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Independent Auditor's report to the members of Friends Provident plc

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					FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                     CORPORATE GOVERNANCE REPORTS




Independent Auditor’s report to the members of Friends Provident plc



We have audited the Group and parent Company financial                     control cover all risks and controls, or form an opinion on the
statements (the ‘’financial statements’’) of Friends Provident plc         effectiveness of the Group’s corporate governance procedures or
for the year ended 31 December 2007 which comprise the                     its risk and control procedures.
Consolidated income statement, the Consolidated and parent
Company balance sheets, the Consolidated cash flow statement, the          We read the other information contained in the Annual Report
Consolidated statement of recognised income and expense and the            and consider whether it is consistent with the audited financial
related notes. These financial statements have been prepared under         statements. We consider the implications for our report if we
the accounting policies set out therein. We have also audited the          become aware of any apparent misstatements or material
information in the Remuneration Report of the Board that is                inconsistencies with the financial statements. Our responsibilities
described as having been audited.                                          do not extend to any other information.

This report is made solely to the Company’s members, as a body, in         Basis of audit opinion
accordance with section 235 of the Companies Act 1985. Our audit           We conducted our audit in accordance with International Standards
work has been undertaken so that we might state to the Company’s           on Auditing (UK and Ireland) issued by the Auditing Practices Board.
members those matters we are required to state to them in an               An audit includes examination, on a test basis, of evidence relevant
auditor’s report and for no other purpose. To the fullest extent           to the amounts and disclosures in the financial statements and the
permitted by law, we do not accept or assume responsibility to anyone      part of the Remuneration Report of the Board to be audited. It also
other than the Company and the Company’s members as a body, for            includes an assessment of the significant estimates and judgments
our audit work, for this report, or for the opinions we have formed.       made by the directors in the preparation of the financial statements,
                                                                           and of whether the accounting policies are appropriate to the
Respective responsibilities of directors and auditors                      Group’s and Company’s circumstances, consistently applied and
The directors’ responsibilities for preparing the Annual Report and        adequately disclosed.
the Group financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the      We planned and performed our audit so as to obtain all the
EU, and for preparing the parent Company financial statements and          information and explanations which we considered necessary in order
the Remuneration Report of the Board in accordance with applicable         to provide us with sufficient evidence to give reasonable assurance
law and UK Accounting Standards (UK Generally Accepted                     that the financial statements and the part of the Remuneration Report
Accounting Practice) are set out in the Statement of Directors’            of the Board to be audited are free from material misstatement,
Responsibilities on page 60.                                               whether caused by fraud or other irregularity or error. In forming our
                                                                           opinion we also evaluated the overall adequacy of the presentation of
Our responsibility is to audit the financial statements and the part of    information in the financial statements and the part of the
the Remuneration Report of the Board to be audited in accordance           Remuneration Report of the Board to be audited.
with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).                                    Opinion
                                                                           In our opinion:
We report to you our opinion as to whether the financial statements        • the Group financial statements give a true and fair view, in
give a true and fair view and whether the financial statements and the         accordance with IFRSs as adopted by the EU, of the state of
part of the Remuneration Report of the Board to be audited have been           the Group’s affairs as at 31 December 2007 and of its loss for
properly prepared in accordance with the Companies Act 1985 and, as            the year then ended;
regards the Group financial statements, Article 4 of the IAS Regulation.   • the Group financial statements have been properly prepared in
We also report to you whether in our opinion the information given             accordance with the Companies Act 1985 and Article 4 of the
in the Directors’ Report is consistent with the financial statements.          IAS Regulation;
The information given in the Directors’ Report includes that specific      • the Parent Company financial statements give a true and fair view,
information presented in the Review of the Year that is cross                  in accordance with UK Generally Accepted Accounting Practice, of
referred from the Business review section of the Directors’ Report.            the state of the parent company’s affairs as at
                                                                               31 December 2007;
In addition we report to you if, in our opinion, the Company has           • the Parent Company financial statements and the part of the
not kept proper accounting records, if we have not received all                Remuneration Report of the Board to be audited have been properly
the information and explanations we require for our audit, or if               prepared in accordance with the Companies Act 1985; and
information specified by law regarding directors’ remuneration             • the information given in the Directors’ Report is consistent with
and other transactions is not disclosed.                                       the financial statements.

We review whether the Corporate Governance Statement reflects              KPMG Audit Plc
the Company’s compliance with the nine provisions of the 2006              Chartered Accountants
Combined Code specified for our review by the Listing Rules of the         Registered Auditor
Financial Services Authority, and we report if it does not. We are not     London
required to consider whether the Board’s statements on internal            18 March 2008


                                                                                                Friends Provident Annual Report & Accounts 2007 73
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                     EEV SUPPLEMENTARY INFORMATION




Consolidated income statement
For the year ended 31 December 2007




                                                                                                              2007            2006
                                                                                            Notes              £m              £m

Revenue
Gross earned premiums                                                                          4               994             980
Premiums ceded to reinsurers                                                                   4             (1,780)            (84)
Net earned premiums                                                                            4               (786)           896
Fee and commission income and income from service activities                                                   719             565
Investment income                                                                              5              2,573           3,697
Total revenue                                                                                                 2,506           5,158
Other income                                                                                   3                 49               -
Claims, benefits and expenses
Gross claims and benefits paid                                                                 6              1,582           1,587
Amounts receivable from reinsurers                                                             6               (175)            (43)
Net claims and benefits paid                                                                                  1,407           1,544
Change in insurance contracts liabilities                                                     28             (1,983)           (764)
Change in investment contracts liabilities                                                    32              1,617           2,682
Transfer to fund for future appropriations                                                                       42             19
Movement in net assets attributable to unit holders                                           34                 42            131
Movement in policyholder liabilities                                                                           (282)          2,068
Acquisition expenses                                                                           7               822             412
Administrative and other expenses                                                              8               581             556
Finance costs                                                                                 12               141              88
Total claims, benefits and expenses                                                                           2,669           4,668
Share of profit of associates and joint venture                                               20                  1               1
(Loss)/profit before tax from continuing operations                                                            (113)           491
Policyholder tax                                                                              13                (23)           (124)
(Loss)/profit before shareholder tax from continuing operations                                                (136)           367
Total tax credit/(charge)                                                                     13                 43             (70)
Policyholder tax                                                                              13                 23            124
Shareholder tax                                                                               13                 66             54
(Loss)/profit for the year                                                                                      (70)           421
Attributable to:
Equity holders of the parent: (i)
  Ordinary shareholders                                                                                        (108)           276
  Other equity holders                                                                                           52             52
                                                                                                                (56)           328
Minority interest                                                                                               (14)            93
(Loss)/profit for the year                                                                                      (70)           421

                                                                                                              2007             2006
Earnings per share                                                                                           pence            pence
Basic (loss)/earnings per share from continuing operations                                    15               (5.0)           13.1
Diluted basic (loss)/earnings per share from continuing operations                            15               (5.1)           12.8


(i) All profit attributable to equity holders of the parent is from continuing operations



74 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                 ABBREVIATIONS AND DEFINITIONS




Consolidated underlying profit
For the year ended 31 December 2007




                                                                                                                            2007              2006
                                                                                                    Notes                    £m                £m

(Loss)/profit before tax from continuing operations*                                                                        (113)                 491
Policyholder tax                                                                                       13                     (23)            (124)
Returns on Group-controlled funds attributable to third parties                                                               23              (104)
(Loss)/profit before tax excluding profit generated within policyholder funds                                               (113)                 263
Non-recurring items                                                                                      3                    (38)                17
Amortisation of Asset Management acquired intangible assets                                            16                     42                  43
Amortisation of acquired present value of in-force business                                            16                     26                  25
Amortisation of Life & Pensions acquired intangible assets                                             16                     11                    7
Impairment of Asset Management acquired intangible assets                                              16                       -                 58
Interest payable on Step-up Tier one Insurance Capital Securities (STICS)                              40                     (52)                (52)
Short-term fluctuations in investment return                                                             5                    78                  39
Underlying (loss)/profit before tax*                                                                                          (46)                400
Tax on underlying (loss)/profit                                                                                               39                    6
Minority interest in underlying (loss)/profit                                                                                 (24)                (29)
Underlying (loss)/profit after tax attributable to ordinary shareholders of the parent                                        (31)                377


                                                                                                                           2007              2006
Earnings per share                                                                                                        pence             pence
Underlying (loss)/earnings per share                                                                   15                    (1.4)            17.9


IFRS underlying (loss)/profit is based on longer-term investment return and excludes: (i) policyholder tax, (ii) returns attributable to minority
interests in policyholder funds, (iii) non-recurring items, (iv) amortisation and impairment of acquired intangible assets and present value of
acquired in-force business; and is stated after deducting interest payable on STICS. Management consider that underlying profit better
reflects the performance of the Group and focus on this measure of profit in its internal monitoring of the Group’s IFRS results.

* Included in (loss)/profit before tax from continuing operations, and underlying (loss)/profit before tax, are one-off items relating to basis
  changes and the adoption of FSA Policy Statement PS06/14 Prudential Changes for Insurers which have decreased profit by £135m in
  2007 (2006: increase of £156m). Further details of these items are set out in note 2(i).




                                                                                                  Friends Provident Annual Report & Accounts 2007 75
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                               EEV SUPPLEMENTARY INFORMATION




Consolidated balance sheet
At 31 December 2007




                                                                                                        2007             2006
                                                                                     Notes               £m               £m

Assets
Intangible assets                                                                       16              1,456            1,405
Property and equipment                                                                  17                 81              80
Investment properties                                                                   18              2,371            2,426
Investments in associates and joint venture                                             20                 14              15
Deferred tax assets                                                                     24                 55                -
Financial assets                                                                        21             47,710           45,150
Deferred acquisition costs                                                              22              1,093            1,111
Reinsurance assets                                                                      23              2,015              85
Current tax assets                                                                                          4              30
Insurance and other receivables                                                         25               620              606
Cash and cash equivalents                                                               26              4,782            3,581
Total assets                                                                                           60,201           54,489
Liabilities
Insurance contracts                                                                     28             13,607           13,762
Fund for future appropriations                                                                           481              439
Financial liabilities
  – Investment contracts                                                                32             37,266           32,821
  – Loans and borrowings                                                                33              2,349            1,130
Net asset value attributable to unit holders                                            34               909              941
Provisions                                                                              35               146              215
Deferred tax liabilities                                                                24               329              318
Current tax liabilities                                                                                  113              116
Insurance payables, other payables and deferred income                                  36               677              582
Total liabilities                                                                                      55,877           50,324
Equity attributable to equity holders of the parent
Attributable to ordinary shareholders:
Share capital                                                                        37, 38              234              214
Share premium                                                                        37, 38             2,372            2,051
Other reserves                                                                       37, 39              346              542
                                                                                                        2,952            2,807
Attributable to other equity holders                                                 37, 40              810              810
                                                                                                        3,762            3,617
Minority interest                                                                       37               562              548
Total equity                                                                            37              4,324            4,165
Total equity and liabilities                                                                           60,201           54,489


The financial statements were approved by the Board of directors on 18 March 2008.

Sir Adrian Montague                                  Jim Smart
Executive Chairman                                   Chief Financial Officer




76 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Consolidated statement of recognised income and expense
For the year ended 31 December 2007




                                                           Equity holders of          Equity          Total equity
                                                                  the parent holders of the         holders of the        Minority
                                                            (ordinary shares) parent (STICS)                parent        interest          Total
                                                                         £m              £m                    £m              £m             £m

Actuarial gains on defined benefit schemes net of tax (i)                 27                 -                   27               3            30
Foreign exchange adjustments                                              43                 -                   43               8            51
Revaluation of owner occupied properties                                    -                -                     -              -              -
Shadow accounting                                                           -                -                     -              -              -
Net income recognised directly in equity                                  70                 -                   70             11             81
(Loss)/profit for the year                                              (108)               52                  (56)            (14)          (70)
Total recognised income and expense for the year                          (38)              52                   14              (3)           11




For the year ended 31 December 2006
                                                            Equity holders of            Equity        Total equity
                                                                   the parent    holders of the      holders of the       Minority
                                                             (ordinary shares)   parent (STICS)              parent       interest           Total
                                                                          £m                £m                  £m             £m             £m

Actuarial (losses)/gains on defined benefit schemes net of tax (i)         (8)               -                    (8)             1             (7)
Foreign exchange adjustments                                              (10)               -                  (10)             (2)           (12)
Revaluation of owner occupied properties                                    6                -                    6               -              6
Shadow accounting                                                          (6)               -                    (6)             -             (6)
Net income recognised directly in equity                                  (18)               -                  (18)             (1)           (19)
Profit for the year                                                      276                52                  328             93            421
Total recognised income and expense for the year                         258                52                  310             92            402


(i)   Tax recognised directly in equity is shown in note 13(c).




                                                                                                  Friends Provident Annual Report & Accounts 2007 77
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                              EEV SUPPLEMENTARY INFORMATION




Consolidated cash flow statement
For the year ended 31 December 2007




                                                                                       2007              2006
                                                                                        £m                £m

Operating activities
(Loss)/profit for the year                                                               (70)             421
Compensation from terminated merger (less related costs)                                 (34)                -
Unrealised losses/(gains) on investments                                               1,245              (311)
Realised gains on investments                                                         (2,025)           (1,618)
Finance costs                                                                           141                88
Amortisation and impairment of intangible assets                                        115               150
Depreciation of property and equipment                                                    10               10
Movement in deferred acquisition costs                                                    74              (119)
Total tax (credit)/expense                                                               (43)              70
Purchase of shares and other variable yield securities                               (15,229)          (13,185)
Sale of shares and other variable yield securities                                    14,122           12,014
Purchase of loans, debt securities and other fixed income securities                 (16,985)          (13,486)
Sale of loans, debt securities and other fixed income securities                      17,238           13,311
Purchase of investment properties                                                       (167)             (285)
Sale of investment properties                                                           107                47
Decrease in insurance contract liabilities                                              (155)             (875)
Increase in investment contract liabilities                                            3,642            5,074
Increase in fund for future appropriations                                                42               19
Decrease in provisions                                                                   (66)              (78)
Net (decrease)/increase in receivables and payables                                     (192)             165
Pre-tax cash inflow from operating activities                                          1,770            1,412
Tax received/(paid)                                                                       27               (86)
Net cash inflow from operating activities                                              1,797            1,326
Investing activities
Acquisition of subsidiaries, net of cash acquired                                        (41)              (21)
Reduction in participation in subsidiaries, net of cash disposed                           -               49
Compensation from investment mandate loss                                                  -               27
Compensation from terminated merger (less related costs)                                  34                 -
Additions to internally generated intangible assets                                      (26)              (18)
Purchase of property and equipment (net)                                                 (11)              (11)
Net cash (outflow)/inflow from investing activities                                      (44)              26
Financing activities
Finance costs                                                                           (134)              (81)
STICS interest                                                                           (52)              (52)
Proceeds from issue of long-term debt, net of expenses                                     -              258
Repayment of long-term debt                                                             (164)             (312)
Net movement in other borrowings, net of expenses                                          8               12
Dividends paid to equity holders of the parent                                          (168)             (164)
Dividends paid to minority interest                                                      (42)              (46)
Net cash outflow from financing activities                                              (552)             (385)
Increase in cash and cash equivalents                                                  1,201              967
Balance at beginning of year                                                           3,581            2,614
Balance at end of year                                                                 4,782            3,581




78 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts


1. Accounting policies                                                     IFRS 2 Share based payment (amendments) – effective 1 January 2009

1.1 Basis of preparation                                                   IFRS 3 Business Combinations (revised) – effective 1 July 2009

The consolidated financial statements of the Group are prepared in         IAS 23 Borrowing costs (amendments) – effective 1 January 2009
accordance with International Financial Reporting Standards (IFRS)
as adopted by the EU, and those parts of the Companies Act 1985            IAS 32 Financial instruments: Presentation and IAS 1 Presentation
applicable to companies reporting under IFRS. The consolidated             of financial statements puttable financial instruments and obligations
financial statements have been prepared under the historical cost          arising on liquidation – effective 1 January 2009.
convention, as modified by the revaluation of property, investment
properties, cash settled share based payment schemes and financial         IFRIC 14 IAS 19 – The limit on a defined benefit asset minimum
instruments at fair value through the income statement. The                funding requirements and their interaction – effective 1 January 2008.
financial statements also comply with the revised Statement of
Recommended Practice issued by the Association of British Insurers         The above standards and interpretations once implemented will not
in December 2005 (as amended in December 2006) in so far as                materially impact the results of the Group.
these requirements do not contradict IFRS requirements.
                                                                           1.2 Use of estimates, assumptions and judgements
IFRS 7 Financial Instruments: Disclosures, and amendments to
IAS 1 Presentation of Financial Statements Capital Disclosures,            The preparation of the financial statements requires the use of
were effective from 1 January 2007 and have been adopted in the            estimates, assumptions and judgements that affect the reported
year. The objective of IFRS 7 is to enable users to understand the         amounts of assets, liabilities and contingent liabilities at the balance
nature and extent of risks arising from financial instruments. The         sheet date, as well as affecting the reported income and expenses
amendments to IAS 1 provide users with information on what the             for the year. Although the estimates are based on management’s
Group manages as capital and how its objectives for managing               best knowledge and judgement of information and financial data as
capital are met, and has no effect on the primary statements.              at the date the financial statements are approved, the actual
                                                                           outcome may differ from these estimates. Further information on the
The Group presents its balance sheet in order of liquidity. Where          use of estimates, assumptions and judgements is set out in note 2.
applicable, for each asset and liability line item that combines
amounts expected to be recovered or settled both within and beyond         1.3 Summary of significant accounting policies
12 months after the balance sheet date, disclosure of the amount
                                                                           The principal accounting policies set out below have been
due beyond 12 months is made in the respective line item note.
                                                                           consistently applied to all years presented in these consolidated
                                                                           financial statements.
Financial assets and financial liabilities are not offset, unless there
is a legally enforceable right to offset the recognised amounts and
                                                                           1.3.1 Business combinations
there is an intention to settle on a net basis, or to realise the assets
and settle the liability simultaneously. Income and expenses are not       The cost of a business combination is measured as the fair value of
offset in the income statement unless required or permitted by an          the assets given, equity instruments issued and liabilities incurred or
accounting standard or interpretation, as specifically disclosed in the    assumed at the date of exchange, plus costs directly attributable to
accounting policies of the Group.                                          the business combination. Identifiable assets acquired and liabilities
                                                                           and contingent liabilities assumed in a business combination are
The parent company has continued to present individual financial           measured initially at their fair values at the business combination
statements prepared on a UK GAAP basis as permitted by section             date, irrespective of the extent of any minority interest. The excess
226A of, and Schedule 4 to, the Companies Act 1985, adopting the           of the cost of the business combination over the fair value of the
exemption of omitting the profit and loss account and related notes        Group’s share of the identifiable net assets acquired is recorded as
conferred by section 230 of that Act. The parent company financial         goodwill. If the cost of the business combination is less than the fair
statements, with its respective accounting policies, are presented         value of the net assets acquired, the difference is recognised
on pages 193 to 197.                                                       directly in the income statement.

The Group has not early adopted a number of new standards,                 (a) Subsidiaries
interpretations and amendments to existing standards, which                Subsidiaries are all entities over which the Group has the power,
are not mandatory for 2007 as follows:                                     directly or indirectly, to govern the financial and operating policies
                                                                           so as to obtain economic benefits, generally accompanying a
IFRS 8 Operating Segments – effective 1 January 2009                       shareholding of more than one half of the voting rights. Potential
                                                                           voting rights that presently are exercisable or convertible are also
IFRS 8 introduces new requirements for reporting segment                   taken into account.
information. It requires information to be reported on the basis of
separate internal financial information used by the Group to evaluate
operating performance of each segment.



