.5 303.9 Unallocated assets 144.7 93.5 Consolidation adjustments 102.6 (30.7) Total Assets 16,083.4 13,433.5 Segment Liabilities Life business 14,879.7 12,481.8 Unit trust business 130.1 94.0 Other business 76.1 69.4 Unallocated liabilities 318.2 297.5 Consolidation adjustments 236.8 108.6 Total Liabilities 15,640.9 13,051.3 Capital expenditure Other business 6.5 3.0 Depreciation Expense Other business 2.2 2.5 Amortisation Expense Life business - DAC 38.6 35.0 Life business - acquired value of in-force business 3.3 3.1 Unit trust business - DAC 6.8 5.2 (37) 5. INCOME TAXES Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionPolicyholder taxOverseas withholding taxes 12.4 9.2Deferred tax on unrelieved expenses- Current year credit (7.5) -- Prior year credit (30.4) -Deferred tax on unrealised gains in unit linked funds (23.2) 41.8UK corporation tax 55.8 21.3 Total policyholder tax charge for the year 7.1 72.3 Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionShareholder taxUK corporation tax Current year charge 4.6 8.7 Prior year charge 1.0 0.1Overseas taxes 2.2 0.9 7.8 9.7Deferred tax charge / (credit) On unrelieved expenses - (1.1) Other 10.2 11.0 Total shareholder tax charge for the year 18.0 19.6 The prior year credit for deferred tax on unrelieved expenses relates to thechange in basis of valuation for tax relief from a market consistent stochasticmodel to the recognition of deferred tax on the entire balance of unrelievedexpenses. In addition, where deferred tax balances represent future adjustmentsat the policyholder rate, these are now recognised as policyholder items. The change in the corporation tax rate from 30% to 28% effective from 1 April2008 included in the 2007 Finance Act has been incorporated into the deferredtax balances. 6. EARNINGS PER SHARE Year Ended Year Ended 31 December 31 December 2007 2006 Pence Pence Basic earnings per share 16.8 19.4Adjustments - disposal of LAHC - (1.5) Basic adjusted earnings per share 16.8 17.9 Diluted earnings per share 16.1 18.4Adjustments - disposal of LAHC - (1.5) Diluted adjusted earnings per share 16.1 16.9 (38) The earnings per share (EPS) calculations are based on the following figures: Year Ended Year Ended 31 December 31 December 2007 2006 £' Million £' MillionEarningsProfit after tax (for both basic and diluted EPS) 78.1 88.0Adjustments - disposal of LAHC - (7.0) Adjusted profit (for both basic and diluted EPS) 78.1 81.0 Weighted average number of sharesWeighted average number of ordinary shares in issue (for basic EPS) 465.6 452.8Adjustments for outstanding share options 20.4 25.8 Weighted average number of ordinary shares (for diluted EPS) 486.0 478.6 7. DIVIDENDS The following dividends have been paid by the Group: Year Ended Year Ended Year Ended Year Ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Pence per Pence per £' Million £' Million share share Final dividend in respect of previousfinancial year 2.15 1.85 10.0 8.3Special dividend in respect ofprevious financial year 6.35 - 29.4 -Interim dividend in respect ofcurrent financial year 1.75 1.50 8.3 6.8 Total 10.25 3.35 47.7 15.1 The Directors have recommended a final dividend of 2.55 pence per share (2006:2.15 pence). This amounts to £12.2 million (2006: £10.0 million) and will,subject to shareholder approval at the Annual General Meeting, be paid on 14 May2008 to those shareholders on the register as at 7 March 2008. (39) 8. INSURANCE LIABILITIES 2007 2006 £' Million £' Million Balance at 1 January 374.3 430.6 Movement in unit linked liabilities 26.3 32.9 Movement in non-unit linked liabilities New business (2.6) (2.9) Existing business 3.4 2.9 Effect of PS06/14 - (43.7) Other assumption changes (6.0) (29.4) Claims reserve reclassification - (14.9) Experience variance 10.0 (1.2) Total movement in non-unit linked liabilities 4.8 (89.2) Balance at 31 December 405.4 374.3 Unit linked 333.8 307.5Non-unit linked 71.6 66.8 405.4 374.3 Current 56.4 52.5Non current 349.0 321.8 405.4 374.3 Assumptions used in the calculation of liabilities The principal assumptions used in the calculation of the liabilities are: Assumption Description Interest rate The valuation interest rate is calculated by reference to the long term gilt yield at 31 December 2007 and the specific gilts backing the liabilities. The specific rates used are between 3.2% and 4.6% depending on the tax regime (3.2% and 4.5% at 31 December 2006). Mortality Mortality is based on company experience and is set at 72% of the TM/F92 tables with an additional loading for smokers. There has been no change since 2006. Morbidity - CI Morbidity is based on company experience. The shape and level are unchanged since last year. Sample annual rates per £ for a male non-smoker are: Age Rate 25 0.000703 35 0.001235 45 0.002953 (40) Morbidity - PHI Morbidity is based on company experience. Sample annual rates per £ income benefit p.a. for a male non-smoker are: Rate Age 2007 2006 25 0.00510 0.00586 35 0.01345 0.01547 45 0.02918 0.03356 Expenses Contract liabilities are calculated allowing for the actual costs of administration of the business. The assumption has been increased to allow for inflation but is otherwise unchanged. Annual cost Product 2007 2006 Investment bonds £20.65 £19.63 Pension business £40.48 £39.07 Protection