Insurance & Investment
continued

Operational Performance

Investment sales increased by 23% to £1,817m APE (2005 £1,473m) reflecting strong growth across all three distribution channels with Bancassurance up 12%, Intermediary up 28% and Wealth Management up 58%.

Bancassurance

Sales through the Bancassurance channel increased by 12% to £937m APE (2005 £838m). Although sales growth was slower than other channels, the profitability and persistency of this business is strong. With over one million customers, we continue to reinforce our position as the clear number one bancassurer in the UK with simple value for money ‘no load’ products provided alongside full financial advice, offering our customers a compelling proposition.

We believe that our Bancassurance sales forces remain the most productive in the market with approximately £620,000 APE per active adviser in our branches (2005 £590,000) and £850,000 APE (2005 £700,000) per client manager in the Bank of Scotland Investment Service (‘BOSIS’) high net worth sales force.

Additional new business growth through our branch based Personal Financial Advisers (‘PFAs’) has come, in part, from the expansion of our Retail branch network. The opening of further branches across the South East of England, together with the benefits from branch regeneration activity, will help to drive future growth. BOSIS is becoming an increasingly important source of new business. Sales through this channel increased by 26% to £211m APE (2005 £168m). In an environment of increasing personal wealth, we expect this channel to be an important driver of future growth.

Intermediary

Intermediary sales increased by 28% to £531m APE (2005 £414m). Impressive growth was again seen in our offshore proposition (up 104%) through our Global Investor Product, and also in our pensions products. Our full pension product range has been successfully transitioned to the simplified regime introduced after Pensions ‘A-Day’ and we continue to benefit from our well regarded technical support to IFAs and other intermediary partners under the Clerical Medical brand.

Continued strong growth in volumes is helping to drive down unit costs and this, together with changes in business mix, has improved new business margins. We will continue our selective approach to this channel, focusing on individual pensions and investment business, where we are able to leverage the strengths of the HBOS Group to generate stronger returns, in preference to Group Pensions business where margins are thin and the future of the market is uncertain given the planned introduction of personal pension accounts, as proposed by the Government in its pensions White Paper of December 2006.

In keeping with competitors, we have also put in place specific initiatives to help reduce the relatively high level of lapses experienced in the Intermediary channel in 2006. This will include special reinvestment offers for customers switching out of the with-profit fund.

Investment Sales*

	Year ended 31.12.2006 Single £m	Year ended 31.12.2006 Annual £m	Year ended 31.12.2006 Total £m	Year ended 31.12.2006 Total APE £m	Year ended 31.12.2005 Single £m	Year ended 31.12.2005 Annual £m	Year ended 31.12.2005 Total £m	Year ended 31.12.2005 Total APE £m
Investment Bonds	6,645	23	6,668	688	5,767	12	5,779	589
Individual Pensions	2,293	243	2,536	472	1,607	160	1,767	321
Group Pensions	84	115	199	123	51	70	121	75
Annuities	292		292	29	242		242	24
Protection		40	40	40		55	55	55
Mutual Funds	1,790	286	2,076	465	1,665	243	1,908	409
Total	11,104	707	11,811	1,817	9,332	540	9,872	1,473
Banc- assurance	5,482	389	5,871	937	5,130	325	5,455	838
Intermediary	3,035	228	3,263	531	2,591	155	2,746	414
Wealth Management	2,587	90	2,677	349	1,611	60	1,671	221
Total	11,104	707	11,811	1,817	9,332	540	9,872	1,473
Insurance Contracts**	3,776	85	3,861	462	3,096	81	3,177	390
Investment Contracts	7,328	622	7,950	1,355	6,236	459	6,695	1,083
Total	11,104	707	11,811	1,817	9,332	540	9,872	1,473

* APE is calculated as annual premiums plus 10% of single premiums.
** Accounted for on an EV basis under IFRS reporting.

Wealth Management

Sales at St. James’s Place (‘SJP’) increased by 58% to £349m APE (2005 £221m) in yet another year of strong performance. Sales of investment bonds continued to be strong whilst at the same time significant growth in pensions business was generated from the Pensions ‘A-Day’ changes. Fund performance and business retention have been excellent, with funds under management up 25% to £15.4bn (2005 £12.3bn). Partner numbers now stand at 1,157.

Movement in assets under management

At a time when there is a considerable amount of business replacement activity across the industry, particularly in the Intermediary channel following Pensions ‘A-Day’, the following table is designed to assist in understanding net flows of investment business (i.e. premiums received less the outflow of funds from surrendered or matured policies) in addition to sales growth and investment returns.

	Year ended 31.12.2006 £bn	Year ended 31.12.2005 £bn
Opening assets under management	68.1	57.4
Premiums (new and existing business)	12.2	10.9
Maturities & claims	(2.4)	(2.7)
Lapses (i.e. surrenders and repurchases)	(7.4)	(5.6)
Net inflow of business	2.4	2.6
Investment return (net of charges)	5.6	8.1
Increase in assets under management	8.0	10.7
Closing assets under management	76.1	68.1
Lapse rate (i.e. lapses as % of average assets)	10%	9%

Assets under management increased by £8.0bn (up 12%) to £76.1bn with premiums from new and existing business increasing by 12%. Lapses, however, also increased, primarily in the Intermediary channel as a result of replacement activity associated with Pensions ‘A-Day’ and higher lapses on with-profit bonds. Net inflows were £2.4bn (2005 £2.6bn) and investment returns (net of charges) were £5.6bn (2005 £8.1bn).

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