Annual Report and Accounts 2007

Review of the Year

Operational Review

Friends Provident International

Strengths and strategy

Friends Provident acquired the international operations of Royal & SunAlliance in 2002 and, since then, the renamed Friends Provident International (FPI) has grown significantly.

FPI offers a broad range of products including investment bonds, regular savings products and protection contracts. It operates through intermediaries, principally in Asia, the Middle East, Europe and the UK offshore market. These markets offer the prospect of higher margins and higher growth rates than the UK, hence FPI's continuing growth strategy. Market and product diversification therefore remain the bedrock of the FPI strategy.

One of FPI's strengths is its demonstrable commitment to intermediary markets in the regions in which it operates, with branch offices in Hong Kong (for 20 years), Singapore and Dubai.

A key strength of FPI is how it inter-relates with the UK-facing business, as it uses many of its attributes including product design and expertise in dealing through intermediaries. In addition, through its shared IT platform, it is able to leverage technology capabilities and deliver a superior customer experience. The business is also inherently more profitable than its UK counterpart.

Our strategy is to continue to grow the FPI business using the attributes of the UK business to enhance both the growth rate and the return of the business portfolio. Distribution remains primarily focused on IFAs, although there is a growing emphasis on bancassurance arrangements as well as a number of specially selected distribution partners, particularly in some of the newer markets for FPI such as the Middle East and Germany.

In future, international development will be prioritised, our objective being to grow this business at a faster rate than the UK-facing business. This will include developing improved IT applications to offer enhanced services for customers and intermediaries. It will also include development in some of the newer territories in which the business is now operating: Singapore, Dubai and Germany. We are also exploring entry into a number of other territories, provided they offer appropriate financial returns.

Market and outlook

Our approach to market diversification garnered real benefits during the course of 2007, with legislative and other changes affecting individual markets at different times throughout the year. This diversification enables FPI to move and adapt its focus to where it will have maximum business benefit. FPI's strong momentum continued to build through 2007.

The Hong Kong market for offshore products grew strongly through the year. As a result of promoting and refining its key savings product, FPI increased Hong Kong market share, measured against its peer group. Our understanding of intermediaries and customers in this market means we believe this position is sustainable. We expect our new Singapore office to transact more business in 2008, but from a very low base in 2007.

In the latter part of the year FPI's UK insurance bond sales were affected by uncertainty surrounding capital gains tax. Until the Government clarifies the situation we expect the UK market to remain subdued. This is a relatively small market for FPI, and one that in any event tends to generate a lower margin than other territories.

FPI was granted a United Arab Emirates (UAE) Federal Licence in 2007 and this has led to a strengthening of ties with existing and new distributors alike. We have continued to develop our product range in the Middle East, where further development will seek to capitalise fully on our larger footprint.

2007 was also our first full year in the German pensions market, with FPI products and electronic new business capabilities, based on the UK platform, gaining positive market feedback.

Market and competitor activity in 2007 saw no lessening from that of previous years, but the continuing strength of demand, its development of online solutions, and the growth of its presence in key markets mean that FPI retains a confident and positive outlook.

Performance

FPI new business was up 60% year-on-year. Increased regular premium savings business in Asia and the Middle East was the principal driver of this result, supported by pensions in Germany, which accounted for 8m of APE in the year. FPI's UK insurance bond sales slowed in the latter part of the year because of uncertainty surrounding capital gains tax. In the year, new licences were obtained in UAE and Singapore.

Contribution from new business increased 50% to 39m as margin was broadly unchanged at 3.2%. IRR was 17.8%, down on 2006 as it was affected by the mix of products sold. New business strain was 69m driven by the sales increase. Cash payback was maintained at 6 years. Net cash outflow at 25m was affected by the higher new business strain and reduced in-force surplus, as 2006 included an exceptionally high release of 15m resulting from a misclassification in the segmental analysis. IFRS underlying profit fell to 3m, reflecting the same factors. Funds under management grew 29% to 5,022m as new business sales exceeded maturities and lapses.

Key Performance Indicators

New business – APE

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Assets under management

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Contribution from new business

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Cash payback

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New business – PVNBP

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Shareholder cash generation/outflow

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Internal rate of return

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IFRS underlying profit

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Additional information 2007 2006
New business (APE m)
Asia 100 57
UK 16 19
Middle East 22 14
Europe (excluding UK) 27 16
Rest of the world 21 11
Total 186 117