Financial Review
continued

The contribution from new business under the Full EV basis increased by 38% in 2006 to £461m (2005 £333m), reflecting strong growth in new business volumes in all channels and increased overall margins. Increased sales of bonds and funds through Bancassurance was the primary driver of this growth, but strong sales growth through Wealth Management and increased volumes and margins in Intermediary also made important contributions.

The contribution from existing business decreased by 5% in 2006 to £213m (2005 £225m), the 12% increase in the expected contribution being more than offset by a £75m adverse impact of actual vs expected experience. The major driver of this was worsened persistency in respect of Intermediary business as a result of replacement activity associated with Pensions ‘A-Day’ and higher lapses on with-profit bonds.

Reconciliation of IFRS to Full EV

A reconciliation of underlying profit before tax on the Full EV basis with the reported IFRS basis is set out below:

	Year ended 31.12.2006				Year ended 31.12.2005
	Life & Pensions Insurance Contracts £m	Life & Pensions Investment Contracts £m	Mutual Funds Investment Contracts £m	Total £m	Life & Pensions Insurance Contracts £m	Life & Pensions Investment Contracts £m	Mutual Funds Investment Contracts £m	Total £m
Underlying profit before tax (IFRS basis)	227*	18	32	277	237	1	(3)	235
Additional contribution from new business		270	204	474		210	155	365
Lower contribution from existing business		(131)	(91)	(222)		(122)	(69)	(191)
Additional investment earnings on net assets		6	4	10		4	1	5
Increase in underlying profit before tax		145	117	262		92	87	179
Underlying profit before tax (Full EV basis)	227	163	149	539	237	93	84	414

* Development costs, overheads, other income and costs and financing costs have been attributed to Life & Pensions Insurance Contracts business for presentational purposes only.

Moving to the Full EV basis results in earlier recognition of profits from sales of new investment contracts, offset in part by the subsequent recognition of lower profits on existing investment contracts. The Full EV basis, unlike the IFRS basis, recognises profits on new business at the point of sale with the contribution from existing business consisting only of subsequent changes in the net present value of future cashflows and changes in experience compared to that initially modelled at the point of sale.

The contribution from new investment contracts in 2006 under the Full EV basis was £474m higher than under the reported IFRS result, the Full EV contribution being £245m compared to a loss of £229m under the IFRS basis.

Under the Full EV basis, the contribution from existing investment contracts in 2006 was £222m lower than under the IFRS basis, the Full EV basis contribution being £57m compared to £279m under the IFRS basis. The lower contribution from existing business under the Full EV basis includes (£91m) of actual vs expected experience on investment contracts, which largely reflects worse than expected persistency on Intermediary business.

New Business Profitability

With the publication of this supplementary information and also with the industry-wide demise of the Achieved Profits basis new business profitability will, from now onwards, be reported by reference to the Full EV basis rather than the Achieved Profits basis. This results in new business profitability for 2005 which is 2% APE lower than previously reported because the Full EV basis allocates a higher proportion of overhead expenses to new business. The contribution from new business includes direct costs of writing new business and an appropriate allocation of overheads. Other overheads are allocated to the contribution from existing business or are recorded as overheads associated with development activity.

New business profitability for the UK Investment Business (including both Life & Pensions and Mutual Funds) calculated by reference to the Full EV basis is set out below:

	Year ended 31.12.2006			Year ended 31.12.2005
	New Business APE* £m	New Business Contribution £m	New Business Profitability %APE	New Business APE* £m	New Business Contribution £m	New Business Profitability %APE
Bancassurance	916	304	33	813	233	29
Intermediary	511	49	10	389	32	8
Wealth Management	304	108	36	185	68	37
Total	1,731	461	27	1,387	333	24
Life & Pensions	1,299	337	26	1,004	258	26
Mutual Funds	432	124	29	383	75	20
Total	1,731	461	27	1,387	333	24

* Excluding business (£86m APE in 2006, £86m in 2005) distributed but not manufactured by the Group.

New business profitability increased strongly in 2006 to 27% (2005 24%) reflecting our continued focus on value creation. In Wealth Management, profitability remains strong at 36% (2005 37%), with the decrease in margin being due to higher sales of pensions business post Pensions ‘A-Day’. Our Bancassurance channel continues to deliver strong margins through the efficiency of our model and the productivity of our sales forces, and margins in this channel increased to 33% (2005 29%). There has also been an increase in profitability in the Intermediary channel to 10% (2005 8%) reflecting reducing unit costs and increased average policy sizes.

Overall Life & Pensions margins remained flat at 26%. The increase in Mutual Funds profitability largely reflects efficiencies from increased scale, larger case sizes and changes in the mix of funds.

Balance Sheet Information

The total net of tax embedded value of UK Investment Business on the Full EV basis is as follows:

	Year ended 31.12.2006				Year ended 31.12.2005
	Life & Pensions Insurance Contracts £m	Life & Pensions Investment Contracts £m	Mutual Funds Investment Contracts £m	Total £m	Life & Pensions Insurance Contracts £m	Life & Pensions Investment Contracts £m	Mutual Funds Investment Contracts £m	Total £m
Shareholder funds	2,315	469	230	3,014	2,445	460	82	2,987
Value of in-force business (net of tax)	1,544	1,249	577	3,370	1,373	993	471	2,837
Total embedded value (net of tax)	3,859	1,718	807	6,384	3,818	1,453	553	5,824

Note: Total embedded value excludes subordinated debt liabilities for the UK Investment Business of £987m (2005 £977m).

The table below analyses the movement in embedded value of our UK Investment Business on the Full EV basis:

	Year ended 31.12.2006
	Life & Pensions Insurance Contracts £m	Life & Pensions Investment Contracts £m	Mutual Funds Investment Contracts £m	Total £m
Opening embedded value	3,818	1,453	553	5,824
Contribution from Investment business	485	163	149	797
Development costs, associated overheads and financing costs *	(258)			(258)
Underlying profit before tax	227	163	149	539
Short term investment fluctuations	(97)	45	28	(24)
Tax charge	2	(51)	(52)	(101)
Dividends paid	(42)	(11)	(4)	(57)
Other capital movements	(49)	119	133	203
Movement in embedded value	41	265	254	560
Closing embedded value	3,859	1,718	807	6,384

* Development costs, overheads, other income and costs and financing costs have been attributed to Life & Pensions Insurance Contracts business for presentational purposes only.

Phil Hodkinson

Group Finance Director

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