                                                                                                Friends Provident Annual Report & Accounts 2007 79
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                              EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


1. Accounting policies continued                                            Once a policyholder contract has been classified as an insurance
                                                                            contract, it remains an insurance contract for the remainder of its
Open ended investment companies and unit trusts in which the                lifetime, even if the insurance risk reduces significantly during this
Group has a percentage holding in excess of 50% are consolidated            period. As a general guideline, the Group defines as significant
as special purpose vehicles under SIC12 (the Group obtains the              insurance risk the possibility of having to pay benefits on the
majority of the benefits, and controls these vehicles as an                 occurrence of an insured event that is more than 5% greater than
investment manager). The units not owned by the Group are treated           the benefits payable if the insured event did not occur.
as a liability called ‘net asset value attributable to unit holders’.
                                                                            (b) Investment contracts
The consolidated financial statements incorporate the assets,               Policyholder contracts not considered insurance contracts under
liabilities, results and cash flows of the Company and its                  IFRS 4 are classified as investment contracts. Contracts classified
subsidiaries. The results of subsidiaries acquired or sold during the       as investment contracts are either unit-linked or contracts with
period are included in the consolidated results from the date of            Discretionary Participation Features (DPF). These are mainly
acquisition or up to the date of disposal. Intra-group balances and         unitised with-profits contracts. See 1.3.20 on page 85 for the
income and expenses arising from intra-group transactions are               definition of DPF.
eliminated in preparing the consolidated financial statements.
                                                                            (c) Options and guarantees
Profits or losses arising from changes in holdings in subsidiaries          Options and guarantees are valued separately unless the option or
that do not impact the Group’s control over that subsidiary are             guarantee itself meets the definition of an insurance contract, or it
recognised directly in equity.                                              is a policyholder option to surrender an insurance contract for a
                                                                            fixed amount.
(b) Associates and joint ventures
Associates are all entities over which the Group has significant            For options and guarantees separated from the host contract, the
influence but not control over the financial and operating policies,        Group measures them at fair value and includes the change in fair
generally arising from holding between 20% and 50% of the voting            value in the income statement on the same basis as for its other
rights. Investments in associates are accounted for by the equity           embedded derivatives.
method of accounting and are initially recognised at cost. The
Group’s investment in associates includes goodwill (net of any              1.3.3 Segment reporting
impairment loss) identified on acquisition.                                 Management reviews the Group’s operations on the basis of its key
                                                                            or business segments. These are groups of assets or operations that
Joint ventures are those entities where the terms of the contractual        provide products or services that are different in terms of risks and
agreement ensure that the parties involved jointly control the entity,      returns to those of other business segments. The Group therefore
notwithstanding that the Group’s share of the underlying assets and         reports its primary segment information using business segments.
liabilities may be more than 50%. The Group recognises its interests
in joint ventures using the equity method.                                  Secondary segment information is reported using geographical
                                                                            segments. A geographical segment provides products or services
Under the equity method, an investment is included as a single line         within a particular economic environment that are subject to risks and
item in the consolidated balance sheet as the Group’s share of the          returns that are different to those of other geographical segments.
fair value of the investee undertaking’s net assets plus goodwill,
which equates to the cost of the investment plus the Group’s share          Further details of the segments selected by the Group are included
of post-acquisition reserves. The Group’s share of post-tax profits or      in note 3.
losses is presented as a single line item in the consolidated income
statement, adjusted for the effect of any fair value adjustments.           1.3.4 Foreign currency translation
                                                                            (a) Foreign currency transactions
1.3.2 Product classification
                                                                            Transactions in foreign currencies are translated to sterling (the
(a) Insurance contracts                                                     functional currency of the Group) at the foreign exchange rates
Contracts under which the Group accepts significant insurance risk          ruling at the date of the transaction. Monetary assets and liabilities
from another party (the policyholder), by agreeing to compensate            denominated in foreign currencies at the balance sheet date are
the policyholder if a specified uncertain future event (the insured         translated to sterling at the exchange rate ruling at the balance
event) adversely affects the policyholder, are classified as insurance      sheet date, and any exchange differences arising are taken to the
contracts. Under IFRS 4, insurance risk is risk other than financial        income statement. Non-monetary assets and liabilities measured at
risk. Financial risk is the risk of a possible future change in one or      historical cost in a foreign currency are translated using the
more of: a specified interest rate, security price, commodity price,        exchange rate at the date of the transaction and are not
foreign exchange rate, index of price or rates, a credit rating or credit   subsequently restated. Non-monetary assets and liabilities stated
index or other variable. Insurance contracts may transfer some              at fair value in a foreign currency are translated at the rate on the
financial risk.                                                             date the fair value was determined. When a gain or loss on a
                                                                            non-monetary item is recognised directly in equity, any exchange
                                                                            component of that gain or loss is recognised directly in equity.

80 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


1. Accounting policies continued                                           time period. Performance fees are recognised when the quantum of
                                                                           the fee can be estimated reliably, which is when the performance
Conversely, when a gain or loss on a non-monetary item is                  period ends, when this occurs on or before the reporting date, or
recognised in the income statement, any exchange component of              where there is a period of less than six months remaining to the end
that gain or loss is recognised in the income statement. Foreign           of the performance period, and there is evidence at the reporting date
exchange adjustments recognised in equity are reported in the              which suggests that the current performance will be sustainable.
Group’s foreign currency translation reserve within retained earnings
and reported in the statement of recognised income and expense.            (c) Investment income
                                                                           All income received from investments is recognised in the income
(b) Overseas subsidiaries                                                  statement and includes dividends, interest, rental income, and the
The assets and liabilities of overseas subsidiaries, including goodwill    movement in financial assets and investment properties, at fair
and intangible assets attributable to the acquisition of the overseas      value through the income statement.
subsidiary, and fair value adjustments arising on consolidation, are
translated to sterling at foreign exchange rates ruling at the balance     Dividend income from listed and unlisted securities is recognised as
sheet date. The revenues and expenses of overseas subsidiaries are         revenue when the right to receive payment is established. For listed
translated to sterling at average foreign exchange rates for the year.     securities this is the date the security is listed as ex-dividend.

Foreign exchange differences arising on the translation to sterling        Interest income is recognised in the income statement as it accrues,
are classified as equity movements and recognised in the Group’s           taking into account the effective yield of the asset or an applicable
foreign currency translation reserve and reported in the statement of      floating rate. Interest income includes the amortisation of any
recognised income and expense. These exchange differences are              discount or premium.
recognised in the income statement in the period in which the
overseas subsidiary is disposed of.                                        Rental income from investment properties under operating leases is
                                                                           recognised in the income statement on a straight-line basis over the
1.3.5 Revenue recognition                                                  term of the lease. Lease incentives received are recognised in the
                                                                           income statement as an integral part of the total lease income.
(a) Premiums
Premium income in respect of single premium business, new                  Determination of gains and losses and the movement in financial
generation group pensions business and pensions business not               assets and investment properties at fair value through the income
subject to contractual regular premiums, is accounted for when the         statement are explained in their respective accounting policies.
premiums are received.
                                                                           1.3.6 Expense recognition
For all other classes of business, premium income is accounted for
in the year in which it falls due.                                         (a) Claims and benefits paid
                                                                           Insurance claims reflect the cost of all claims incurred during the
(b) Fee and commission income and income from service activities           year, including claims handling costs. Death claims and surrenders
Investment contract policyholders are charged for policy                   are recognised on the basis of notifications received. Maturities and
administration services, investment management services and for            annuity payments are recorded when due. Claims and benefits
surrenders. Investment management services comprise primarily              recorded are accrued to the policyholder and included within
fees and charges from unit-linked investment contracts issued by           insurance and investment contracts liabilities.
the Life & Pensions business. Fees earned by the Asset
Management business relate to the sale and management of retail            Claims handling costs include internal and external costs incurred
investment products and from managing investments in the                   in connection with the negotiation and settlement of claims.
institutional market.                                                      Internal costs include all direct expenses of the claims department
                                                                           and any general administrative costs directly attributable to the
These fees and charges are recognised as revenue in the                    claims function.
accounting period in which the services are rendered.
                                                                           Reinsurance recoveries are accounted for in the same period as the
Front-end fees are charged at the inception of the contract. The           related claim.
consideration received is deferred as a liability and recognised over
the expected term of the contract on a straight-line basis.                (b) Finance costs
                                                                           The interest expense, recognised in the income statement under
Regular fees charged to the policyholder periodically (monthly,            finance costs, is calculated using the effective interest rate method.
quarterly or annually), are recognised on a straight-line basis over the   Interest accrued on variable rate interest bearing loans and
period in which the service is rendered.                                   borrowings is recognised under insurance payables, other payables
                                                                           and deferred income and not in the carrying value of interest
In respect of Asset Management a number of contracts have                  bearing loans and borrowings.
performance fees based on an agreed level of performance in a set



                                                                                                Friends Provident Annual Report & Accounts 2007 81
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


1. Accounting policies continued                                          (c) Present value of acquired in-force business (PVIF)
                                                                          On acquisition of a portfolio of insurance contracts or investment
(c) Operating lease payments                                              contracts, either directly or through the acquisition of a subsidiary
Payments made under operating leases are recognised in the                undertaking, the net present value of the Group’s interest in the
income statement on a straight-line basis over the term of the lease.     expected pre-tax cash flows of the in-force business is capitalised in
Lease incentives paid are recognised in the income statement over         the balance sheet as an intangible asset. This is amortised over the
the period of the lease.                                                  anticipated lives of the related contracts which typically vary
                                                                          between 5 and 50 years.
(d) Investment properties related expenses
Expenses with regards to investment properties are treated as             (d) Other intangible assets
administrative expenses and are recognised when incurred.                 Customer relationships, distribution lists, brands and licences
                                                                          acquired are capitalised at cost, being the fair value of the
1.3.7 Impairment                                                          consideration paid. Software is capitalised on the basis of the costs
Assets, other than investment property and financial assets at fair       incurred to acquire and to bring into use. Direct costs of internally
value through the income statement, are reviewed at each reporting        generated software are capitalised as intangible assets.
date to assess whether there are any circumstances that might
indicate that they are impaired. If such circumstances exist,             Other intangible assets have finite useful lives and are carried at
impairment testing is performed and any resulting impairment              cost less accumulated amortisation and impairment. Amortisation is
losses are charged to the income statement. The carrying value            calculated using the straight-line method to allocate the cost over
is adjusted to the recoverable amount. Goodwill is tested annually        the estimated useful lives of the intangible asset as follows:
for impairment or more frequently if events or changes in                                                                  Years
circumstances indicate that the carrying value may be impaired.           Customer relationships                           3–12
                                                                          Distribution lists                               7–15
Impairment is determined by assessing the recoverable amount of           Brands                                          10–12
the asset, or in respect of goodwill, the cash generating unit to         Licences                                          3–5
which the goodwill relates. The recoverable amount is the higher          Software                                             3
of: the asset’s fair value less costs to sell, and value in use.
                                                                          Subsequent expenditure on other intangible assets is capitalised
Each cash generating unit to which goodwill is allocated represents       only when it increases the future economic benefits embodied in
the lowest level within the Group at which the goodwill is monitored      the specific asset to which it relates. All other expenditure is
for internal management purposes and is not larger than any of the        expensed as incurred.
Group’s primary or secondary segments used for segmental reporting.
                                                                          1.3.9 Property and equipment
1.3.8 Intangible assets
                                                                          (a) Owned assets
(a) Goodwill                                                              Land and buildings are initially recognised at cost and subsequently
Goodwill arising on business combinations is the future economic          measured at fair value. Revaluations are performed annually by
benefit arising from assets that are not capable of being individually    independent valuers, who hold a recognised and relevant
identified and separately recognised.                                     professional qualification and have recent experience in the location
                                                                          and category of properties being valued. Valuations are performed
(b) Investment management contracts                                       with sufficient regularity such that the carrying amount does not
Investment management contracts acquired separately are                   differ materially from that which would be determined using fair
measured on initial recognition at cost. The cost of investment           values at the balance sheet date. The fair value is the amount for
management acquired in a business combination is the fair value           which a property could be exchanged between knowledgeable and
as at the date of acquisition. Following initial recognition, contracts   willing parties in an arm’s length transaction.
are carried at cost less accumulated amortisation and any
accumulated impairment losses. The useful lives of investment             Properties occupied by the Group are held at fair value on the
management contracts are finite and are amortised as the revenue          basis of open market value at the date of revaluation. Revaluation
on those contracts is earned, which equates to a straight line basis      surpluses are credited to the revaluation surplus in shareholders’
over the estimated average contract term, depending on the nature         equity. Decreases that offset previous increases of the same
of the contract, with amortisation being charged to the income            asset are charged against the revaluation surplus directly to equity;
statement. The amortisation period is reviewed at each financial          all other decreases are charged to the income statement.
year-end. The estimated useful lives have been assessed as follows:

                                                 Years                    Equipment is recognised at cost less accumulated depreciation and
Investment trusts                                  10                     impairment losses.
Insurance                                          10
Institutional                                        4
Retail                                             10


82 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                 ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


1. Accounting policies continued                                             1.3.12 Financial assets
(b) Depreciation                                                             The Group classifies its investments as either financial assets at
Depreciation is charged so as to write off the cost of an asset net of       fair value through the income statement or loans. The classification
the estimated residual value, using the straight-line method, over the       depends on the purpose for which the investments were acquired
estimated useful life of each part of an item of property and                or originated.
equipment, as follows:
                                                                             Purchases and sales of financial assets are recognised on the date
                                                   Years
                                                                             the Group commits to purchase or sell the asset.
Motor vehicles                                      3–4
Computer hardware and related software              1–4
                                                                             A financial asset is derecognised when and only when the
Fixtures, fittings and office equipment            3–10
                                                                             contractual right to receive cash flows expires or when the asset,
                                                                             together with substantially all the risks and rewards of ownership,
Residual values and useful lives are reviewed at each financial year
                                                                             has been transferred.
end and adjusted if appropriate.

                                                                             (a) Financial assets at fair value through the income statement
(c) Disposal and derecognition
                                                                             All financial assets at fair value through the income statement, with
An item of property and equipment is derecognised upon disposal or
                                                                             the exception of derivative financial instruments are designated on
when no further future economic benefits are expected from its use.
                                                                             initial recognition. Derivative financial instruments are classified as
Any gain or loss arising on derecognition of the asset is included in
                                                                             fair value through the income statement as they are held for trading.
the income statement in the year the asset is derecognised.

                                                                             Financial assets are designated upon initial recognition at fair value
Any revaluation reserve relating to the particular asset being
                                                                             through the income statement as they are managed individually or
disposed of or no longer in use is transferred to retained earnings.
                                                                             together on a fair value basis.

1.3.10 Investment properties
                                                                             All financial assets at fair value through the income statement are
Investment properties comprise land and/or buildings that are not            measured at fair value. The fair value on initial recognition is
occupied by the Group and are held either to earn rental income or           generally the consideration given, excluding any transaction costs
for capital appreciation, or for both.                                       directly attributable to their acquisition. Movements in fair value are
                                                                             taken to the income statement in the period in which they arise.
In accordance with IAS 17 Leases, properties held by the Group
under operating leases are classified as investment properties when          (b) Loans
the properties otherwise meet the definition of investment properties.       Loans are financial assets with fixed or determinable payments that
                                                                             are not quoted in an active market. Loans are measured on initial
Investment property is initially included in the balance sheet at cost       recognition at the fair value of the consideration given plus
and subsequently measured at its fair value, which is supported by           incremental costs that are incurred on the acquisition of the
market evidence, based on annual valuations by independent valuers           investment. Subsequent to initial recognition, loans are measured
who hold a recognised and relevant professional qualification and            at amortised cost using the effective interest rate method.
have recent experience in the location and category of investment
property being valued. Movements in the fair value of investment             The amortised cost is the present value of estimated future cash
properties are taken to the income statement in the period in which          flows discounted at the original effective interest rate.
they arise.
                                                                             1.3.13 Deferred acquisition costs
1.3.11 Fair values of financial instruments
                                                                             For both insurance contracts and investment contracts with DPF,
Fair values of listed financial instruments are based on quoted bid          acquisition costs comprise all direct and indirect costs arising from
values for assets and offer price for liabilities at the close of business   writing the contracts, which are incurred during a financial period.
on the balance sheet date. For unlisted financial instruments, broker        Costs are deferred where their recovery has not been reflected in
or dealer price quotations or published bid values are obtained. If          the valuation of policyholder liabilities, but only to the extent that
prices are not readily available, the fair value is based on valuation       they are recoverable out of future margins.
techniques. Certain financial instruments, including financial
derivative instruments, are valued using pricing models that consider,       The rate of amortisation of deferred acquisition costs on such
among other factors, contractual and market prices, correlation, time        contracts is proportional to the future margins emerging in respect
value of money, credit risk, yield curve volatility factors and/or           of the related policies, over the lifetime of those policies.
prepayment rates of the underlying positions. Alternatively,
discounted cash flow techniques are used. Estimated future cash              For investment contracts without DPF, and for Asset Management
flows are based on management’s best estimates and the discount              service contracts, deferred acquisition costs comprise all
rate used is a market related rate for a similar instrument.                 incremental costs that are directly related to the writing of the
                                                                             contract, which are incurred during a financial period and are


                                                                                                  Friends Provident Annual Report & Accounts 2007 83
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                                  EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


1. Accounting policies continued                                              1.3.16 Insurance and other receivables
                                                                              Insurance and other receivables are recognised when due and
deferred to the extent that they are recoverable out of future
                                                                              measured on initial recognition at the fair value of the amount
margins. Such deferred acquisition costs are amortised on a
                                                                              receivable plus incremental costs. Subsequent to initial recognition,
straight-line basis over the lifetime of the contract.
                                                                              receivables are measured at amortised cost using the effective
                                                                              interest rate method.
1.3.14 Reinsurance
Amounts due to and from reinsurers are accounted for in                       1.3.17 Cash and cash equivalents
accordance with the relevant reinsurance contract. Premiums ceded             Cash and cash equivalents include cash in hand, deposits held at call
and claims reimbursed are individually presented on a gross basis.            with banks, other short-term highly liquid investments with original
                                                                              maturities of three months or less, and bank overdraft facilities.
Contracts that do not give rise to a significant transfer of insurance risk
to the reinsurer are considered financial reinsurance and are accounted       1.3.18 Financial liabilities
for and disclosed in a manner consistent with financial instruments.          The Group classifies financial liabilities as either financial liabilities at
                                                                              fair value through the income statement or financial liabilities carried
1.3.15 Taxation                                                               at amortised cost. Financial liabilities at fair value through the income
(a) Current tax                                                               statement, such as investment contracts, are designated on initial
The tax expense represents the sum of current year corporation tax,           recognition when one of the following criteria is satisfied:
the movement in deferred tax and adjustments to prior periods’ tax.           • It eliminates or significantly reduces an accounting mismatch
                                                                                  caused by financial assets and financial liabilities being measured
Taxation is based on profits and income for the period as determined              on a different basis.
in accordance with the relevant tax legislation, together with                • The financial liability contains or may contain an embedded
adjustments to provisions for prior periods. Tax payable is calculated            derivative.
using tax rates that have been enacted or substantively enacted by
the balance sheet date.                                                       A financial liability is recognised when, and only when, the Group
                                                                              becomes a party to the contractual provisions of a financial instrument.
The tax charge is analysed between tax in respect of income and
investment return on the policyholders’ interest in the with-profits          A financial liability is derecognised when, and only when, the
and linked fund assets, representing policyholders’ tax, with the             obligation specified in the contract is discharged, cancelled or expires.
balance being tax on equity holders’ investment return and profits,
representing shareholders’ tax.                                               1.3.19 Insurance contracts
                                                                              Insurance contract liabilities are determined separately for each life
(b) Deferred tax                                                              operation following an annual investigation of the long-term funds at
Deferred tax is the tax expected to be payable or recoverable on              31 December. For UK operations the liabilities are calculated in
temporary differences between the carrying amount of assets and               accordance with the relevant Financial Services Authority (FSA) rules
liabilities in the financial statements and the corresponding tax basis       contained in the Prudential Sourcebook for Insurers. For overseas
used in the computation of taxable profit. This is accounted for using        operations, insurance contract liabilities are calculated on recognised
the balance sheet liability method and the amount of deferred tax             actuarial principles, based on local regulatory requirements. The
provided is based on the expected manner of realisation or                    valuations are subject to adjustments to reflect relevant accounting
settlement of the carrying amount of the assets and liabilities.              requirements as set out below.
The tax rates used are the rates that have been enacted or
substantively enacted by the balance sheet date.                              For the conventional with-profits business in Friends Provident Life &
                                                                              Pensions Limited (FPLP), the liabilities to policyholders include both
Deferred taxation is recognised in the income statement for the               declared and constructive obligations for future bonuses not yet
period, except to the extent that it is attributable to a gain or loss        declared (excluding the shareholders’ share of future bonuses) and
that is recognised directly in equity. In this case the gain or loss is       include the cost of options and guarantees measured on a market
shown net of the attributable deferred tax. Deferred tax liabilities are      consistent basis. The basis of valuation does not recognise deferred
recognised for all taxable temporary differences and deferred tax             acquisition costs, but allows for future profits of non-profit and unit-
assets are recognised to the extent that it is probable that taxable          linked business written in the With-Profits Fund to be recognised.
future profits will be available against which deductible temporary
differences can be utilised. Any deferred tax assets not recognised           The calculation of the liabilities to policyholders in respect of
are separately disclosed.                                                     conventional with-profits contracts in Friends Provident Life
                                                                              Assurance Limited (FPLA) includes an implicit provision for future
The carrying amount of deferred tax assets is reviewed at each                regular bonuses, but not final bonuses, by means of a reduction in
balance sheet date and reduced to the extent that it is no longer             the valuation interest rate and an assessment of options and
probable that sufficient future taxable profits will be available to          guarantees on a deterministic basis.
allow all or part of the asset to be recovered.