business £32.38 £31.28 Persistency Allowance is made for a prudent level of lapses within the calculation of the liabilities. There has been no change in the allowance for lapses since 2006. Sample annual lapse rates include: Product 1 - 5 years 6 + years Bond 3% 5% Protection 14% 11% Single premium pensions 2% 8% Note: the lapse assumptions for single premium pension business vary by age rather than duration. The rates included in the table above are in respect of a plan commencing at age 55. Sensitivity analysis The table below sets out the sensitivity of the profit and net assets to keyassumptions. The analysis reflects the change in the variable / assumptionshown while all other variables / assumptions are left unchanged. In practicevariables / assumptions may change at the same time as some may be correlated(for example, an increase in interest rates may also result in an increase inexpenses if the increase reflects higher inflation). It should also be notedthat in some instances sensitivities are non-linear. (41) Sensitivity analysis Change in Change in profit before profit before Change in Change in Change in tax tax net assets net assets assumption 2007 2006 2007 2006 % £' Million £' Million £' Million £' Million Withdrawal rates -10% (2.3) (1.4) (1.9) (1.0) Expense assumptions -10% 1.3 2.1 1.0 1.8 Mortality / morbidity -5% 0.8 0.2 0.6 0.2 A change in interest rates will have no material impact on insurance profit or net assets. 9. OTHER PROVISIONS Endowments Office Other Total Restructuring Provisions £' Million £' Million £' Million £' Million At 1 January 2007 0.8 2.1 0.2 3.1Charged to the consolidatedincome statement (0.3) (1.3) - (1.6)Additional provisions - 2.9 1.1 4.0Unused amounts released - - (0.2) (0.2) At 31 December 2007 0.5 3.7 1.1 5.3 Current 0.4 2.9 1.1 4.4Non current 0.1 0.8 - 0.9 0.5 3.7 1.1 5.3 The endowments provision relates to the cost of redress for mortgage endowmentcomplaints. The provision is based on estimates of the total number ofcomplaints expected to be upheld, the average cost of redress and the estimatedtiming of settlement. The office restructuring provision represents the expected amounts payable undera number of non-cancellable operating leases for office space that the Group nolonger occupies. The provision is based on estimates of the rental payableuntil the approximate dates on which the Group expects either to have sublet theaffected space or to have reached break clauses within the relevant leaseagreements and making appropriate allowance for the time value of money. Other provisions refer to sundry miscellaneous items. (42) 10. SHARE CAPITAL Number of Ordinary Shares Share Capital £' Million At 1 January 2006 447,431,123 67.1 Scrip dividend 3,553,044 0.5 Exercise of options 12,874,781 2.0 At 31 December 2006 463,858,948 69.6 Scrip dividend 2,422,538 0.4 Exercise of options 10,204,367 1.5 At 31 December 2007 476,485,853 71.5 The total authorised number of ordinary shares is 605 million (2006: 605million), with a par value of 15 pence per share (2006: 15 pence per share).All issued shares are fully paid. 11. RESERVES Share Treasury Profit and Miscellaneous Total Premium Shares Loss Reserves Reserve Reserve £' Million £' Million £' Million £' Million £' Million At 1 January 2006 29.6 (11.0) 186.5 2.3 207.4 Profit for the year 88.0 88.0 Dividends (15.1) (15.1) Issue of share capital Scrip dividend 10.6 10.6 Exercise of options 17.2 17.2 Consideration paid for own shares (5.4) (5.4) Own shares vesting charge 5.7 (5.7) - P & L reserve credit in respect of proceeds from exercise of share options of shares held in trust 2.3 2.3 P & L reserve credit in respect of share option charges 7.6 7.6 At 31 December 2006 57.4 (10.7) 263.6 2.3 312.6 Profit for the year 78.1 78.1 Dividends (47.7) (47.7) Issue of share capital Scrip dividend 10.3 10.3 Exercise of options 14.5 14.5 Consideration paid for own shares (10.3) (10.3) Own shares vesting charge 2.8 (2.8) - P & L reserve credit in respect of proceeds from exercise of share options of shares held in trust 1.0 1.0 P & L reserve credit in respect of share option charges 12.5 12.5 At 31 December 2007 82.2 (18.2) 304.7 2.3 371.0 Miscellaneous reserves represent other non-distributable reserves. (43) 12. NON STATUTORY ACCOUNTS The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2007 or 2006 but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theregistrar of companies, and those for 2007 will be delivered in due course. Theauditors have reported on those accounts; their report was (i) unqualified, (ii)did not include a reference to any matters to which the auditors drew attentionby way of emphasis without qualifying their report and (iii) did not contain astatement under section 237 (2) or (3) of the Companies Act 1985. 13. ANNUAL REPORT The Company's annual report and accounts for the year ended 31 December 2007 isexpected to be posted to shareholders by 31 March 2008. Copies of both thisannouncement and the annual report and accounts will be available to the publicat the Company's registered office at St. James's Place House, Dollar Street,Cirencester GL7 2AQ and through the Company's website at www.sjp.co.uk. This information is provided by RNS The company news service from the London Stock Exchange