Provident foresees growth

On a European embedded value basis, underlying profits was up by
around 34% and profit before tax was up by about 60%. Can you tell me what was
behind this? And how diversified those profits were across the Group?

We saw good growth in all three parts of our business: on asset management,
following the acquisition of F&C; on the international life and pensions
side, with the acquisition of Lombard and good growth on the Isle of Man
business, with Friends Provident International; and in UK life and pensions, we
saw good growth in new business (up around 10%) and also on existing business.

Under IFRS, underlying EPS was down. What was behind this?

We don’t find IFRS particularly helpful in the way it presents the financial
affairs of a company. We prefer the European Embedded Value methodology. To give
some examples of why IFRS doesn’t work, it expenses many acquisition costs in
the year the business is written. As a result, a fast-growing life and pensions
company will show significant losses in that period. Even on cash, for some
major products, IFRS will show a worse result than the actual cash emergence
from the business.

You have placed great importance on transparency. What are you doing
about this at Friends Provident, on cashflow, for example?

We’ve rewritten the report and accounts. Our aim is to be fully transparent
to all our stakeholders: shareholders, customers, staff and so on. We’ve
embraced the OFR principles, even although they’ve been withdrawn, we see them
as best practice. We’ve enhanced our cashflow disclosures with this year’s
preliminary announcement and I’m showing the level of new business strain and
the cash emergence from the back book. We have even tried to make our IFRS notes
more intelligible.

Some analysts have asked for easier comparison between companies on
an EEV reporting basis, but can that happen in isolation?

EEV is a big step forward from EV, and a number of methodologies have been
used. We believe in the market consistent approach. We’d expect the methodology
to converge and so we’ll get more consistency between the companies.

Are you happy now with the shape of the balance sheet? And is there
scope for further leverage?

The balance sheet is in great shape. It’s all about managing supply and
demand. If you take the demand side, it’s about reducing risk where we don’t
want to take it, and therefore reducing the amount of capital we have to hold.
It’s about investing capital where we want to grow.

On the supply side, we’ve done a lot of capital raising recently and at very
low cost. We’ve improved the quality and cost of that capital and, in doing so,
taken some of the soft items that were on our balance sheet and replaced them
with much higher quality ones.

Related reading