84 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


1. Accounting policies continued                                           1.3.21 Fund for future appropriations (FFA)
                                                                           The FFA comprises all funds available for allocation, either to
The calculation of liabilities to policyholders for non-profit contracts
                                                                           policyholders or to shareholders, the allocation of which has not
includes explicit allowance for future expenses and allows for lapses
                                                                           been determined at the balance sheet date.
where appropriate.
                                                                           Within FPLP, the insurance and investment contracts liabilities allow
The Group applies shadow accounting in relation to certain
                                                                           for discretionary benefit allocations to the extent that they are
insurance contract liabilities, which are supported by owner
                                                                           allowed within current bonus practices. The FFA represents working
occupied properties, on which unrealised gains and losses are
                                                                           capital and the value of future transfers to shareholders’ from the
recognised within equity. Adjustments are made to the insurance
                                                                           With-Profits Fund in respect of discretionary bonuses for
contract provisions to reflect the movements that would have arisen
                                                                           conventional with-profits business.
if the unrealised gains and losses had been recognised in the
income statement. The corresponding change in the value of these
                                                                           Within FPLA, the FFA represents the value of future regular and final
balances is also recognised in equity.
                                                                           bonus payments to policyholders.

The Group carries out an annual liability adequacy test on its insurance
                                                                           1.3.22 Interest-bearing loans and borrowings
contract liabilities less related deferred acquisition costs and other
related intangible assets to ensure that the carrying amount of its        Borrowings are recognised initially at fair value, which is generally
liabilities is sufficient in the light of estimated future cash flows.     the cash consideration received, net of transaction costs incurred,
Where a shortfall is identified, an additional provision is made.          and subsequently stated at amortised cost. Any difference between
                                                                           the proceeds, net of transaction costs, and the redemption value is
1.3.20 Investment contracts                                                recognised in the income statement over the period of the
                                                                           borrowings, using the effective interest rate method.
Investment contracts are either unit-linked or contracts with DPF
(mainly unitised with-profits contracts).
                                                                           Convertible bonds that can be converted to share capital at the
                                                                           option of the holder, where the number of shares issued does not
A unit-linked investment contract is recognised at fair value through
                                                                           vary with changes in their fair value, are accounted for as compound
the income statement. The fair value is calculated as the number of
                                                                           financial instruments. Compound financial instruments are split and
units allocated to policyholders in each of the unit-linked funds
                                                                           the equity and liability components recorded separately. The equity
multiplied by the unit price of those funds at the balance sheet date.
                                                                           component of the convertible bonds is calculated on issue as the
The fund assets and liabilities used to determine the unit prices at
                                                                           excess of the issue proceeds over the present value of the future
the balance sheet date are valued on a basis that is consistent with
                                                                           interest and principal payments, discounted at the market rate of
their measurement basis in the consolidated Group balance sheet,
                                                                           interest applicable to similar liabilities that do not have a conversion
adjusted to take account of the effect on the liabilities of discounting
                                                                           option. The equity component is recognised and included in
for the time value of future tax on unrealised gains on assets held in
                                                                           shareholders’ equity, net of tax effects. The liability component is
the fund. Provision is made for renewal commissions at the
                                                                           recorded on an amortised cost basis until extinguished on
inception of an investment contract as intermediaries are not
                                                                           conversion or maturity of the bonds.
required to perform any service once the policy is incepted.
                                                                           1.3.23 Provisions
A contract with DPF is a contractual right held by a policyholder
to receive, as a supplement to guaranteed minimum payments,                A provision is recognised when the Group has a present legal or
additional payments:                                                       constructive obligation, as a result of a past event, which is likely to
• that are likely to be a significant portion of the total contractual     result in an outflow of resources and where a reliable estimate of
     payments, and                                                         the amount of the obligation can be made. If the effect is material,
• whose amount or timing is contractually at the discretion of             the provision is determined by discounting the expected future cash
     the issuer and that are contractually based on:                       flows at a pre-tax risk free rate and, where appropriate, the risks
     – the performance of a specified pool of contracts, or a              specific to the liability.
       specified type of contract, or
     – realised and/or unrealised investment returns on a specified        The Group recognises a provision for onerous contracts when the
       pool of assets held by the issuer, or                               expected benefits to be derived from the contracts are less than the
     – the profit or loss of the company that issues the contracts.        related unavoidable costs.

Investment contracts with DPF held within the FPLP and FPLA                1.3.24 Insurance payables, other payables and
with-profits funds (which are mainly unitised with-profits contracts)      deferred income
are measured on a basis that is consistent with a measurement
                                                                           Insurance and other payables are recognised when due and
basis for insurance contracts held within those funds.
                                                                           measured on initial recognition at the fair value of the consideration
                                                                           paid. Subsequent to initial recognition, payables are measured at
                                                                           amortised cost using the effective interest rate method.


                                                                                                Friends Provident Annual Report & Accounts 2007 85
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


1. Accounting policies continued                                          (b) Share based payment schemes
                                                                          The Company and certain subsidiary undertakings offer share based
Fees charged for services to be provided in future periods are deferred   payment schemes to employees of the Group, depending on
and recognised in the income statement on a straight line basis as        eligibility. The fair value of equity-settled share based payments is
the services are provided over the expected term of the contract.         measured at the grant date and expensed on a straight-line basis
                                                                          over the vesting period in the income statement. A corresponding
1.3.25 Employee benefits                                                  amount is credited to equity.

(a) Pension obligations                                                   At each balance sheet date, the Group revises its estimate of the
(i) Defined benefit schemes                                               number of options that are expected to become exercisable. It
Pension schemes are in operation for employees of certain                 recognises the impact of the revision of original estimates, if any, in
subsidiary undertakings. The principal schemes, to which the              the income statement, with a corresponding adjustment to equity
majority of employees belong, are of the funded defined benefit           over the remaining vesting period. The fair value is measured using
type with assets managed by F&C Asset Management plc (F&C),               scenario based modelling techniques that take into account the
a subsidiary undertaking. The schemes provide benefits based on           terms and conditions upon which these options were granted. The
final pensionable salary. The assets of the schemes are held in           amount recognised as an expense is adjusted to reflect the actual
separate trustee administered funds.                                      number of share options that vest, except where forfeiture is only
                                                                          due to share prices not achieving the threshold for vesting.
The pension asset and liability recognised in the balance sheet is the
present obligation of the employer, which is the estimated present        The dilutive effect of outstanding options is reflected in the
value of future benefits that employees have earned in return for         computation of diluted earnings per share.
their services in the current and prior years, less the value of the
plan assets in the schemes. The pension surplus is recognised to          For cash-settled schemes, the fair value of the share based payment
the extent it is recoverable through available reductions in future       is measured at the grant date and expensed over the vesting period
contributions. The discount rate applied to the employees’ benefits       in the income statement with a corresponding credit to liabilities.
is the appropriate AA rated corporate bond yield at the balance           The estimated fair value of cash-settled awards is remeasured at
sheet date. A qualified actuary performs the calculation annually         each reporting date until the payments are ultimately settled.
using the projected unit credit method.
                                                                          1.3.26 Share capital and dividends
The pension costs for the schemes are charged to the income
statement and consist of current service cost, past service cost,         Where either the Company or F&C has a holding in its own equity
interest cost on scheme liabilities, the effect of any settlements and    which has been classified as treasury shares, the consideration paid
curtailments, and the expected return on pension assets. Past             is deducted from reserves. Where such shares are subsequently
service costs are recognised in the income statement on a straight-       sold, reissued or otherwise disposed of, any consideration received
line basis over the period in which the increase in benefits vest.        is included in equity attributable to the Company’s equity holders,
                                                                          net of any directly attributable incremental transaction costs and the
The actuarial gains and losses, which arise from any new valuation        related tax effects.
and from updating the latest actuarial valuation to reflect conditions
at the balance sheet date, are taken to the statement of recognised       Dividends are recognised as an appropriation on the date declared by
income and expense for the period. The adjustment is shown net of         the Group’s directors or, if subject to approval, by the shareholders.
deferred taxation.

(ii) Defined contribution schemes                                         2. Use of estimates, assumptions and judgements
Contributions made to these schemes are charged to the income
statement as they become payable in accordance with the rules of          The Group makes estimates, assumptions and judgements in the
the scheme.                                                               application of critical accounting policies, that affect the reported
                                                                          amounts of assets and liabilities. Estimates, assumptions and
(iii) Other long-term employee benefits                                   judgements are continually evaluated and based on historical
Other long-term employee benefits are recognised at the discounted        experience and other factors, including expectations of future events
present value of the defined benefit obligation at the balance sheet      that are considered to be reasonable under the circumstances.
date. The obligation is calculated using the unit credit method.
                                                                          (a) Product classification
(iv) Termination benefits                                                 IFRS 4 requires contracts to be classified as either ‘insurance contracts’
Termination benefits are recognised as a liability and an expense         or ‘investment contracts’ based on the significance of insurance
when the Group terminates the employment of an employee before            risk present in the contract with consequential impacts on the
the normal retirement date.                                               accounting policies applied to the valuation of policyholder liabilities,
                                                                          deferral of acquisition costs and pattern of revenue recognition.




86 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


2. Use of estimates, assumptions and judgements                           The carrying value of goodwill is £733m (2006: £662m) and of other
continued                                                                 intangible assets is £723m (2006: £743m). Details of the testing of
                                                                          impairment performed during the year are contained in note 16.
(b) Liabilities arising from insurance contracts and investment
contracts with DPF                                                        (d) Provision for the review of mortgage endowment and other sales
The estimation of the ultimate liabilities of insurance contracts         The Group has made provision for the estimated cost and
or investment contracts with DPF arising is a critical accounting         compensation associated with the review of mortgage endowment
estimate. There are several sources of uncertainty that need to be        and other sales. These provisions are subject to considerable
considered in the estimation of the liabilities that the Group will       uncertainty and are influenced by external factors beyond the control
ultimately pay on maturity of the policies and on claims made.            of management. Although the provisions are regularly reviewed, the
                                                                          final outcome could be different from the provision established.
A number of assumptions are used to determine the liabilities of
insurance contracts or investment contracts with DPF, which contain       The total carrying value (including actuarial provisions) for the review
guarantees and options. The most significant assumptions are:             of mortgage endowment and other sales is £37m (2006: £63m).
• mortality, morbidity and persistency assumptions;
• for with-profits policies within FPLP, the stochastic model used        (e) Fair value determination of financial instruments at fair value
   to value liabilities is sensitive to risk-free rates, assumed asset    through the income statement
   volatilities and the assumed correlation between asset volatilities.   Financial assets are designated at fair value as they are managed on
   Risk-free rates are set in accordance with current market rates;       a fair value basis. Financial liabilities such as investment contracts
• for other policies, the valuation interest rate is the most             are designated at fair value to eliminate mismatch with
   significant economic assumption;                                       corresponding assets.
• for guaranteed annuity options (one of the principal guarantees
   written by the Group) the cost depends on assumptions such             Fair values are based on quoted bid prices for a specific instrument,
   as the level of policy discontinuance and the tax-free cash            or comparisons with other highly similar financial instruments, or the
   take-up rate;                                                          use of valuation models. Establishing valuations where there are no
• changes in assumptions behind the valuation techniques for              quoted bid prices inherently involves the use of judgement.
   assets that are not quoted in active markets could have a
   significant impact on the value of assets that are backing             Methods considered when determining fair values of unlisted shares
   insurance and investment contract liabilities.                         and other variable securities include discounted cash flow
                                                                          techniques, net asset valuation or carrying value.
The carrying value of insurance contracts liabilities is £13,607m
(2006: £13,762m) and investment contracts liabilities with DPF            The value of derivative financial instruments is estimated by applying
is £5,002m (2006: £5,700m).                                               valuation techniques, using pricing models or discounted cash flow
                                                                          methods. Where pricing models are used, inputs – including future
(c) Impairment testing                                                    dividends, swap rates and volatilities – based on market data at the
The Group is required to perform an annual impairment test of             balance sheet date are used to estimate derivative values. Where
goodwill. Other assets, excluding those assets held at fair value         discounted cash flow techniques are used, estimated future cash
through the income statement, are reviewed where there is an              flows and discount rates are based on current market swap rates.
indication of impairment. For most assets this requires the Group
to estimate future cash flows and discount these amounts using a          For units in unit trusts and shares in open ended investment
suitable rate which reflects the risk of those cash flows. In             companies, fair value is by reference to published bid-values.
projecting cash flows, the Group makes a number of assumptions
on matters which include, but are not restricted to:                      Participation in investment pools mainly relates to property
• Investment market conditions                                            investments. Property is independently valued in accordance with
• Sales and margins                                                       the Royal Institute of Chartered Surveyor’s guidelines on the basis
• Expenses                                                                of open fair values as at each year end.
• Policy/client lapses
• Discount rates                                                          The carrying amount of financial assets at fair value through the
• Terminal values                                                         income statement (excluding units in unit trusts and shares in open
                                                                          ended investment companies) that are not based on quoted bid
These assumptions are established using management’s best                 prices is £1,506m (2006: £1,835m). An analysis of financial assets
estimate of the likely outcome but with all assumptions there             by category is disclosed in note 21.
remains a degree of uncertainty as to the final results.
                                                                          The total amount of the change in fair value of financial assets
Management have determined that there are six segments for                estimated using a valuation technique that is recognised in the
impairment testing: UK Life & Pensions; Lombard; FPI;                     income statement during the year is a charge of £62m (2006: £98m).
Asset Management; and IFA groups Sesame and Pantheon Financial.



                                                                                               Friends Provident Annual Report & Accounts 2007 87
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


2. Use of estimates, assumptions and judgements                           from a reduction in net liabilities to policyholders of £138m
continued                                                                 (2006: £111m) and a write-down in DAC of £172m (2006: £78m).

(f) Staff pension schemes assumptions                                     • One-off basis change: Expenses
In assessing the pension benefit obligation, assumptions are              Estimated expenses of £20m per annum previously categorised
made as to the life expectancy of all current, deferred and retired       as development have been treated as maintenance, recognising
members, rates of increases of salaries and pensions, and interest        there will always be a recurring level of development costs not
and inflation rates. Material assumptions used and sensitivities are      related to new markets or products. The impact on profit before
explained in detail in note 10.                                           tax is a decrease of £99m, arising from an increase in net liabilities
                                                                          to policyholders of £51m and a write-down in DAC by £48m
The carrying value of the net pension liability of the Group is £22m      through expenses.
(2006: £77m), comprising of a surplus of £5m in the FP pension
scheme and a deficit of £27m in the F&C schemes.                          • One-off basis change: Lapses
                                                                          Lapse assumptions for certain unit linked policies have been
(g) Share options and share based payments                                increased to bring them in line with most recently observed
In assessing the cost of share options expected to vest, estimates are    experience, particularly on policy durations of more than 5 years.
made of future staff leaver numbers on the basis of past experience,      The impact on profit before tax is a decrease of £13m arising from
and of the fair value of the options using assumptions including          a write-down in DAC through expenses.
expected future levels of share price volatility and dividend yield.
                                                                          • Taxation of International profits
The amount charged to the income statement in respect of share            Taxation of profits generated by subsidiary company Friends
based payments is £21m (2006: £22m).                                      Provident International Limited have been provided for at a rate of
                                                                          28% (previously nil), being the UK corporation tax rate, reflecting the
(h) Deferred tax assets                                                   value of those profits to the Group’s shareholders, should they be
In assessing deferred tax assets, an estimate of probable future          repatriated to the UK.
taxable profits is made, against which the temporary differences,
being the carry forward of excess tax expenses, and tax losses are        The impact of this tax rate assumption change is a deferred tax
utilised. These involve management’s best estimate based on past          charge of £24m.
profit experience, adjusted for possible future deviations that
management consider might occur.                                          3. Segmental information

The carrying value of deferred tax assets is £55m (2006: £97m).           (a) Summary
                                                                          Segment information is presented in respect of the Group’s
(i) Changes in accounting estimates                                       business and geographical segments. The primary reporting format,
• One-off basis change: FSA Policy Statement (PS) 06/14                   based on the Group’s management and internal reporting structure,
     Prudential changes for insurers                                      is business segments.
Regulatory reserving rule changes arising from the adoption of the
Prudential Requirements for Insurers (Amendment) instrument 2006          Inter-segment pricing is determined on an arm’s length basis.
(2006/62) have been applied to the valuation of the remaining Life        Segment results, assets, and liabilities, include items directly
Protection Insurance contracts not covered in 2006, namely Income         attributable to a segment, as well as those that can be allocated on a
Protection business and other protection business reinsured on a          reasonable basis. Segment capital expenditure includes purchases of
risk premium basis. PS06/14 permits negative reserves to be               property and equipment, investment properties and intangible assets.
recognised to the extent they offset positive reserves within the
same fund, reducing overall liabilities. The impact of this second        Business segments (primary segment)
stage of PS06/14 has been restricted due to insufficient positive         The Group comprises the following main business segments:
reserves being available to offset against the negative reserves on       • UK Life & Pensions (including corporate items)
Life Protection contract liabilities.                                     • International Life & Pensions
                                                                          • Asset Management (including F&C’s Managed Pension Fund
Negative reserves represent all discounted future cash flows, including      business)
the recovery of acquisition costs, less a margin for prudence. As a
result, any related Deferred Acquisition Costs (DAC) will be fully        Geographical segments (secondary segment)
amortised where negative reserves are recognised in full. Where full      In presenting information on the basis of geographic segments,
benefit cannot be taken for negative reserves, the cash flows relating    segment revenue is based on the geographical location of
to the recovery of DAC will emerge out of future margins and DAC will     customers. Segment assets are based on the geographical location
be restricted to the level of these future margins.                       of the assets. The Group has defined three geographical areas:
                                                                          • UK
The impact of completing the second stage of PS06/14 on profit            • Europe
before tax is a decrease of £34m (2006: increase of £33m), arising        • Rest of the world


88 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


3. Segmental information continued

(b) Business segment information (primary segment information)
(i) Revenue and expenses

                                                                           International                 Elimination of
                                                             UK Life &            Life &           Asset inter-segment
                                                             Pensions          Pensions      Management        amounts                  Total
Year ended 31 December 2007                                        £m                £m              £m             £m                    £m

Gross earned premiums on insurance and
  investment contracts                                            3,955            2,802                97                 -            6,854
Less investment contracts premiums (i)                           (2,974)          (2,789)              (97)                -           (5,860)
Gross earned premiums                                               981               13                  -                -              994
Less premiums ceded to reinsurers                                (1,779)              (1)                 -                -           (1,780)
Net earned premiums                                                (798)              12                  -                -             (786)
Fee and commission income and
  income from service activities                                    311              180               276               (48)             719
Investment income                                                 1,755              754                64                 -            2,573
Total revenue                                                     1,268              946               340               (48)           2,506
Other income (ii)                                                    49                 -                 -                -               49
Net claims and benefits paid                                      1,406                1                  -                -            1,407
Movement in insurance and investment contracts liabilities       (1,156)             748                42                 -             (366)
Transfer to fund for future appropriations                           42                 -                 -                -               42
Movement in net assets attributable to unit holders                  42                 -                 -                -               42
Acquisition expenses                                                732               77                13                 -              822
Administrative and other expenses                                   270              117               242               (48)             581
Finance costs                                                       119                4                18                 -              141
Total claims, benefits and expenses                               1,455              947               315               (48)           2,669
Share of profits of associates and joint venture                       -                -                1                 -                 1
(Loss)/profit before tax from continuing operations                (138)               (1)              26                 -             (113)
Policyholder tax                                                    (22)                -                (1)               -              (23)
Shareholder tax                                                      69                3                 (6)               -               66
Segmental result after tax                                          (91)               2                19                 -              (70)
Inter segment revenue/(expense)                                     (48)                -               48                 -                 -


(i) Accounted for as deposits under IFRS
(ii) Compensation received (excluding related costs) resulting from the terminated merger with Resolution plc.




                                                                                              Friends Provident Annual Report & Accounts 2007 89
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                       EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


3. Segmental information continued


                                                                          International                   Elimination of
                                                             UK Life &          Life &           Asset    inter-segment
                                                             Pensions        Pensions      Management           amounts          Total
Year ended 31 December 2006                                        £m               £m             £m                £m           £m

Gross earned premiums on insurance and
  investment contracts                                          3,709            2,769            199                  -        6,677
Less investment contracts premiums (i)                          (2,741)         (2,757)           (199)                -        (5,697)
Gross earned premiums                                             968               12               -                 -          980
Less premiums ceded to reinsurers                                  (82)              (2)             -                 -           (84)
Net earned premiums                                               886               10               -                 -          896
Fee and commission income and
  income from service activities                                  148              198            258               (39)          565
Investment income                                               2,934              640            123                  -        3,697
Total revenue                                                   3,968              848            381               (39)        5,158
Other income                                                         -                -              -                 -             -
Net claims and benefits paid                                    1,542                2               -                 -        1,544
Movement in insurance and investment contracts liabilities      1,176              641            101                  -        1,918
Transfer to fund for future appropriations                         19                 -              -                 -           19
Movement in net assets attributable to unit holders               131                 -              -                 -          131
Acquisition expenses                                              329               72              11                 -          412
Administrative and other expenses                                 240               68            287               (39)          556
Finance costs                                                      72               15               1                 -           88
Total claims, benefits and expenses                             3,509              798            400               (39)        4,668
Share of profits of associates and joint venture                     1                -              -                 -             1
Profit before tax from continuing operations                      460               50             (19)                -          491
Policyholder tax                                                 (124)                -              -                 -         (124)
Shareholder tax                                                    45                1               8                 -           54
Segmental result after tax                                        381               51             (11)                -          421
Inter segment revenue/(expense)                                    (39)               -             39                 -             -


(i) Accounted for as deposits under IFRS.




90 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                            ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


3. Segmental information continued

(ii) Underlying profit
                                                                                             International
                                                                               UK Life &            Life &           Asset
                                                                               Pensions          Pensions      Management               Total
Year ended 31 December 2007                                                          £m                £m              £m                 £m

(Loss)/profit before tax from continuing operations                                  (138)               (1)              26             (113)
Policyholder tax                                                                      (22)                -               (1)             (23)
Returns on Group-controlled funds attributable to third parties                        23                 -                -               23
(Loss)/profit before tax excluding profit generated within
  policyholder funds                                                                 (137)               (1)              25             (113)
Non-recurring items (i)                                                               (49)                -               11              (38)
Amortisation of Asset Management acquired intangible assets                              -                -               42               42
Amortisation of acquired present value of in-force business                             9               17                 -               26
Amortisation of Life & Pensions acquired intangible assets                              3                 8                -               11
Interest payable on STICS                                                             (52)                -                -              (52)
Short-term fluctuations in investment return                                           81                (3)               -               78
Underlying (loss)/profit before tax                                                  (145)              21                78              (46)
Tax on underlying (loss)/profit                                                                                                            39
Minority interest in underlying (loss)/profit                                                                                             (24)
Underlying loss after tax attributable to ordinary
  shareholders of the parent                                                                                                              (31)
Earnings per share
Underlying loss per share (pence)                                                                                                         (1.4)


(i) Non-recurring items
    Life & Pensions items include a net credit of £34m (2006: £nil) being compensation received (less related costs) relating to the terminated
    merger with Resolution plc, a credit of £15m (2006: credit of £3m) in respect of the cost to shareholders of mortgage endowment
    complaints and historic business reviews, £nil (2006: credit of £1m) in respect of the review conducted into pension transfers and opt-
    outs and £nil (2006: charge of £2m) arising from the closure of the Appointed Representative sales channel.

   Asset Management items include costs of £nil (2006: £10m) incurred integrating, rationalising and reorganising the Asset Management
   business following the acquisition of F&C Group (Holdings) Limited, a charge of £7m (2006: £12m) in respect of issuing shares to
   employees under the 2004 Reinvestment Plan, £nil (2006: £3m) compensation received on loss of an investment management contract
   and a charge of £4m (2006: £nil) in respect of a provision for VAT repayable to investment trusts.




                                                                                              Friends Provident Annual Report & Accounts 2007 91
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


3. Segmental information continued


                                                                                             International
                                                                              UK Life &            Life &          Asset
                                                                              Pensions          Pensions     Management             Total
Year ended 31 December 2006                                                         £m                 £m            £m              £m

Profit/(loss) before tax from continuing operations                                 460                50            (19)           491
Intersegment loan interest                                                           12                  -           (12)               -
Policyholder tax                                                                   (124)                 -             -            (124)
Returns on Group-controlled funds attributable to third parties                    (104)                 -             -            (104)
Profit/(loss) before tax excluding profit generated within
  policyholder funds                                                                244                50            (31)           263
Non-recurring items                                                                   (2)                -           19               17
Amortisation of Asset Management acquired intangible assets                            -                 -           43               43
Amortisation of acquired present value of in-force business                           9                16              -              25
Amortisation of Life & Pensions acquired intangible assets                             -                7              -               7
Impairment of Asset Management acquired intangible assets                              -                 -           58               58
Interest payable on STICS                                                            (52)                -             -             (52)
Short-term fluctuations in investment return                                         41                (2)             -              39
Underlying profit before tax                                                        240                71            89             400
Tax on underlying profit                                                                                                               6
Minority interest in underlying profit                                                                                               (29)
Underlying profit after tax attributable to ordinary
  shareholders of the parent                                                                                                        377
Earnings per share
Underlying earnings per share (pence)                                                                                               17.9


(iii) Assets and liabilities

                                                                           International                Elimination of
                                                              UK Life &           Life &          Asset inter-segment
                                                              Pensions         Pensions     Management        amounts              Total
Year ended 31 December 2007                                         £m               £m             £m             £m                £m

Segment assets                                                    42,738         15,487            2,038             (76)         60,187
Investment in associates and joint venture                           14                -                 -             -              14
Total assets                                                      42,752         15,487             2,038            (76)         60,201
Total liabilities                                                 39,457         14,927             1,569            (76)         55,877
Other segment information:
  Capital expenditure                                               195                6                3              -            204
  Depreciation                                                        5                1                4              -              10
  Amortisation                                                       26              26                43              -              95
  Impairment losses (i)                                              17               3                  -             -              20




92 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                        ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued



3. Segmental information continued


                                                                           International                     Elimination of
                                                             UK Life &           Life &          Asset      inter-segment
                                                             Pensions         Pensions     Management             amounts              Total
Year ended 31 December 2006                                        £m                £m            £m                   £m              £m

Segment assets                                                  40,182           12,243            2,126               (77)          54,474
Investment in associates and joint venture                          15                 -                -                 -              15
Total assets                                                    40,197           12,243            2,126               (77)          54,489
Total liabilities                                               36,991           11,730            1,680               (77)          50,324
Other segment information:
  Capital expenditure                                              313                4                5                  -             322
  Depreciation                                                       7                 -               3                  -              10
  Amortisation                                                      24               24               44                  -              92
  Impairment losses (i)                                               -                -              58                  -              58


(i) Comprises impairment losses on acquired intangible assets £nil (2006: £58m) and impairment losses on internally generated intangible
    assets £20m (2006: £nil).



(c) Geographical segmental information (secondary segment information)

                                                                                                                   Rest of
                                                                                    UK           Europe         the world             Total
Year ended 31 December 2007                                                         £m              £m                £m                £m

Gross earned premiums                                                               981               13                  -             994
Fee and commission income and income from service activities                        485              177                57              719
Revenue from external customers                                                   1,466              190                57            1,713
Investment income                                                                                                                     2,573
Less premiums ceded to reinsurers                                                                                                    (1,780)
Total revenue                                                                                                                         2,506
Total assets                                                                     44,351           10,983            4,867            60,201
Capital expenditure                                                                 196                7                 1              204




                                                                                            Friends Provident Annual Report & Accounts 2007 93
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                    EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


3. Segmental information continued


                                                                                           Rest of
                                                                  UK         Europe      the world             Total
Year ended 31 December 2006                                       £m            £m            £m                £m

Gross earned premiums                                             968            12               -            980
Fee and commission income and income from service activities      274           215             76             565
Revenue from external customers                                 1,242           227             76            1,545
Investment income                                                                                             3,697
Less premiums ceded to reinsurers                                                                               (84)
Total revenue                                                                                                 5,158
Total assets                                                   43,238         7,361          3,890           54,489
Capital expenditure                                               316             6               -            322




4. Net earned premiums


                                                               Gross earned premiums    Premiums        Total net
                                                                                         ceded to         earned
                                                               Single       Regular     reinsurers     premiums
Year ended 31 December 2007                                       £m            £m             £m             £m

Protection                                                          3           332            (93)            242
Investment                                                           -          278              (1)           277
Individual pensions                                                 7            13              (2)             18
Group pensions                                                       -           10               -              10
Annuities                                                         349             2         (1,684)          (1,333)
Total                                                             359           635         (1,780)            (786)



                                                               Gross earned premiums     Premiums        Total net
                                                                                          ceded to         earned
                                                                Single       Regular     reinsurers     premiums
Year ended 31 December 2006                                        £m           £m              £m             £m

Protection                                                          1           301            (81)            221
Investment                                                           -          315              (1)           314
Individual pensions                                                10            12               -              22
Group pensions                                                       -           19              (1)             18
Annuities                                                         322              -             (1)           321
Total                                                             333           647            (84)            896




94 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


5. Investment income

(a) Net investment return

                                                                                                                      2007              2006
                                                                                                                       £m                £m

Interest income                                                                                                      1,009                954
Expected return on pension scheme assets net of interest cost                                                             8                 9
Dividend income                                                                                                        632                678
Rental income                                                                                                          139                127
Net realised and unrealised gains on assets at fair value:
  Financial assets designated on initial recognition                                                                 1,032              1,803
  Investment properties                                                                                                (190)              273
  Financial derivative instruments                                                                                      (57)             (147)
Total net investment return                                                                                          2,573              3,697



(b) Longer-term investment return – underlying profit
The longer-term investment return used in arriving at underlying profit before tax is calculated in respect of equity and fixed interest
investments by applying the longer-term rate of return for each investment category to the quarterly weighted average of the corresponding
assets, after adjusting for the effect of any short-term market movements. The longer-term rates of return are based on assumed gilt and
cash returns, adjusted where appropriate to reflect the additional risks associated with the type of investment. The directors have determined
the longer-term rates of investment return to be as follows:


                                                                                                                      2007              2006
                                                                                                                        %                 %

Equities                                                                                                               8.00              7.25
Government fixed interest                                                                                              5.00              4.25
Other fixed interest                                                                                                   5.50              4.75



(c) Sensitivity of longer-term investment return – underlying profit

                                                                                                                      2007              2006
                                                                                                                       £m                £m

Longer-term investment return:                                                                                           62                43
  After the impact of a 1% increase in the longer-term rates of investment return                                        85                62
  After the impact of a 1% decrease in the longer-term rates of investment return                                        39                26



(d) Comparison of longer-term and actual investment return – underlying profit
                                                                                             1 January 2003 to            1 January 2002 to
                                                                                             31 December 2007            31 December 2006
                                                                                                           £m                           £m

Actual investment return attributable to shareholders                                                        403                         171
Longer-term investment return                                                                                (340)                      (378)
Cumulative surplus/(deficit) of actual return over longer-term returns                                         63                       (207)




                                                                                             Friends Provident Annual Report & Accounts 2007 95
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


6. Net claims and benefits paid

                                                          Gross      Amounts         Total net
                                                     claims and     receivable     claims and
                                                        benefits          from        benefits
                                                           paid     reinsurers           paid
Year ended 31 December 2007                                 £m              £m             £m

Protection                                                  168            (52)           116
Investment                                                  762              (2)          760
Individual pensions                                         160               -           160
Group pensions                                              173              1            174
Annuities                                                   319           (122)           197
Total                                                     1,582           (175)          1,407




                                                          Gross       Amounts        Total net
                                                     claims and      receivable    claims and
                                                        benefits          from        benefits
                                                           paid      reinsurers           paid
Year ended 31 December 2006                                 £m              £m             £m

Protection                                                  145            (42)           103
Investment                                                  782              (1)          781
Individual pensions                                         180               -           180
Group pensions                                              179               -           179
Annuities                                                   301               -           301
Total                                                     1,587            (43)          1,544




7. Acquisition expenses

                                                                          2007            2006
                                                                           £m              £m

Commission                                                                 355             302
Other acquisition expenses                                                 393             229
Deferral                                                                  (274)           (334)
Amortisation                                                               348             215
Net acquisition expenses                                                   822             412




96 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                        ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


8. Administrative and other expenses

(a) Analysis of administrative and other expenses

                                                                                                                    2007              2006
                                                                                                                     £m                £m

Amortisation of intangible assets                                                                                      95                79
Impairment of intangible assets                                                                                        20                58
Employee remuneration                                                                                                205                184
Share based payments:
  Equity-settled transactions                                                                                          19                20
  Cash-settled transactions                                                                                             2                 2
Auditors’ remuneration                                                                                                  4                 9
Investment expenses and charges (i)                                                                                    72                56
Investment property expenses                                                                                            6                 5
Operating lease rentals:
  Land and buildings                                                                                                   21                21
  Equipment                                                                                                             6                 4
Renewal commission                                                                                                     18                22
Office costs                                                                                                           22                12
Movement in provision for past sales                                                                                    4                 8
Sundry administrative expenses                                                                                         87                76
Total administrative and other expenses                                                                              581                556


(i) Following an analysis of expense classifications a reallocation of 2006 costs has occurred moving £62m from the administration expenses
    line to the movement in investment contracts line.

Sub-lease rentals of £3m (2006: £2m) were received during the year.




                                                                                           Friends Provident Annual Report & Accounts 2007 97
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


8. Administrative and other expenses continued

(b) Auditors’ remuneration
At the Company’s Annual General Meeting held on 24 May 2007, the shareholders approved the reappointment of KPMG Audit Plc as auditor
to the Company and subsidiaries. The following tables give an analysis of the total fees excluding VAT in respect of services provided to the
Group. Information concerning the auditors’ appointment process is given in the Corporate Governance Report on page 59.

                                                                                           International
                                                                              UK Life &           Life &          Asset
                                                                              Pensions         Pensions     Management                Total
Fees for the year ended 31 December 2007                                            £m               £m             £m                  £m

Fees paid to KPMG
Statutory audit fees                                                                 0.4              0.1              0.4              0.9
Subsidiary and pension scheme audit fees                                             1.2                -              0.2              1.4
Total audit fees                                                                     1.6              0.1              0.6              2.3
Other services supplied pursuant to such legislation                                   -                -              0.1              0.1
Other services relating to taxation                                                    -                -              0.1              0.1
Services relating to information technology                                          0.1                -                -              0.1
Services relating to corporate finance transactions                                  1.1                -                -              1.1
All other services                                                                     -                -              0.1              0.1
Total KPMG fees                                                                      2.8              0.1              0.9              3.8


KPMG Audit Plc is the auditor of the principal pension scheme of the Group, the Friends Provident Pension Scheme (FPPS). Fees paid to
KPMG Audit Plc in 2007 in respect of the audit of FPPS amounted to £32,000 (2006: £29,000).

Corporate items of £1.7m (2006: £1.6m) are included within UK Life & Pensions.

IFA groups Sesame and Pantheon Financial which were acquired during the year have temporarily retained their pre-acquisition auditors for
the 2007 year end.

PricewaterhouseCoopers LLP are auditors of Sesame and were paid £0.3m in audit related fees and, £0.03m in other fees. Deloitte and
Touche LLP are the auditors of Pantheon Financial and were paid £0.06m in audit fees and £0.01m in other fees.




98 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                 ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


8. Administrative and other expenses continued

                                                                   International
                                                       UK Life &         Life &           Asset
                                                       Pensions        Pensions     Management                Total
Fees for the year ended 31 December 2006                     £m              £m             £m                 £m

Fees paid to KPMG
Statutory audit fees                                         0.3               -                 -              0.3
Subsidiary and pension scheme audit fees                     0.8            0.1               0.5               1.4
Other audit fees                                             0.2               -              0.1               0.3
Total audit fees                                             1.3            0.1               0.6               2.0
Other services supplied pursuant to such legislation         0.2               -              0.1               0.3
Services relating to information technology                    -               -              0.6               0.6
Services relating to recruitment and remuneration              -               -              0.1               0.1
All other services                                             -               -              0.1               0.1
Total KPMG fees                                              1.5            0.1               1.5               3.1
Fees paid to Ernst & Young
Other services supplied pursuant to such legislation           -               -              0.5               0.5
Other services relating to taxation                            -               -              0.4               0.4
Services relating to information technology                  0.8               -                 -              0.8
All other services                                           4.4               -              0.1               4.5
Total Ernst & Young fees                                     5.2               -              1.0               6.2
Total fees                                                   6.7            0.1               2.5               9.3




                                                                   Friends Provident Annual Report & Accounts 2007 99
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                        EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


9. Employee remuneration

(a) Aggregate remuneration
The aggregate remuneration in respect of employees, including executive directors, was as follows:
                                                                                                                   2007             2006
                                                                                                                    £m               £m

Wages and salaries                                                                                                   242                216
Social security costs                                                                                                 24                 21
Pension costs                                                                                                         35                 30
Share based payments expenses                                                                                         21                22
Total remuneration                                                                                                   322                289



(b) Average number of employees
The average number of employees, including executive directors, employed by the Group was as follows:
                                                                                                                   2007             2006
                                                                                                                    No.              No.

UK Life & Pensions                                                                                                 4,142           3,548
International Life & Pensions                                                                                        636                669
Asset Management                                                                                                     901                855
Average number of employees                                                                                        5,679           5,072



(c) Directors’ emoluments
Information concerning individual directors’ emoluments and transactions is given on pages 64 to 72 of the Remuneration Report of the
Board. Directors’ interests in the share capital of Friends Provident plc and F&C Asset Management plc are shown in note 43.




10. Staff pension schemes

(a) Introduction
The Group operates several defined benefit schemes: the Friends Provident Pension Scheme (FPPS), to which the majority of the Group’s
UK Life & Pensions employees belong, and various schemes operated by F&C. In addition, defined contribution schemes are operated by FP
(see 10 (c)(x)), F&C, Friends Provident International Limited, Pantheon Financial Limited and Sesame Group Limited. Lombard does not
operate a pension scheme.

(b) Total schemes
The pension surplus and deficits are recognised on the balance sheet gross of deferred tax.




100 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                          ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

                                                                                                                   2007              2006
                                                                                                                    £m                £m

Surplus in FPPS                                                                                                        5                  -
Group pension surpluses included in insurance and other receivables                                                    5                  -
Deferred tax                                                                                                          (1)                 -
Net pension surplus                                                                                                    4                  -
Deficit in FPPS                                                                                                         -              (31)
Deficit in the F&C schemes                                                                                           (27)              (46)
Group pension deficits included in provisions                                                                        (27)              (77)
Deferred tax                                                                                                           8               23
Net pension deficits                                                                                                 (19)              (54)
Analysis of net pension asset/(liability)
FPPS                                                                                                                   4               (22)
F&C schemes                                                                                                          (19)              (32)
                                                                                                                     (15)              (54)
Amounts recognised in the income statement
FPPS                                                                                                                 (17)              (14)
F&C schemes                                                                                                           (5)                (4)
                                                                                                                     (22)              (18)
Amounts recognised in the statement of recognised income and expense
FPPS                                                                                                                  32               (12)
F&C schemes                                                                                                           11                 2
Deferred tax                                                                                                         (13)                3
                                                                                                                      30                 (7)



(c) Friends Provident Pension Scheme
The FPPS is a UK defined benefit scheme to which the majority of the Group’s UK Life & Pensions employees belong. The scheme’s assets,
which are administered by F&C, are held under the control of the Trustee and used to secure benefits for the members of the Scheme and
their dependents in accordance with the Trust Deed and Rules.

The Trustee board consists of a Chairman who is appointed by the employer and 8 additional directors of which 4 are employer appointed
directors, 3 member selected directors and 1 pensioner selected director.

(i) Principal assumptions used by the Scheme Actuary
                                                                                                                   2007              2006
                                                                                                                     %                 %

Inflation assumption                                                                                                3.53             3.02
Rate of increase in salaries*                                                                                       3.50             3.50
Rate of increase in pensions in payment                                                                             3.40             3.02
Discount rate                                                                                                       5.51             5.02


* Plus allowance for salary scale increases




                                                                                         Friends Provident Annual Report & Accounts 2007 101
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(ii) Mortality assumptions
Mortality assumptions for pensioners are based on the appropriate 2000 series mortality tables (2006: 1992 series) published by the
Continuous Mortality Investigations (CMI) in 2006. In addition, allowance is made for future improvements in mortality according to each
individual’s year of birth through the use of the ‘medium cohort’ projections (with certain amendments) published by the CMI in 2002. The
amendments are to introduce a minimum annual rate of improvement in future mortality - for males this is assumed to be 1% pa and for
females 0.75% pa.

The mortality assumptions provide the following average life expectancies of members retiring at the age of 60:

                                                                                                                        2007            2006

Expected age at death of future male pensioner                                                                            89                88
Expected age at death of future female pensioner                                                                          90                90
Expected age at death of current male pensioner                                                                           87                87
Expected age at death of current female pensioner                                                                         89                90


The present value of providing an annuity from the age of 60, based on the above life expectancies, for every one pound of pension
accumulated, is as follows:

Cost of annuities                                                                                                       2007            2006
                                                                                                                           £               £

Male annuity                                                                                                           24.67            24.68
Female annuity                                                                                                         23.45            23.81


These rates assume a monthly payments model with a discount rate of 5.51% (2006: 5.02%). The rates also assume two thirds of the
members’ benefit will be paid to the spouse, a 5-year guarantee is provided and pensions in excess of the Guaranteed Minimum Pension will
increase by 3.40% (2006: 3.02%) per annum.


                                                                                                                     2007              2006
                                                                                                                % of total         % of total
                                                                                                              membership         membership

Active members                                                                                                            23                24
Deferred members                                                                                                          56                56
Pensioners                                                                                                                21                20
                                                                                                                         100              100


The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

Assumption                                                           Change in assumption                         Impact on scheme liabilities

Inflation                                                            Increase/decrease by 0.5%                    Decrease/increase by 2.4%
Salaries                                                             Increase/decrease by 0.5%                    Decrease/increase by 1.7%
Pensions                                                             Increase/decrease by 0.5%                    Decrease/increase by 5.9%
Discount rate                                                        Increase/decrease by 0.5%                    Decrease/increase by 9.9%
Rate of mortality                                                    Increase/decrease by 1 year                  Increase/decrease by 2.5%




102 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                          ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(iii) Changes in the present value of obligations of defined benefit scheme
                                                                                                                     2007              2006
                                                                                                                      £m                £m

Present value of obligations at 1 January                                                                             942               907
Interest cost                                                                                                           48               43
Current service cost                                                                                                    25               23
Contributions by plan participants                                                                                       1                 3
Actuarial gains                                                                                                        (18)               (9)
Benefits paid                                                                                                          (27)              (25)
Present value of obligations at 31 December                                                                           971               942


(iv) Analysis of defined benefit obligations
                                                                                                                     2007              2006
                                                                                                                      £m                £m

Wholly or partly funded plans                                                                                         971               942


The profile of the obligations is analysed as follows:
                                                                                                                     2007              2006
                                                                                                                      £m                £m

Active members                                                                                                        337               324
Deferred members                                                                                                      296               291
Pensioners                                                                                                            338               327
                                                                                                                      971               942


(v) Changes in present value of defined benefit plan assets
                                                                                                                     2007              2006
                                                                                                                      £m                £m

Fair value of plan assets at 1 January                                                                                911               888
Expected return on plan assets                                                                                          56               52
Actuarial gains/(losses)                                                                                                14               (21)
Employer contributions                                                                                                  21               14
Contributions by plan participants                                                                                       1                 3
Benefits paid                                                                                                          (27)              (25)
Fair value of plan assets at 31 December                                                                              976               911


Included within the fair value of plan assets at 31 December 2007 are investments in internal linked funds of £55m (2006: £49m).




                                                                                           Friends Provident Annual Report & Accounts 2007 103
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                      EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued




10. Staff pension schemes continued

(vi) Assets in the defined benefit scheme and the expected rate of return
                                                                               Expected rate of return                     Value
                                                                                 2007            2006              2007            2006
                                                                                   %               %                £m              £m

Fixed interest bonds                                                                    -         5.02                -              64
Index-linked bonds                                                                      -         5.02                -              31
Equities                                                                          7.32            7.00             356             523
Derivatives                                                                             -         5.02                -             14
Liability Driven Investment pools                                                 5.51            5.02             460             256
Cash                                                                              3.82            4.00             160              23
Total market value of assets                                                                                       976             911
Present value of scheme liabilities                                                                                (971)           (942)
Surplus/(deficit) in the scheme                                                                                       5             (31)


The expected return on net pension scheme assets is calculated using the assumptions and the market value of pension scheme assets as
stated in the table above for the preceding year.



(vii) Amounts recognised in the income statement in respect of defined benefit scheme
                                                                                                                   2007            2006
                                                                                                                    £m              £m

Current service costs                                                                                               (25)            (23)
Interest cost                                                                                                       (48)            (43)
Expected return on plan assets                                                                                      56              52
Total amounts recognised in the income statement                                                                    (17)            (14)
Actual return on plan assets                                                                                        70              31



(viii) Amounts recognised in the statement of recognised income and expense in respect of defined benefit scheme
                                                                                                                   2007            2006
                                                                                                                    £m              £m

Actuarial gains/(losses) recognised in the year                                                                     32              (12)




104 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued




10. Staff pension schemes continued

(ix) History of experience gains and losses of defined benefit scheme
                                                                     2003*             2004               2005             2006            2007
                                                                      £m                £m                 £m               £m              £m

Present value of defined benefit obligation                           (609)             (706)             (907)             (942)           (971)
Fair value of plan assets                                              603              665                848              911              976
Surplus/(deficit)                                                        (6)             (41)               (59)             (31)                 5
Difference between the expected and actual return on scheme assets
Amounts                                                                 61                64               157               (21)             14
Percentage of closing scheme assets                                     10%               10%               19%               (2)%                1%
Experience gains and losses on scheme liabilities
Amount                                                                 (11)               (8)                (7)              (4)             24
Percentage of the present value of the scheme liabilities                (2)%             (1)%               (1)%               -             (2)%
Total amount recognised in the statement of recognised income and expense
Amount                                                                  26                (6)                (9)             (12)             32
Percentage of the present value of the scheme liabilities                4%               (1)%               (1)%             (1)%                3%


* The history before 1 January 2004, the date of adoption of IFRS, is prepared on a UK GAAP basis.

(x) Future funding
The most recently completed triennial actuarial valuation of FPPS was performed by an independent actuary and was carried out as at
30 September 2005. From 1 July 2007 it has been decided to close the scheme to new members and existing members have been asked
to increase their contributions of 3% by 1% per annum until 2010 if they wish to continue to retire at the age of 60, or reduce their
contributions from 3% to 2% and increase their normal retirement age to 65. Friends Provident has agreed to increase its contributions from
15% to 20%. A new defined contribution plan has been introduced for new employees.

A draft Statement of Funding Principles is being agreed by the Group and the Trustee. The statement provides the principles around
assumption setting, in particular, choosing the discount rate, future price inflation, future pension increases, rates of mortality, future pay
increases, employee turnover, pension commencement age, and typical partner or dependent information. In addition the Trustee has the
following objectives for investments, as set out in the Statement of Investment Principles:
• To achieve and maintain a minimum funding level of 100% on a long-term ongoing basis; and
• To maintain the cost of providing the benefits at an acceptable level to the Employer.

Amounts paid to FPPS in the past 2 years and expected future payments over the next 5 years are as follows:


                                                                                                                                               £m
Contributions paid
2006                                                                                                                                              14
2007                                                                                                                                              21


Contributions expected to be paid
2008                                                                                                                                              21
2009                                                                                                                                              20
2010                                                                                                                                              20
2011                                                                                                                                              20
2012                                                                                                                                              20




                                                                                                 Friends Provident Annual Report & Accounts 2007 105
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(xi) Risk management
The Trustee has established a separate investment subcommittee which is responsible for assisting the Trustee in investment policy and
monitoring the Scheme’s investments. The investment subcommittee seeks advice from the investment adviser and believes it has sufficient
skills and expertise to make investment decisions based on this advice.

The Trustee sets general investment policy but delegates day to day responsibility for the selection of specific investments (other than
investments in respect of Members’ voluntary contributions) to the Investment Manager.

The Trustee has set performance and risk targets for the Investment Manager. The performance objectives are long-term (5 years), however,
the Trustee monitors the Investment Manager on a regular basis in order to ensure that it is on track to meet its long term objectives.

Interest rate and inflation risk
In 2006, FPPS inflation swaps, Government bonds, and index linked bonds, were exchanged for positions in ten Liability Driven Investment
(LDI) pools managed by F&C. These pools are designed to achieve a good match to the interest rate and nominal sensitivities of the liabilities
of FPPS liabilities. In 2007, FPPS increased its holding in LDI pools further to implement a revised strategy of 60% LDI exposure and 40%
equity exposure. The value of investment in LDI pools at 31 December 2007 was £460m (2006: £256m).

Currency risk
To increase the diversification of the equity portfolio, the Scheme invests in overseas assets. The Scheme’s liability is entirely in pounds
Sterling and therefore there is a risk that the appreciation of UK sterling against other currencies will reduce the return from overseas
equities. The Trustee has reviewed this risk and hedged one third of the overseas exposure.

Operational risk
The Investment Manager does not directly hold any of the Scheme’s securities. These are held in a separate account with the custodian.

All organisations involved in stock lending are kept under review by the Investment Manager’s credit committee. The borrowing organisations
have to post collateral with the Scheme, which is marked to market on a daily basis.




106 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(d) F&C Asset Management plc pension schemes
F&C operates a defined benefit scheme in the United Kingdom, one in The Netherlands, one in the Republic of Ireland, and participates in
one in Portugal. The UK scheme is closed to new entrants. All new UK employees are eligible to benefit from defined contribution
arrangements, which provide greater certainty over the future cost to F&C.

On 31 March 2007 the F&C Management Pension Plan was merged into the ISIS Asset Management plc Pension Fund as part of a
rationalisation of UK employment arrangements. The new scheme was renamed the F&C Asset Management Pension Plan (FCAM).

In the past, where F&C was unable to separately identify its share of assets and liabilities in overseas multi-employer defined benefit
schemes, these schemes were accounted for as defined contribution plans.

Prior to the Merger of F&C and ISIS in 2004, employee benefits in Ireland were provided through the multi-employer Friends First pension
scheme. In 2006 a separate pension plan was established and in 2007 employees decided whether to transfer into the new plan, or accept a
defined contribution alternative. The new plan maintained the existing benefits enjoyed previously by employees in Ireland. Until the member
decisions had been finalised, the pension plan in Ireland was accounted for as a defined contribution (multi-employer) scheme. The F&C share
of assets and liabilities for this scheme is now separately identifiable and are included as a defined benefit scheme from 1 January 2007.

A separate exercise is being conducted to make an assessment of any final transfer value receivable from Eureko in respect of the non-UK
schemes acquired as part of the acquisition in 2004. The exercise is now complete and Eureko paid F&C £2.4m in January 2008.

The Chairman of F&C, Mr RW Jenkins, was awarded pension benefits by F&C Management Limited prior to completion of the merger of
ISIS and F&C in respect of his past service to F&C. This is an unfunded pension liability and therefore the Group has made an appropriate
provision in its accounts.

The results of the latest full actuarial valuations were updated at 31 December 2007 by qualified independent actuaries.

The information given below reflects the aggregate disclosures in respect of all defined benefit pension arrangement.

(i) Principal assumptions used by the Schemes’ Actuary
                                                                                                                        2007              2006
                                                                                                                          %                 %

Inflation assumption                                                                                               2.00–3.30        1.75–3.00
Rate of increase in salaries                                                                                       2.50–4.55        2.50–4.25
Rate of increase in pensions in payment                                                                            2.50–4.25        2.75–4.00
Discount rate                                                                                                      5.50–5.60        4.60–5.00




                                                                                             Friends Provident Annual Report & Accounts 2007 107
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(ii) Mortality assumptions
Mortality assumptions for pensioners are based on the appropriate 1992 series mortality tables (2006: 1992 series) published by the CMI. In
addition, allowance is made for future improvements in mortality according to each individual’s year of birth through the use of the ‘medium
cohort’ projections published by the CMI in 2002, reduced by one year of age. In 2006 projections of future improvements in mortality were
based on ‘typical’ year of birth of 1935 for current pensioners and 1965 for future pensioners.

The mortality assumptions provide the following average life expectancies of members retiring at the age of 60:

                                                                                                                      2007             2006

Expected age at death of future male pensioner                                                                          89               88
Expected age at death of future female pensioner                                                                        92               91
Expected age at death of current male pensioner                                                                         88               86
Expected age at death of current female pensioner                                                                       91               89


In The Netherlands the mortality assumption was updated to the Prognosetafel 2008-2050. The corresponding assumption used at 31
December 2006 was the industry standard table Coll 2003. The change in assumption led to an increase of approximately 2.5% in liabilities
for The Netherlands scheme.

The present value of providing an annuity from the age of 60, based on the above life expectancies, for every one pound of pension
accumulated, is as follows:

Cost of annuities                                                                                                     2007             2006

Male annuity                                                                                                         23.50            24.50
Female annuity                                                                                                       24.00            25.00


These rates assume a monthly payments model with a discount rate of 5.6% (2006: 5.00%) based on the iBoxx over 15 year AA corporate
bond index of 5.82% (2006: 5.12%). The rates also assume two-thirds of the members’ benefit will be paid to the spouse, a 5-year guarantee
is provided and pensions in excess of GMP will increase by 3.3% (2006: 3.00%) per annum.

                                                                                                                    2007             2006
                                                                                                               % of total        % of total
                                                                                                             membership        membership

Active members                                                                                                          22               21
Deferred members                                                                                                        68               69
Pensioners                                                                                                              10               10
                                                                                                                       100              100


The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

Assumption                                                          Change in assumption                     Impact on scheme liabilities

Inflation                                                           Increase/decrease by 0.1%                Increase/decrease by 1.7%
Salaries                                                            Increase/decrease by 0.1%                Increase/decrease by 0.4%
Pensions                                                            Increase/decrease by 0.1%                Increase/decrease by 1.2%
Discount rate                                                       Increase/decrease by 0.1%                Decrease/increase by 2.4%
Rate of mortality                                                   Increase/decrease by 1 year              Increase/decrease by 2.1%




108 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(iii) Changes in the present value of obligations of defined benefit schemes
                                                                                                         2007              2006
                                                                                                          £m                £m

Present value of obligations at 1 January                                                                 180               164
Interest cost                                                                                                9                 8
Foreign exchange movements                                                                                   1                 -
Current service cost                                                                                         4                 4
Contributions by plan participants                                                                            -                -
Actuarial gains                                                                                            (13)               (4)
Benefits paid                                                                                               (5)               (3)
Past service cost                                                                                             -                -
Transfer in respect of The Netherlands scheme                                                                 -              11
Transfer in respect of the Ireland scheme                                                                    1                 -
Present value of obligations at 31 December                                                               177               180


(iv) Analysis of defined benefit obligations
                                                                                                         2007              2006
                                                                                                          £m                £m

Wholly unfunded plans                                                                                        2                 2
Wholly or partly funded plans                                                                             175               178
                                                                                                          177               180


The profile of the obligations is analysed as follows:
                                                                                                         2007              2006
                                                                                                          £m                £m

Active members                                                                                              50               57
Deferred members                                                                                            82               83
Pensioners                                                                                                  45               40
                                                                                                          177               180


(v) Changes in present value of defined benefit plan assets
                                                                                                         2007              2006
                                                                                                          £m                £m

Fair value of plan assets at 1 January                                                                    134               116
Expected return on plan assets                                                                               9                 8
Foreign exchange movement                                                                                    1                 -
Actuarial (losses)/gains                                                                                    (2)                2
Employer contributions                                                                                      12                 4
Benefits paid                                                                                               (5)               (3)
Transfer in respect of The Netherlands scheme                                                                 -                7
Transfer in respect of the Ireland scheme                                                                    1                 -
Fair value of plan assets at 31 December                                                                  150               134




                                                                               Friends Provident Annual Report & Accounts 2007 109
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                       EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(vi) Assets in the defined benefit schemes and the expected annual rate of return
                                                                                Expected rate of return*                    Value
                                                                                    2007          2006              2007            2006
                                                                                      %             %                £m              £m

Gilts                                                                               5.00          5.00                 2             17
Equities                                                                            7.00          7.00              100              93
Corporate bonds                                                                     5.60          5.00                 -             13
Other                                                                               7.00          7.00                 9               7
Liability Driven Investment Pools                                                   4.50           n/a               37                -
Cash                                                                                4.50          4.50                 2               4
Total market value of assets                                                                                         150             134
Present value of scheme liabilities                                                                                 (177)           (180)
Deficit in the schemes                                                                                               (27)            (46)


* Expected returns are shown for UK obligations only.

The expected return on net pension scheme assets is calculated using the assumptions and the market value of pension scheme assets as
stated in the table above for the preceding year.



(vii) Amounts recognised in the income statement in respect of defined benefit schemes
                                                                                                                    2007            2006
                                                                                                                     £m              £m

Current service costs                                                                                                 (4)             (4)
Interest cost                                                                                                         (9)             (8)
Expected return on plan assets                                                                                         9               8
Past service cost                                                                                                     (1)              -
Total amounts recognised in the income statement                                                                      (5)             (4)
Actual return on plan assets                                                                                           7             10



(viii) Amounts recognised in the statement of recognised income and expense in respect of defined benefit schemes
                                                                                                                    2007            2006
                                                                                                                     £m              £m

Actuarial gains recognised in the year                                                                               11                2




110 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

(ix) History of experience gains and losses of defined benefit schemes
                                                                    2003*            2004               2005             2006           2007
                                                                     £m               £m                 £m               £m             £m

Present value of defined benefit obligations                         (37)            (114)              (164)             (180)          (177)
Fair value of plan assets                                             30               96                116              134             150
Deficit                                                                (7)             (18)               (48)             (46)           (27)
Difference between the expected and actual return on schemes assets
Amount                                                                   2               2                11                 2             (2)
Percentage of closing schemes assets                                     7%              2%               10%                1%            (1)%
Experience gains and losses on schemes liabilities
Amount                                                                   -              (1)                 -               (2)            (3)
Percentage of the present value of the schemes liabilities               -              (1)%                -               (1)%           (2)%
Total amount recognised in the statement of recognised income and expense
Amount                                                                   1              (3)               (31)               2             11
Percentage of the present value of the schemes liabilities               3%             (3)%              (19)%              1%             6%


* The history before 1 January 2004, the date of adoption of IFRS, is prepared on a UK GAAP basis.


(x) Future Funding requirements
UK schemes
The Trustees of the ISIS Fund and F&C Pension Plan merged the schemes on 31 March 2007 into the FCAM Plan. This was achieved by the
transfer of all of the defined benefit assets and liabilities from the F&C Fund into the ISIS Fund. The assets and liabilities were merged on a
co-mingled basis (ie they will not be separately identifiable into F&C Fund or ISIS Fund sections). In conjunction with this merger, special
employer contributions totalling £8m were paid into the ISIS Fund around the time of the merger with a view to improving the funding level
of the merged scheme.

Following the merger, a formal actuarial valuation was initiated dated 31 March 2007. This actuarial valuation is still ongoing. This valuation
will be subject to the requirements of the scheme funding regulations introduced under the Pensions Act 2004 and the funding principles are
to be agreed between the trustees of the merged scheme and F&C. The results of this formal valuation will help to determine the future
level of employer contributions to the merged scheme. Until such time as any revision to employer contributions is agreed following this
valuation, it is anticipated that employer contributions will continue initially at 25% of pensionable salaries for ex-ISIS Fund members and at
29.9% of pensionable salaries for ex-F&C Pension Plan members.




                                                                                               Friends Provident Annual Report & Accounts 2007 111
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


10. Staff pension schemes continued

Overseas schemes
Given possible changes in overseas pension provisions (for example the recent establishment of new schemes), there is some uncertainty
over the future level of employer contributions that may be required. The figures in the table below assume that contributions at the level
paid in 2007 continue for the overseas schemes.

Contributions to defined benefit schemes
Amounts paid into F&C’s Group’s defined benefit schemes in the past two years and expected future payments over the next five years are
as follows:
                                                                                                                                          £m
Contributions paid
2006                                                                                                                                       4
2007                                                                                                                                      12


Contributions expected to be paid
2008                                                                                                                                          4
2009                                                                                                                                          4
2010                                                                                                                                          4
2011                                                                                                                                          4
2012                                                                                                                                          4


(xi) Risk Management

UK scheme

The Trustees set general investment policy but delegate the responsibility for the selection of specific investments (other than investments in
respect of members’ voluntary contributions) to the investment manager.

The Trustees regularly monitor the Plan’s investments. The Trustees seek advice from their investment adviser and believe they have
sufficient skills and expertise to make investment decisions based on this advice.

The Trustees have set performance and risk targets for the investment manager. The performance objectives are long-term, however, the
Trustees monitor the investment manager on a regular basis in order to ensure that the scheme is on track to meet its long-term objectives.

Prior to the merger of the two schemes, both sets of Trustees conducted an asset-liability review. These studies were used to assist the
Trustees and F&C to determine the optimal long-term asset allocation with regard to the liabilities within the schemes, subject to an
acceptable funding cost to F&C. The results of the studies were also used to assist the Trustees and F&C in managing volatility in the
underlying investment performance and risk of a significant increase in the schemes’ deficits by providing information used to determine the
schemes’ investment strategy. A further asset-liability review is being undertaken alongside the actuarial valuation of the merged plan.

Asset allocation
Following the pre-merger asset-liability reviews, both sets of trustees agreed with F&C that they would implement a Liability Driven
Investment (LDI) approach to their investment strategy. In both cases this involves the use of pooled LDI products managed by F&C.
The exact details of the investment strategy and asset allocation for the merged plan for the future are still being considered.

Interest rate and inflation risk
The LDI pools are intended to help provide a degree of matching to the liabilities of the scheme. Each pool comprises zero coupon
derivatives with the same maturity as the expected cash flows of the scheme. Each pool has leveraged exposure of varying amounts to
inflation and interest rates.

The pools are valued using the market values of the underlying securities.

The assets are ring fenced from F&C’s creditors and are therefore transferable.



112 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                   ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


10. Staff pension schemes continued

Currency risk
In order to increase the diversification of the equity portfolio, the Plan invests in overseas assets. However, the Plan’s liabilities are entirely in
Sterling and therefore there is a risk that the appreciation of Sterling against other currencies will reduce the return from overseas equities.

Operational risk
The investment managers do not directly hold any of the Plan’s securities. These are held by an external custodian.

Overseas schemes

The plan in The Netherlands is insured. The value of the plan assets is the value of the reserve which the insurance company holds to match
guaranteed pension liabilities. These reserves are in effect fixed interest instruments, so provide a reasonable match to pension liabilities.

The plan in Portugal is part of an industry-wide banking sector plan. Each participant company holds a share of the assets, which are invested
using the same asset allocation as the overall plan assets. F&C Portugal is the asset manager for the overall scheme.

The plan in Ireland invests in pooled unitised funds, with returns reflecting the performance of the underlying assets.

At 31 December 2007, the assets of both the Portugal and Ireland plans were invested in diversified portfolios that consisted primarily of
debt and equity securities.

(e) Other pension schemes
The Group operates five defined contribution schemes: the schemes operated by Friends Provident, F&C, Friends Provident International
Limited, Pantheon Financial Limited and Sesame Group Limited. Contributions for the year were £0.1m, £4.4m, £0.6m, £0.1m and £0.4m
respectively.

Lombard does not operate a staff pension scheme.




11. Share based payments

(a) Summary
The Group operates a number of share based payment schemes within Friends Provident plc and F&C Asset Management plc. The number
of options and awards issued by the schemes and outstanding at the year end, and the charge to the consolidated income statement in the
year are as follows:
                                                                                                2007                                2006
                                                                              No. of options             Charge    No. of options            Charge
                                                                               outstanding                  £m       outstanding                £m

Friends Provident                                                                  33,784,431                  5       32,816,922                   4
F&C                                                                                22,913,460                 16       24,821,455                 18
                                                                                   56,697,891                 21       57,638,377                 22


The charge to the income statement comprises £19m (2006: £20m) relating to equity-settled schemes and £2m (2006: £2m) relating to cash-
settled schemes. The most significant scheme is the Re-Investment Plan operated by F&C, which accounts for £5m (2006: £11m) of the
total charge for the year. Details of the Re-Investment Plan are set out in section (b) below.

The carrying amount of the liability arising from cash-settled schemes is £1m (2006: £3m).




                                                                                                  Friends Provident Annual Report & Accounts 2007 113
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


11. Share based payments continued

(b) The Re-Investment Plan
The Re-Investment Plan was a plan established to allow employees previously employed by F&C Group (Holdings) Limited (F&CGH Group)
prior to the 2004 merger to voluntarily re-invest one half of their entitlement under the F&CGH Shadow Equity Plan (SEP) into ordinary shares
in F&C and rights to receive further ordinary shares in F&C. The Re-Investment Plan is primarily an equity settled scheme with an additional
minor cash settled award being made in certain circumstances.

To encourage reinvestment, and in recognition of the fact that the Investment Shares carry forfeiture provisions, after three years participants
will receive up to one Matching Share for each Investment Share (subject to continued employment and achievement of performance
conditions relating to EPS growth). One third of Matching Shares have no performance criteria, while the remaining two-thirds vest in line
with performance based on F&C Underlying EPS growth between 2003 and 2006.

The cash settled element of the awards is based on dividends payable on the F&C shares during the vesting period (prior to becoming
unconditional) being notionally reinvested in F&C shares. Once the award shares vest, the value of the notional shares is paid to the
employee in cash.

The number of Investment Share and Matching Share awards are as follows:


                                                                             2007                                          2006
                                                            Investment                Matching             Investment               Matching
                                                              shares no.              shares no.             shares no.             shares no.
Outstanding at start of year                                      47,907               7,903,160             4,625,626              9,533,741
Forfeited                                                               -                (83,576)             (169,199)            (1,144,760)
Exercised                                                        (47,907)             (7,819,584)           (4,408,520)              (485,821)
Expired                                                                 -                       -                      -                      -
Outstanding at end of year                                              -                       -               47,907              7,903,160


The exercise price for all awards is nil pence.

The weighted average F&C share price during 2007 was 193 pence (2006: 201 pence).

The fair value of services received in return for share awards granted are measured by reference to the fair value of share awards granted.

No valuation model was used as awards were granted at full market value.




114 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


11. Share based payments continued

(c) Friends Provident plc
(i) Description of the plans
There are a number of active stock option and award schemes over Friends Provident shares, all of which are equity settled schemes.
Certain schemes are open to all employees whilst others are open to executives only. Schemes operated by the Group include ShareSave
schemes, Executive Share Options Schemes (ESOS), and Long Term Incentive Plan (LTIP). There is a range of performance and vesting
conditions including conditions based on term of service, the financial performance of the Company, and other terms. ShareSave schemes
vest on completion of continuous terms of service ranging from 3-5 years. The ESOS and LTIP schemes vest on completion of 3 years’
service and the achievement of certain financial performance measures by the Group, initially over a 3 year period.

(ii) Outstanding options and awards relating to Friends Provident plc
Share options
The options outstanding at 31 December 2007, over Friends Provident plc shares, had an exercise price and an earliest exercise date as
shown below:


                                                        Number of                        Exercise price                           Earliest
                                                     share options                     pence per share                      exercise date

ShareSave 2002                                             178,753                               107.76                   1 October 2007
ShareSave 2003                                             444,056                               108.54                   1 October 2008
ShareSave 2004                                              88,280                               102.47                   1 October 2007
ShareSave 2004                                             647,484                               102.47                   1 October 2009
ShareSave 2005                                           1,813,404                               143.94                 1 November 2008
ShareSave 2005                                             414,125                               143.94                 1 November 2010
ShareSave 2006                                           1,275,182                               147.74                 1 November 2009
ShareSave 2006                                             526,380                               147.74                 1 November 2011
ShareSave 2007                                           2,788,828                               141.34                 1 November 2012
ShareSave 2007                                           2,074,010                               141.34                 1 November 2012
ESOS 2002                                                2,033,357                               195.00                    14 March 2006
ESOS 2003                                                  648,846                                 71.00                   17 March 2006
ESOS 2003                                                   73,989                               136.00                    6 August 2006
ESOS 2004                                                6,328,444                               153.00                    15 March 2007
ESOS 2004                                                  360,300                               127.00                   12 August 2007
ESOS 2005                                                5,666,059                               178.00                    29 March 2008
LTIP 2005                                                1,143,799                                 10.00                   29 March 2008
LTIP 2006                                                1,432,029                                 10.00                   24 March 2009
LTIP 2006                                                   74,175                                 10.00                   9 August 2009
LTIP 2006                                                  283,020                                 10.00               13 November 2009
LTIP 2007                                                2,195,516                                 10.00                   22 March 2010


The following table summarises information about options outstanding at 31 December 2007:


Range of                                              Number of          Weighted average remaining          Weighted average exercise
exercise prices                              options outstanding             contractual life in years                  price in pence

£0.10 – £0.72                                            5,777,385                                  1.31                             16.85
£0.73 – £1.35                                            1,718,873                                  0.89                            109.73
£1.36 – £1.98                                           22,993,778                                  1.33                            159.06




                                                                                          Friends Provident Annual Report & Accounts 2007 115
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


11. Share based payments continued

The following table summarises information about options outstanding at 31 December 2006:


Range of                                                       Number of     Weighted average remaining            Weighted average exercise
exercise prices                                       options outstanding        contractual life in years                    price in pence

£0.10 – £0.72                                                  4,588,642                               1.53                             21.50
£0.73 – £1.35                                                  6,495,693                               1.02                            110.93
£1.36 – £1.98                                                 20,171,082                               1.10                            163.82


Share awards
The awards outstanding at 31 December 2007, over Friends Provident plc shares, had an exercise price and an earliest exercise date as
shown below:

                                                                                                          Number of                   Vesting
Scheme                                                                                                  share awards                     date

Deferred Share Plan (DSP) 2006                                                                                1,416,499        25 March 2009
Deferred Share Plan (DSP) 2007                                                                                1,877,896        23 March 2010



(iii) Movements in the year

Movements of the option plans are as follows:
                                                                            2007                                            2006
                                                                            Weighted average                                Weighted average
                                                             Number of          exercise price                Number of         exercise price
                                                               options               in pence                   options              in pence
Outstanding at start of year                                  31,255,417                     132           47,707,385                     129
Granted                                                        7,206,835                     100              4,635,359                    80
Forfeited                                                       (869,902)                    160               (994,487)                  156
Exercised                                                     (4,422,342)                    106           (17,273,200)                    73
Expired                                                       (2,679,972)                    110              (2,819,640)                 176
Outstanding at end of year                                    30,490,036                     129           31,255,417                     132
Exercisable at end of year                                     3,425,388                     154              3,630,776                   158


The fair value of services rendered in return for share options granted are measured by reference to the fair value of share options granted.

The estimate of the fair value of the services received is measured using binomial modelling techniques.




116 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


11. Share based payments continued

The fair values of the share options and grants made during the year have been calculated using the following assumptions:

                                  ShareSave                ShareSave                     DSP                     LTIP                  LTIP
                                    (3 year)                 (5 year)                                          (TSR)                (ROEV)
Award date                        1 Nov 2007               1 Nov 2007          22 March 2007          22 March 2007          22 March 2007
Fair value (pence)                       55.3                     57.7                 170.20                    54.3                184.00
Exercise price                        141.34                    141.34                       -                 10.00                  10.00
Share price                           172.10                    172.10                 193.25                 193.25                 193.25
Volatility                               40%                      40%                    40%                    40%                    40%
Dividend yield                            3%                       3%                     3%                     3%                     3%
Average life                          3 years                  5 years                 3 years                3 years               3 years
Risk-free rate                         5.80%                    5.76%                  4.04%                  5.04%                  5.04%



(d) F&C Asset Management plc

(i) Description of the plans
There are a number of active stock option and award schemes over F&C Asset Management plc shares including equity settled and cash
settled schemes. The most significant scheme is the Re-Investment Plan details of which are set out in section (b) above. The other
schemes are less significant and comprise schemes open to all employees and those which are restricted to executives only. There is a
range of performance and vesting conditions including conditions based on term of service, the financial performance of the company, and
other terms. The Executive Director Remuneration Plan (EDRP) was approved at the F&C 2007 AGM. Any Executive Director of F&C is
eligible to participate in the EDRP. The EDRP provides for the grant of two different forms of award, the EDRP Restricted Share Award and
the EDRP Deferred Share Award.

The vesting of awards under these schemes is mainly dependent on specified performance conditions and conditions of continued service.
The performance conditions applied to the largest of these schemes, the Long-Term Remuneration Plan (LTRP), are determined by the F&C
Board and are measured over a 3-year performance period. 50% of any awards relate to the achievement of total shareholder return targets
and 50% of the awards relate to F&C underlying EPS growth.

(ii) Outstanding options and awards excluding the Re-Investment Plan, relating to F&C Asset Management plc
The options outstanding at 31 December 2007, over F&C Asset Management plc shares, had an exercise price and earliest exercise date as
shown below:


                                                        Number of                        Exercise price                            Earliest
Scheme                                               share options                     pence per share                       exercise date

ESOS 1998                                                  321,490                                 203.80                    24 March 2006
ESOS 1999                                                  340,158                                 232.50                    24 March 2006
ESOS 2000                                                  323,659                                 214.00                    24 March 2006
ESOS 2000                                                    18,740                                320.17                    24 March 2006
ESOS 2001                                                  329,000                                 455.83                    24 March 2006
ESOS 2003                                                  500,692                                 139.00                    19 March 2006
ESOS 2004                                                  727,535                                 240.83                     9 March 2007
ShareSave 2003                                             256,474                                 114.00                        9 May 2008
ShareSave 2004                                             108,287                                 181.00                     19 April 2007
ShareSave 2005                                             319,514                                 186.60                     29 April 2008
ShareSave 2006                                             355,083                                 171.00                     18 April 2009
ShareSave 2007                                             618,609                                 144.30                     25 April 2010




                                                                                          Friends Provident Annual Report & Accounts 2007 117
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                       EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


11. Share based payments continued

The following table summarises information about options outstanding at 31 December 2007:


Range of                                                   Number of     Weighted average remaining        Weighted average exercise
exercise prices                                   options outstanding        contractual life in years                price in pence

£1.14 – £2.28                                               2,803,808                              1.05                         165.07
£2.29 – £3.43                                               1,086,433                                  -                        166.80
£3.44 – £4.57                                                 329,000                                  -                        455.83



The following table summarises information about options outstanding at 31 December 2006:


Range of                                                    Number of      Weighted average remaining       Weighted average exercise
exercise prices                                    options outstanding         contractual life in years               price in pence

£1.14 – £2.28                                               3,648,688                              0.83                         171.02
£2.29 – £3.43                                               1,318,867                              0.11                         238.86
£3.44 – £4.57                                                 393,500                                  -                        455.80

Share awards
The awards outstanding at 31 December 2007, over F&C Asset Management plc shares, had vesting dates as shown below:

                                                                                           Number of                            Vesting
Scheme                                                                                   share awards                              date
LTRP 2006 – performance vesting                                                                525,108                  17 May 2009
LTRP 2007 – performance vesting                                                                327,548                 16 March 2010
LTRP 2006 – time vesting                                                                     3,002,337                  17 May 2009
LTRP 2006 – time vesting                                                                         96,969            1 September 2009
LTRP 2007 – time vesting                                                                     5,383,828                 16 March 2010
LTRP 2007 – time vesting                                                                       130,890                  16 April 2010
Purchased Equity Plan 2005                                                                     525,640                 24 March 2008
Purchased Equity Plan 2006                                                                     815,749                 24 March 2009
Purchased Equity Plan 2007                                                                   1,130,199                  13 April 2010
Deferred Share Award 2006                                                                      154,838                 9 August 2009
Deferred Share Award 2007                                                                      593,747             22 November 2008
Deferred Share Award 2007                                                                      502,792             21 December 2008
EDRP Restricted Share Award 2007                                                             2,002,000                  10 May 2010
EDRP Restricted Share Award 2007                                                             2,002,000             10 November 2010
EDRP Deferred Share Award 2007                                                               1,500,574                  10 May 2010


The exercise price for all awards is nil pence.




118 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


11. Share based payments continued

(iii) Movements in the year
Movements of the option plans are as follows:
                                                                              2007                                        2006
                                                                                   Weighted                                      Weighted
                                                           Number of        average exercise              Number of       average exercise
                                                             options          price in pence                options         price in pence
Outstanding at start of year                                 5,361,055                    209              8,091,858                    199
Granted                                                       663,307                     144                564,830                    171
Forfeited                                                     (933,194)                   217              (1,676,710)                  117
Exercised                                                     (871,927)                   158              (1,618,923)                  133
Expired                                                               -                      -                      -                      -
Outstanding at end of year                                   4,219,241                    207              5,361,055                    209
Exercisable at end of year                                   2,572,465                    239              3,161,533                    220


The fair values of the share options and grants made during the year have been calculated using the following assumptions:

                                                                          Share Save                            Purchased Equity Plan
                                                                3 year                 5 year                 Equity               Cash
Award date                                               25 April 2007          25 April 2007           13 April 2007          13 April 2007
Fair value                                                       64.00                  70.00                 168.00                  14.00
Exercise price                                                  144.30                 144.30                       -                      -
Share price                                                     189.00                 189.00                 182.00                 182.00
Volatility                                                        30%                    30%                      n/a                    n/a
Dividend yield                                                  2.75%                  2.75%                      n/a                    n/a
Average life                                                   3 years                 5 years                3 years               3 years
Risk-free rate                                                  5.24%                  5.24%                      n/a                    n/a



LTRP performance vesting options                                                TSR                                      EPS
                                                                Equity                   Cash                 Equity                  Cash
Award date                                             16 March 2007           16 March 2007          16 March 2007          16 March 2007
Fair value                                                       65.00                   6.00                 160.00                  14.00
Exercise price                                                        -                      -                      -                      -
Share price                                                     173.00                 173.00                 173.00                 173.00
Volatility                                                        30%                    30%                      n/a                    n/a
Dividend yield                                                  2.75%                  2.75%                  2.75%                  2.75%
Average life                                                   3 years                 3 years                3 years               3 years
Risk-free rate                                                  5.02%                  5.02%                      n/a                    n/a




                                                                                          Friends Provident Annual Report & Accounts 2007 119
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                      EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


11. Share based payments continued

LTRP timing vesting options                                                    TSR                                 EPS
                                                                Equity                 Cash              Equity                  Cash
Award date                                               16 March 2007       16 March 2007         16 April 2007         16 April 2007
Fair value                                                      160.00                14.00              176.00                 15.00
Exercise price                                                       -                     -                   -                     -
Share price                                                     173.00               173.00              191.00                191.00
Volatility                                                         n/a                   n/a                 n/a                   n/a
Dividend yield                                                  2.75%                2.75%               2.75%                 2.75%
Average life                                                   3 years               3 years            3 years                3 years
Risk-free rate                                                     n/a                   n/a                 n/a                   n/a

Deferred Share Award
                                                                Equity            DSP Cash               Equity            DSP Cash
Award date                                            21 December 2007   21 December 2007 21 December 2007         21 December 2007
Fair value                                                      186.30                 8.20              185.60                  8.90
Exercise price                                                       -                     -                   -                     -
Share price                                                     194.50               194.50              194.50                194.50
Volatility                                                         n/a                   n/a                 n/a                   n/a
Dividend yield                                                  4.65%                4.65%               4.65%                 4.65%
Average life                                                 11 months           11 months           12 months             12 months
Risk-free rate                                                     n/a                   n/a                 n/a                   n/a


EDRP Restricted Share Awards                                      Restricted - EPS (3 years)             Restricted - EPS (3.5 years)
                                                                Equity                 Cash              Equity                 Cash
Award date                                                 21 May 2007         21 May 2007         21 May 2007           21 May 2007
Fair value                                                      178.00                15.00              175.00                 18.00
Exercise price                                                       -                     -                   -                     -
Share price                                                     193.00               193.00              193.00                193.00
Volatility                                                         n/a                   n/a                 n/a                   n/a
EPS Performance Hurdle                                            50%                  50%                 50%                   50%
Average life                                                   3 years               3 years           3.5 years             3.5 years
Risk-free rate                                                     n/a                   n/a                 n/a                   n/a


EDRP Deferred Share Award                                                                               Equity                   Cash
Award date                                                                                         21 May 2007           21 May 2007
Fair value                                                                                               178.00                 15.00
Exercise price                                                                                                 -                     -
Share price                                                                                              193.00                193.00
Volatility                                                                                                   n/a                   n/a
Dividend yield                                                                                           2.75%                 2.75%
Average life                                                                                            3 years                3 years
Risk-free rate                                                                                               n/a                   n/a




120 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


12. Finance costs
                                                                                                                       2007              2006
                                                                                                                        £m                £m
Subordinated loan interest                                                                                                18               20
Debenture loan interest                                                                                                   26               29
Convertible loan interest                                                                                                 22               22
Interest paid to credit institutions                                                                                      75               17
Total finance costs                                                                                                      141               88


Interest expense is calculated using the effective interest rate method.



13. Taxation

(a) Tax charged to the income statement
                                                                                                                       2007              2006
                                                                                                                        £m                £m

Current tax expense
UK corporation tax 30%                                                                                                    67               49
Adjustments in respect of prior periods                                                                                  (30)              (25)
Overseas taxation                                                                                                          6               21
Tax relief on STICS interest payable                                                                                     (16)              (16)
Total current tax expense                                                                                                 27               29
Deferred tax expense
Origination and reversal of temporary differences                                                                        (86)              31
Adjustments in respect of prior periods                                                                                   16               10
Total deferred tax expense                                                                                               (70)              41
Total tax expense                                                                                                        (43)              70
Analysis:
  Policyholder tax                                                                                                        23              124
  Shareholder tax                                                                                                        (66)              (54)
Total tax expense                                                                                                        (43)              70


Policyholders’ tax is tax on the income and investment returns charged to policyholders of linked and with-profits funds. Shareholders’ tax is
tax charged to shareholders on the profits of the Group.




                                                                                             Friends Provident Annual Report & Accounts 2007 121
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                        EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


13. Taxation continued

(b) Factors affecting tax charge for period

                                                                          2007                                          2006
                                                       Shareholder Policyholder        Profit    Shareholder     Policyholder       Profit
                                                             profit         tax    before tax          profit             tax   before tax
                                                               £m           £m            £m             £m               £m           £m

Profit before tax from continuing operations                  (136)         23           (113)           367             124          491
Profit before tax from continuing operations
  multiplied by the standard rate of corporation tax
  in the UK of 30%                                             (41)          7            (34)           110              37          147
Effects of:
  Non-taxable investment return                                (11)           -           (11)           (12)               -         (12)
  Non-taxable income                                            (5)          (7)          (12)             (6)           (37)         (43)
  Deductions not allowable for tax purposes                     11            -            11              4                -              4
  Tax on reserving adjustments                                  (8)           -            (8)           (14)               -         (14)
  Overseas tax                                                   -            -              -           (13)               -         (13)
  Adjustments in respect of prior periods                       (8)           -            (8)           (13)               -         (13)
  Utilisation of excess expenses brought forward                17            -            17            (29)               -         (29)
  Current year movement in tax losses not valued                (7)           -            (7)           (28)               -         (28)
  Tax relief on share based payments                             -            -              -             (6)              -             (6)
  Change to corporation tax rate                                (5)           -            (5)              -               -              -
  Tax relief on STICS interest payable                         (16)           -           (16)           (16)               -         (16)
  Non-taxable with-profits minority interest                     7            -             7            (31)               -         (31)
  Policyholder tax                                               -          23             23               -            124          124
Total tax expense                                              (66)         23            (43)           (54)            124              70



(c) Tax recognised directly in equity
Tax recognised directly in equity relates to defined benefit plans and foreign exchange adjustments and amounted to £7m (2006: £(11)m).




122 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


14. Appropriations of profit

(a) Dividends paid and proposed on ordinary shares

Dividends paid during the year and recognised in reserves                                                           2007              2006
                                                                                                                     £m                £m

Final dividend in respect of 2006 and paid in May 2007 of 5.2p per share
  (in respect of 2005 and paid in May 2006 of 5.1p per share)                                                        110                108
Interim dividend in respect of 2007 and paid in November 2007 of 2.7p per share
  (in respect of 2006 and paid in November 2006 of 2.65p per share)                                                    58                56
Total dividends paid                                                                                                 168                164


After the balance sheet date the dividends set out below were proposed by the directors. In accordance with IAS 10 these have not been
provided as a liability at the balance sheet date.
                                                                                                                    2007              2006
                                                                                                                     £m                £m

Final dividend in respect of 2007 payable in May 2008 of 5.3p per share
  (in respect of 2006 paid in May 2007 of 5.2p per share)                                                            123                111


The 2007 estimated final dividend is based on 2,323m shares estimated to be in issue at the dividend payment date (excluding treasury
shares). The 2006 estimated final dividend was based on 2,136m shares (excluding treasury shares).


(b) STICS interest
STICS interest paid during the year and recognised in reserves
                                                                                                                    2007              2006
                                                                                                                     £m                £m

Interest on 2003 STICS at 6.875%
  Paid in May 2007 (May 2006)                                                                                          10               10
  Paid in November 2007 (November 2006)                                                                                11                11
Total 2003 STICS interest paid                                                                                         21               21
Interest on 2005 STICS at 6.292%
  Paid in June 2007 (June 2006)                                                                                        31                31
Total 2005 STICS interest paid                                                                                         31               31
Total STICS interest paid                                                                                              52               52




                                                                                          Friends Provident Annual Report & Accounts 2007 123
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


15. Earnings per share

(a) Basic and underlying earnings per share from continuing operations
Earnings per share have been calculated based on the profit after tax and on the underlying profit after tax, attributable to ordinary shareholders
of the parent. The directors consider that the underlying earnings per share figure gives a better indication of operating performance.

                                                                                      2007              2007             2006              2006
                                                                                  Earnings         Per share          Earnings         Per share
                                                                                       £m             pence                £m             pence

(Loss)/profit after tax attributable to ordinary shareholders of the parent            (108)              (5.0)            276              13.1
Short-term fluctuations in investment return                                             78               3.6                39               1.8
Non-recurring items                                                                      (38)             (1.8)              17               0.8
Amortisation and impairment of acquired intangible assets                                79               3.7              133                6.3
Minority interest on items excluded from underlying (loss)/profit                        (15)             (0.7)             (40)             (1.9)
Tax credit on items excluded from underlying (loss)/profit                               (27)             (1.2)             (48)             (2.2)
Underlying (loss)/profit after tax attributable to ordinary
  shareholders of the parent                                                             (31)             (1.4)            377              17.9



(b) Diluted basic earnings per share from continuing operations


                                                                     2007                                                2006
                                                                Weighted                                             Weighted
                                                                 average                                              average
                                                               number of                                            number of
                                                       2007      ordinary             2007              2006          ordinary             2006
                                                   Earnings        shares        Per share           Earnings          shares          Per share
                                                        £m       millions           pence                 £m          millions            pence
(Loss)/profit after tax attributable to ordinary
  shareholders of the parent                           (108)        2,152               (5.0)             276            2,111              13.1
Dilution (c)                                             (1)              -             (0.1)              16              164               (0.3)
Diluted (loss)/profit after tax attributable to
  ordinary shareholders of the parent                  (109)        2,152               (5.1)             292            2,275              12.8



(c) Dilution
Options over 33,784,431 shares outstanding under the Company’s option schemes as at 31 December 2007 were not dilutive for the period
shown because their impact on EPS would be to reduce the loss per share.

Options over 16,620,550 shares outstanding under F&C’s option schemes as at 31 December 2007 had a dilutive impact on the Group’s loss
due to the potential decrease in the Group’s share of F&C’s earnings.

Options over 32,816,922 shares were outstanding under the Company’s option schemes as at 31 December 2006. Of these, 24,239,504
options were not dilutive for that period because the market price of the Company’s shares was below the option price or the performance
criteria were not met.

Options over 12,987,402 shares outstanding under F&C’s option schemes as at 31 December 2006 were non-dilutive.

The calculation of diluted earnings per share for 2006 also includes an allocation of shares in respect of the final earn-out payment for the
Lombard acquisition and an estimate of the impact of the conversion of the convertible bonds in 2007. Both these items had a dilutive impact
in 2006.



124 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


16. Intangible assets
                                                                                                 Investment
                                                                                  Acquired      management
                                                                Goodwill             PVIF          contracts             Other             Total
                                                                    £m                 £m                £m                £m                £m

Cost
At 1 January 2006                                                     677               484               620              195             1,976
Other additions                                                          4                 -                 -               18               22
Disposals                                                               (4)                -               (43)                -              (47)
Adjustment to consideration                                            (12)                -                 -                 -              (12)
Foreign exchange adjustments                                            (3)               (4)               (4)              (3)              (14)
At 31 December 2006                                                   662               480               573              210             1,925
Acquisition through business combinations                               37                 -                 -               32               69
Other additions                                                         11                 -                 -               26               37
Disposals                                                                 -                -                 -              (13)              (13)
Adjustment to consideration (note 42(e))                                10                 -                 -                 -              10
Foreign exchange adjustments                                            13               19                12                12               56
At 31 December 2007                                                   733               499               585              267             2,084


Amortisation and impairment
At 1 January 2006                                                         -             115               204                67              386
Amortisation charge for year                                              -              25                43                24               92
Impairment charge                                                         -                -               58                  -              58
Disposals                                                                 -                -               (16)                -              (16)
At 31 December 2006                                                       -             140               289                91              520
Amortisation charge for year                                              -              26                42                27               95
Impairment charge                                                         -                -                 -               20               20
Disposals                                                                 -                -                 -              (13)              (13)
Foreign exchange adjustments                                              -                3                 -                3                 6
At 31 December 2007                                                       -             169               331              128               628
Carrying amounts
At 31 December 2006                                                   662               340               284              119             1,405
At 31 December 2007                                                   733               330               254              139             1,456



(a) Goodwill
Goodwill is the only intangible asset which has an indefinite useful life. The goodwill has been allocated to the following cash-generating units:
                                                                                                                          2007              2006
                                                                                                                           £m                £m

UK Life & Pensions                                                                                                         192               191
Lombard                                                                                                                    161               138
Sesame                                                                                                                        8                 -
Pantheon Financial                                                                                                           28                 -
Friends Provident International Limited                                                                                        -                -
Asset Management                                                                                                           344               333
Total goodwill                                                                                                             733               662


                                                                                                Friends Provident Annual Report & Accounts 2007 125
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued




16. Intangible assets continued

In accordance with IAS 36 Impairment of Assets, goodwill is assessed for possible impairment each year. This assessment takes place in
December of each year and compares the carrying value of goodwill for each segment with its recoverable amount. The recoverable amount
has been taken to be the segment’s calculated value in use.

There has been no goodwill impairment charge in 2007 (2006: £nil).

The value in use for UK Life & Pensions and Lombard has been taken from their business plans. These projections reflect the long-term
nature of the business and forecast the cash flows over the anticipated terms of the policies. The plans include forecast sales of new
business for three years and other assumptions that take into account both past experience and market conditions. The key assumptions to
which the calculated values in use are most sensitive are set out below:
• Investment market conditions: the plans assume modest investment growth.
• Policy lapses: the plans assume no change from recent experience.
• Sales and margins: the plans assume a modest reduction in margins but an increasing level of sales.
• Expenses: the plans assume that expenses will broadly increase in line with inflation.
• Discount rate: the discount rate applied to UK Life & Pensions is 8.1% and to Lombard is 7.7%.

The outcome of the impairment assessment has been that it is considered unlikely that goodwill in respect of UK Life & Pensions would be
impaired given that the value in use is significantly higher than the carrying value of goodwill. The UK Life & Pensions segment is operated as
a single group and so a single value in use has been prepared. For Lombard, acquired in January 2005, the levels of new business have
indicated that there is no requirement for any impairment of goodwill. No goodwill has been allocated to FPI.

For the Asset Management segment, the value in use is calculated using a cash flow projection based on the latest annual financial budget
approved by the Board of F&C Asset Management plc. The Asset Management segment is operated as a single group and so a single value
in use has been prepared. The key assumptions to which the calculated values in use are most sensitive are set out below:
• Investment market conditions: the plans assume modest investment growth.
• Sales and margins: the plans assume modest sales and margin growth although operating margins have been capped as a measure of
    prudence.
• Expenses: the plans assume cost growth in excess of inflation recognising the impact of staff costs.
• Discount rate: the discount rate applied to the cash flow projections is 8.5% based on F&C’s weighted average cost of capital.

The outcome of the impairment review is that there is no requirement for any impairment of goodwill in the Asset Management segment.

In addition, the fair value of the Group’s holding in F&C, at 31 December 2007, based on the quoted bid price of F&C’s listed ordinary shares
was £497m (2006: £531m). This was in excess of the carrying value of the Group’s holding in the Asset Management business at this date.

(b) Acquired PVIF
Acquired PVIF is amortised over the lifetime of the in-force policies and is analysed as follows:
                                                                     2007                                              2006
                                                               Cumulative                                        Cumulative
                                                      Cost     amortisation           Net             Cost      amortisation              Net
                                                       £m               £m            £m               £m                £m               £m

UK Life & Pensions                                    184              109             75              184              100                84
International Life & Pensions                         315               60            255              296               40              256
Total acquired PVIF                                   499              169            330              480              140              340

In 2007 there was no indication that PVIF has been impaired.




126 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued




16. Intangible assets continued

(c) Investment management contracts
During 2006 F&C experienced a level of fund outflows which was higher than anticipated. This level of lost business had a notable impact on
revenues and was significant enough to be considered an indicator of potential impairment of certain intangible assets, namely the related
investment management contracts. No such indicators of impairment existed in 2007 and therefore no impairment review of intangible
assets with finite lives has been undertaken this year. The information which follows is the disclosure in relation to the comparative period.

The 2006 review resulted in an impairment being recognised (included within Administrative and other expenses in the income statement) in
respect of investment management contracts as follows:

                                                                                                                        2007              2006
                                                                                                                         £m                £m

F&C Investment Trust contracts                                                                                               -              22
F&C Institutional contracts                                                                                                  -              36
Total impairment recognised in the income statement                                                                          -              58


The above contracts relate to the investment trust management contracts and institutional fund management contracts acquired as a result
of the creation of F&C Asset Management plc following the business combination of ISIS Asset Management plc and F&C Group (Holdings)
Limited on 11 October 2004.

The recoverable amounts of the assets have been determined based on value in use calculations using cash flow projections based on the
latest annual financial budget approved by the F&C board.

The discount rate applied to the cash flow projections as at 31 December 2006 was 9.4% for institutional contracts with no fixed term and
8.4% for fixed term institutional contracts. These rates reflect the varying risks and uncertainties inherent in the revenues from the underlying
assets, using F&C’s weighted average cost of capital of 8.9% as at 31 December 2006.

Revenues in the projections have been grown at 5.75% (2006: 5.75%) per annum in line with F&C’s long-term view of market growth, which
is consistent with that experienced over the last 16 years across the markets in which the managed assets are invested. The revenue
projections are derived using the estimated useful lives of the underlying contracts and assume a constant loss of revenues over the
projection periods.

Costs for the first year of the projections are driven by the budgeted F&C operating margin for 2007. Thereafter costs are driven by F&C’s
projected operating profit margins, as determined for the purposes of the goodwill impairment review.

Impairment has been determined by comparing the results of the value in use calculations in respect of the remaining contracts at the year
end to the carrying value (cost less aggregate amortisation and prior impairment) of the assets at 31 December 2007, with any deficits arising
constituting impairment to be recognised for the year.

F&C continues to monitor the level of investment contracts under management and to assess any impact on the expected lives of the
related assets. Following further business outflows in the second half of 2006, the Board revisited the useful life estimates of the affected
assets at the year-end and as a result, with effect from 1 January 2007, the remaining life of non-fixed term institutional contracts is now
assessed as being 4 years.

The revised useful lives represent a change in the accounting estimate and will accelerate the amortisation of the remaining value of the
assets. The effect of these changes increased the amortisation charge in the second half of 2006 by £1.7m and the charge in 2007 and
beyond is increased by £2.6m per annum compared to continuing to amortise over the lives assigned from 1 July 2006, until such time as
the assets become fully amortised.




                                                                                              Friends Provident Annual Report & Accounts 2007 127
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


16. Intangible assets continued

(d) Other intangible assets
Other intangible assets mainly consist of distribution channel relationships and software development which are amortised over their
anticipated useful lives of between 3 and 15 years. The analysis for each segment is as follows:


                                                                     2007
                                                              Cumulative
                                                             amortisation                                             2006
                                                                     and                                        Cumulative
                                                      Cost    impairment             Net             Cost      amortisation            Net
                                                       £m             £m             £m               £m                £m             £m

UK Life & Pensions                                    130             92              38                  90            69              21
International Life & Pensions                         132             32             100                 116            19              97
Asset Management                                        5              4               1                  4              3               1
Total other intangible assets                         267            128             139                 210            91             119


Included in amortisation is £11m (2006: £7m) in respect of Life & Pensions acquired intangible assets.

At 31 December 2007 management assessed the value attributed to other intangibles. The review has resulted in an impairment of £17m
(2006: £nil) relating to UK Life & Pensions development and software intangibles. Separately a review of International Life & Pensions
software intangibles has resulted in an impairment charge of £3m (2006: £nil).




128 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                            ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


17. Property and equipment

                                                                                                                    Fixtures,
                                                                Owner                                           fittings and
                                                              occupied             Motor         Computer              office
                                                             properties          vehicles       equipment        equipment
                                                           at valuation           at cost           at cost           at cost            Total
                                                                    £m                £m                £m                £m               £m

At 1 January 2006                                                     46                9                38                18              111
Other additions                                                        3                1                  8                3               15
Revaluation                                                            6                 -                 -                 -                 6
Disposals                                                               -               (8)               (1)                -               (9)
At 31 December 2006                                                   55                2                45                21              123
Acquisition through business combinations                              2                 -                 3                1                  6
Other additions                                                         -               1                  8                2               11
Disposals                                                              (2)              (1)               (7)              (1)              (11)
At 31 December 2007                                                   55                2                49                23              129
Depreciation
At 1 January 2006                                                       -               4                27                 7               38
Depreciation charge for year                                            -               1                  7                2               10
Disposals                                                               -               (4)               (1)                -               (5)
At 31 December 2006                                                     -               1                33                 9               43
Acquisition through business combinations                               -                -                 2                1                  3
Depreciation charge for year                                            -               1                  7                3               11
Disposals                                                               -               (1)               (7)              (1)               (9)
At 31 December 2007                                                     -               1                35                12               48
Carrying amounts
At 31 December 2006                                                   55                1                12                12               80
At 31 December 2007                                                   55                1                14                11               81


If owner occupied properties were measured on a cost basis, the carrying amount would be £30m (2006: £31m).




18. Investment properties
                                                                                                                        2007              2006
                                                                                                                         £m                £m

At 1 January                                                                                                           2,426             1,912
Purchases                                                                                                                167               285
Acquisitions through business combinations                                                                                 74                  -
Disposals                                                                                                                 (91)              (39)
Fair value adjustments                                                                                                   (205)             268
At 31 December                                                                                                          2,371            2,426


Investment properties are carried at fair value. The properties are independently valued in accordance with the Royal Institute of Chartered
Surveyors’ guidelines on the basis of open market value. The key assumptions used in preparing the property valuations relate to tenure,
letting and town planning and the location, condition and state of repair of the properties.




                                                                                              Friends Provident Annual Report & Accounts 2007 129
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                              EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


19. Principal Group undertakings

Principal subsidiary undertakings of the Group as at 31 December 2007 are shown below.

Unless otherwise stated, they are undertakings incorporated in England and Wales or Scotland and have only one class of issued ordinary
shares. The voting rights are equal to the percentage holdings unless otherwise stated. Other subsidiaries do not materially affect the results
of the Group.

Subsidiary undertaking                                                               Activity                                        % held

UK Life & Pensions
Friends Provident Life & Pensions Limited*                                           Insurance                                          100
Friends Provident Life Assurance Limited                                             Insurance                                          100
Friends Provident Pensions Limited                                                   Insurance                                          100
Friends Provident Reinsurance Services Limited                                       Reinsurance                                        100
Friends Provident Management Services Limited*                                       Management services                                100
Pantheon Financial Limited                                                           IFA distribution business                          100
Sesame Group Limited                                                                 IFA distribution business                          100
International Life & Pensions
Friends Provident International Limited (i)                                          Insurance                                          100
Lombard International Assurance SA (ii)*                                             Insurance                                          100
Asset Management
F&C Asset Management plc*                                                            Holding company
  Ordinary shares                                                                                                                      52.19
  Variable rate cumulative preference shares                                                                                            100
F&C Managed Pension Funds Limited                                                    Insurance                                         52.19
FP Fund Managers Limited                                                             Asset management                                  52.19
F&C Managers Ltd (formerly ISIS Investment
  Management Limited)                                                                Asset management                                  52.19
F&C Fund Management Limited                                                          Asset management                                  52.19
F&C Portugal Gestao de Patrimonios SA (iii)                                          Asset management                                  52.19
F&C Ireland Limited (iv)                                                             Asset management                                  52.19
F&C Netherlands BV (v)                                                               Asset management                                  52.19
F&C Management Limited                                                               Asset management                                  52.19
F&C Luxembourg (ii)                                                                  Asset management                                  52.19
F&C Investment Business Limited                                                      Investment trust management                       52.19
F&C Asset Management Services Limited                                                Management services                               52.19
F&C Treasury Limited                                                                 Treasury management                               52.19
F&C Commercial Property Trust plc (vi)                                               Property company                                  52.75


* Held directly by Friends Provident plc (all other companies are held indirectly)
(i) Incorporated in the Isle of Man
(ii) Incorporated in Luxembourg
(iii) Incorporated in Portugal
(iv) Incorporated in Ireland
(v) Incorporated in The Netherlands
(vi) Incorporated in Guernsey




130 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                            ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


20. Investments in associates and joint venture

(a) Associates
                                                                                                                       2007              2006
                                                                                                                        £m                £m

Carrying amount of investments                                                                                             1                 2


Investments in associated undertakings are companies over which the Group exerts significant influence. The total assets, liabilities,
revenues and losses of the Group’s associate undertakings are as follows:
                                                                                                                       2007              2006
                                                                                                                        £m                £m

Current assets                                                                                                            77               90
Non-current assets                                                                                                          -                -
Current liabilities                                                                                                      (73)               (5)
Non-current liabilities                                                                                                     -              (86)
Net assets/(liabilities)                                                                                                   4                (1)
Revenue                                                                                                                   18               15
Profit/(loss) before tax                                                                                                   3                 7


(b) Joint venture
                                                                                                                       2007              2006
                                                                                                                        £m                £m

Carrying amount of investment                                                                                             13               13


This investment is in Tenet Group Limited, an IFA firm which comprises two IFA networks, and a compliance network and intermediary
operating in the mortgage and general insurance sectors. The Group’s interest in the ordinary share capital of Tenet Group Limited is 21.1%
(2006: 21.1%). The Group’s share of assets, liabilities, revenue and profit is as follows:
                                                                                                                       2007              2006
                                                                                                                        £m                £m

Current assets                                                                                                             9                 8
Non-current assets                                                                                                         3                 3
Current liabilities                                                                                                       (3)               (4)
Non-current liabilities                                                                                                   (1)               (1)
Net assets                                                                                                                 8                 6
Revenue                                                                                                                    6               24
Profit before tax                                                                                                           -                1




                                                                                             Friends Provident Annual Report & Accounts 2007 131
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


21. Financial assets

The Group’s financial assets are summarised by measurement categories as follows:
                                                                                                                         2007              2006
                                                                                                                          £m                £m

Fair value through the income statement                                                                                47,695            45,135
Loans                                                                                                                       15               15
Total financial assets                                                                                                 47,710            45,150


(a) Financial assets at fair value through the income statement
                                                                                                                         2007              2006
                                                                                                                          £m                £m

Shares and other variable yield securities                                                                             23,720            22,610
Debt securities and other fixed-income securities                                                                      15,659            16,179
Units in unit trusts and shares in open-ended investment companies                                                      7,460             5,335
Participation in investment pools                                                                                         113               136
Derivative financial instruments                                                                                          171               212
Deposits with credit institutions                                                                                         572               663
Total financial assets at fair value through the income statement                                                      47,695            45,135


Included in the carrying amounts above, £43,972m (2006: £41,880m) is expected to be recovered more than 12 months after the balance
sheet date.

All financial assets at fair value through the income statement are designated as such on initial recognition, with the exception of derivative
financial instruments which are held for trading.

Asset Backed Securities directly held by the UK Life & Pensions business comprise approximately 3.4% of Group investments, virtually all of
which are at investment grade.




132 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                                ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


21. Financial assets continued

(b) Loans

                                                                                                                         2007              2006
                                                                                                                          £m                £m

Mortgage loans                                                                                                                 3               2
Other loans                                                                                                                 12               13
Total loans                                                                                                                 15               15


The fair value of loans at both year ends is the same as their carrying value.

(c) Unit-linked assets and liabilities
The amounts included in the balance sheet in respect of assets and liabilities held within unit-linked funds are as follows:

                                                                                                                         2007              2006
                                                                                                                          £m                £m

Investment properties                                                                                                      995              975
Shares and other variable yield securities                                                                             14,923            12,847
Debt securities and other fixed-income securities                                                                        3,473            3,472
Units in unit trusts and shares in open-ended investment companies                                                     10,551             8,200
Derivative financial instruments                                                                                               8               9
Deposits with credit institutions                                                                                          517              518
Other receivables                                                                                                          120              333
Cash and cash equivalents                                                                                                2,070            1,796
Total assets                                                                                                           32,657            28,150
Other payables                                                                                                            (181)            (303)
Total unit-linked assets less liabilities                                                                              32,476            27,847


The impact of consolidating open-ended investment companies in which the Group has a holding in excess of 50% has been excluded from
the analysis of unit-linked assets and liabilities.




22. Deferred acquisition costs
                                                                                                     Insurance    Investment
                                                                                                      contracts     contracts             Total
Year ended 31 December 2007                                                                                 £m            £m                £m

At 1 January                                                                                               369             742            1,111
Incurred and deferred in the year                                                                            3             271              274
Amortisation charge to the income statement (i)                                                           (239)           (109)            (348)
Other movements                                                                                               -             56               56
At 31 December                                                                                             133             960            1,093


(i) The increase in 2007 is largely as a result of changes in accounting estimates (see note 2(i))




                                                                                               Friends Provident Annual Report & Accounts 2007 133
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


22. Deferred acquisition costs continued

                                                                                                  Insurance       Investment
                                                                                                   contracts        contracts             Total
Year ended 31 December 2006                                                                              £m               £m               £m

At 1 January                                                                                            411               583              994
Incurred and deferred in the year                                                                       110               224              334
Amortisation charge to the income statement                                                             (152)             (63)            (215)
Other movements                                                                                            -                (2)              (2)
At 31 December                                                                                          369               742            1,111


Included in the carrying values above, £890m (2006: £983m) is expected to be recovered more than 12 months after the balance sheet date.
Acquisition expenses that do not meet the criteria for deferral are expensed directly as incurred.




23. Reinsurance assets
                                                                                                 Insurance       Investment
                                                                                                  contracts        contracts             Total
Year ended 31 December 2007                                                                             £m               £m                £m

At 1 January                                                                                              47               38               85
Premiums (i)                                                                                          1,779                54            1,833
Claims                                                                                                  (177)                -            (177)
Unwind of discount rate                                                                                   31                 -              31
Other movements                                                                                         238                 5              243
At 31 December                                                                                        1,918                97            2,015


(i) The main item included within Premiums is the reinsurer’s share of liabilities of £1,722m (2006: £nil) arising from a reinsurance arrangement
    entered into in 2007. A related payable amount of £1,611m is included within loans and borrowings, please see note 33(vi) for detail.
No significant gain or loss arose on reinsurance contracts incepted in either 2006 or 2007.

                                                                                                  Insurance       Investment
                                                                                                   contracts        contracts             Total
Year ended 31 December 2006                                                                              £m               £m               £m

At 1 January                                                                                            177                 6              183
Premiums                                                                                                  37               30               67
Claims                                                                                                   (20)                -              (20)
Unwind of discount rate                                                                                    3                 -                3
Other                                                                                                   (150)               2             (148)
At 31 December                                                                                            47               38               85


Included in the carrying totals above, £2,007m (2006: £105m) is expected to be recovered more than 12 months after the balance sheet date.

Amounts expected to be recovered more than 12 months after the balance sheet exceed the carrying value when the expectation is that
premiums will exceed claims in the short term.

Reinsurance assets are valued using the same methods and bases as those used to value the underlying liabilities that are being reinsured.




134 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


24. Deferred tax assets and liabilities
(a) Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:

                                                                      2007                                               2006
                                                   Assets        Liabilities           Net            Assets         Liabilities            Net
                                                      £m                 £m            £m                £m                 £m              £m

Property and equipment                                  46                  -           46                40                   -             40
Intangible assets                                         -              (161)         (161)                -             (176)            (176)
Unrealised gains on investments                           -              (161)         (161)                -             (166)            (166)
Employee benefits                                       20                  -           20                37                   -             37
Deferred acquisition costs                                -               (10)          (10)                -               (73)             (73)
Tax value of recognised tax losses                      11                  -           11                  9                  -               9
Short-term temporary differences                         5                  -             5               11                   -             11
Unremitted profits of subsidiary                          -               (24)          (24)                -                  -               -
Net deferred tax assets/(liabilities)                   82               (356)         (274)              97              (415)            (318)


Of the deferred tax assets above, £55m is attributable to Lombard and is presented gross on the balance sheet.


(b) Movement in temporary differences during the year

                                                                 1 January       Recognised     Recognised          Acquired       31 December
                                                                      2007        in income       in equity           in year             2007
                                                                       £m                £m             £m                £m               £m

Property and equipment                                                    40              6                 -                  -             46
Intangible assets                                                        (176)          30                 (6)               (9)           (161)
Unrealised gains on investments                                          (166)            4                 1                  -           (161)
Employee benefits                                                         37             (5)             (12)                  -             20
Deferred acquisition costs                                                (73)          63                  -                  -            (10)
Tax value of recognised tax losses                                          9             2                 -                  -             11
Short-term temporary differences                                          11             (6)                -                  -               5
Unremitted profits of subsidiary                                            -           (24)                -                  -            (24)
Net deferred tax (liabilities)/assets                                    (318)          70               (17)                (9)           (274)



                                                                  1 January      Recognised      Recognised          Acquired      31 December
                                                                      2006        in income        in equity           in year            2006
                                                                        £m               £m             £m                 £m              £m

Property and equipment                                                    26            14                  -                  -             40
Intangible assets                                                        (223)          38                  9                  -           (176)
Unrealised gains on investments                                           (83)          (83)                -                  -           (166)
Employee benefits                                                         33              2                 2                  -             37
Deferred acquisition costs                                                (73)            -                 -                  -             (73)
Tax value of recognised tax losses                                        11             (2)                -                  -               9
Short-term temporary differences                                          21            (10)                -                  -             11
Net deferred tax (liabilities)/assets                                    (288)          (41)              11                   -           (318)




                                                                                               Friends Provident Annual Report & Accounts 2007 135
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


24. Deferred tax assets and liabilities continued

(c) Unrecognised deferred tax assets and liabilities
Deferred tax assets/(liabilities) have not been recognised in respect of the following items:
                                                                                                                          2007               2006
                                                                                                                           £m                 £m

Assets
Tax losses                                                                                                                   66                93
Total assets                                                                                                                 66                93
Liabilities
Distributable profits of subsidiary                                                                                           -                (11)
Total liabilities                                                                                                             -                (11)
Net unrecognised deferred tax assets                                                                                         66                82


A deferred tax asset has not been recognised in respect of these losses as it is probable that there will be insufficient suitable profits
emerging in future periods against which to relieve them.




25. Insurance and other receivables
                                                                                                                          2007               2006
                                                                                                                           £m                 £m

Receivables arising out of direct insurance operations:
  Policyholders                                                                                                              29                37
  Agents, brokers and intermediaries                                                                                         49                20
Investment income receivables                                                                                                70                93
Investments sold for subsequent settlement                                                                                   76                60
Prepayments and accrued income                                                                                             295                313
Pension surplus                                                                                                               5                  -
Other receivables                                                                                                            96                83
Total insurance and other receivables                                                                                      620                606


All insurance and other receivables are expected to be recovered within 12 months except the pension surplus which is all expected to be
recovered more than 12 months after the balance sheet date.




26. Cash and cash equivalents
                                                                                                                          2007               2006
                                                                                                                           £m                 £m

Bank and cash balances                                                                                                   1,599               1,081
Short-term deposits                                                                                                      3,183               2,500
Total cash and cash equivalents                                                                                          4,782               3,581




136 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


27. Terms and conditions of insurance and investment contracts

The main types of insurance and investment contracts that the Group currently has in force are:

(i) Life
Protection business (other than whole life products) – these insurance contracts consist mainly of regular premium term assurance, critical
illness and income protection products, which pay out a fixed amount (the sum assured) on ill health or death. The premium rate is usually
guaranteed for the lifetime of the contract. For most policies this payout will be a single amount, whereas income protection products
provide a regular income upon incapacity either for the length of illness or to the end of the contract if earlier, depending on the specific
policyholder terms. Most contracts have no surrender value.

Endowments and whole life products – these insurance contracts both provide benefits upon death or, in the case of endowments, at a
preset maturity date if earlier. These policies often have a surrender value, particularly in the later years of the contract. The amount payable
on death is subject to a guaranteed minimum amount. The maturity value usually depends on the investment performance of the underlying
assets. For with-profits business, it is underpinned by a minimum guarantee, which may be increased by the addition of bonuses.

Single premium bonds – these are unit linked or unitised with-profits investment contracts that have no maturity date. On death, the amount
paid is 100%-105% of the value of the units. On surrender the value of units is paid, sometimes in the first few years less a surrender
penalty . For with-profits contracts a final bonus may be payable on death or surrender, or if markets are depressed a market value reduction
may be applied to the surrender values.

(ii) Pensions
Individual and group pensions – these contracts generally provide a cash sum at retirement. If death occurs before retirement, they generally
return the value of the fund accumulated or in some cases premiums paid are returned. Contracts with guaranteed cash and annuity options
(see below) are defined as insurance contracts but in the absence of these guarantees products are normally defined as investment contracts.

Annuities in payment – these insurance contracts are typically single premium products, which provide for a regular payment to the
policyholder whilst they and/or their spouse are still alive. Payments are generally either fixed or increased each year at a specified rate or in
line with the rate of inflation. Most contracts guarantee an income for a minimum period usually of five years, irrespective of death.

(iii) Guarantees and options
The main guarantees and options included within the Group’s insurance contracts, the majority of which arise within FPLP’s With-Profits
Fund, are as follows:

Guaranteed cash and annuity options – most conventional deferred annuity contracts have benefit options expressed in terms of cash and
annuity payments with a guaranteed conversion rate, allowing the policyholder the option of taking the more valuable of the two at
retirement.

Guarantees in respect of bonus additions – bonuses added to with-profits policies increase the guaranteed minimum benefit that
policyholders are entitled to at maturity. These are set at a level that takes account of expected market fluctuations, such that the cost of the
guarantee is generally met by the investment performance of the assets backing the policyholder liability. However in circumstances where
there has been a significant fall in investment markets, such as that which occurred in 2001 to 2003, the guaranteed maturity benefits may
exceed asset shares and these guarantees become valuable to the policyholder.

Guaranteed surrender bases – certain older products have a guaranteed basis for calculating surrender values. In all these cases the basis
includes an element of final bonus which can be reduced or taken away. The guaranteed basis typically applies over a period of 15 years but
in most cases policies are approaching the end of this period. The effect of the guaranteed surrender basis is to extend the guarantee in
respect of bonus additions so that they apply over an extended period and not just at the maturity date.




                                                                                                Friends Provident Annual Report & Accounts 2007 137
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                              EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


28. Insurance contracts

(a) Changes in insurance contracts liabilities
The following table shows the movements in insurance contracts liabilities in the year:

                                                                                                                             2007         2006
                                                                                                                              £m           £m

At 1 January                                                                                                                13,762      14,637
Increase in liability from premiums                                                                                           953           783
Release of liability due to recorded claims                                                                                 (1,524)      (1,506)
Unwinding of discount                                                                                                         155           187
Change in assumptions:
  Economic                                                                                                                     (11)        (254)
  Non-economic                                                                                                                 (19)        (405)
Other movements including net investment return                                                                               291           320
At 31 December                                                                                                              13,607      13,762


Included in the carrying amount above, £12,040m (2006: £12,095m) is expected to be settled more than 12 months after the balance
sheet date.

A liability adequacy test was carried out at policy level and resulted in no additional provision in either 2006 or 2007.

It should be noted that changes in the economic assumptions are typically largely offset by corresponding changes in the assets backing the
liabilities. In addition, assumption changes on with-profits contracts will result in changes in the FFA, and not in retained earnings.

The main items within non-economic assumption changes in 2007 relate to one-off items as set out in note 2(i).

The main change included within other movements is £256m (2006: £546m) in respect of the investment return credited to asset shares and
unit-linked liabilities.

(b) Method used for reserving for both insurance contracts and investment contracts with DPF
The liability for insurance contracts and unitised with-profits contracts is calculated on the basis of recognised actuarial methods having due
regard to actuarial principles and best practice. The methodology takes into account risks and uncertainties of the particular classes of long-
term business written and the results are certified by the professionals undertaking the valuations.

Calculations are generally made on an individual policy basis, however in addition there are some global provisions which are calculated using
statistical or mathematical methods. The results are expected to be approximately the same as if an individual liability was calculated for each
long-term contract.

The methodology for the calculation of liabilities is set out in more detail in note 1.3.19.

(c) Process used for assumptions
(i) Economic assumptions
Details regarding the economic assumptions used in the stochastic model for the valuation of with-profits policyholder liabilities are set out in
note 29.

For other insurance liabilities and unitised with-profits contracts within the FPLA fund, economic assumptions are the same as those used for
reporting to the FSA under the regulatory peak. Economic assumptions are adjusted from year to year by reference to changes in consistent
economic indices or yields on the underlying portfolio. The principal assumption is the valuation interest rate.




138 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


28. Insurance contracts continued

(ii) Non-economic assumptions
The provision for insurance contracts and investment contracts with DPF liabilities is sensitive to the principal assumptions in respect of
mortality, morbidity and maintenance expenses (except for net premium valuations), persistency and guaranteed annuity option take-up rates,
although the relative sensitivity will vary depending on the class of long-term business.

Long-term estimates of future mortality and morbidity assumptions are based on standard tables wherever possible but adjusted to reflect
the Group’s own experience. Expense assumptions are based on recent experience. Experience investigations for mortality, morbidity,
persistency, guaranteed annuity option take-up rates and maintenance expenses are performed at least annually. Where industry analysis
indicates that changes in expected future mortality/morbidity or other assumptions factor patterns mean that claim costs are likely to rise in
the future, then this is taken into account in the valuation basis. No benefit is taken where industry analysis indicates that future trends are
likely to reduce claim costs in the future. Improving mortality has been assumed when valuing annuities and deteriorating morbidity has been
assumed when valuing critical illness business. Assumptions, for policies other than with-profits, are generally intended to be a prudent
estimate of future experience.

(d) Valuation interest rates for policies other than conventional with-profits business in FPLP

                                                                                           Valuation interest rates
                                                                                    With-profits                   Non-profit
                                                                            31 December 31 December 31 December 31 December
                                                                                   2007          2006             2007        2006
Class of business                                                                  % pa          % pa            % pa         % pa

Life Fund:
Endowment and whole-of-life                                                            2.9               2.9              3.1               3.1
Protection                                                                                -                -              3.1               3.1
Pension Fund:
Annuities in payment                                                                      -                -        3.9–4.75         4.2– 4.56
Individual and group pensions                                                          3.7               3.7              3.9               3.9
Protection                                                                                -                -              3.9               3.9
Income protection                                                                         -                -              3.3               3.8


As explained in note 29, FPLP with-profits business is valued in accordance with the FSA’s realistic reporting regime.

For products with overall negative liabilities the interest rate used in 2007 is 2.65% or 5.6% depending on which is most onerous.




                                                                                              Friends Provident Annual Report & Accounts 2007 139
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


28. Insurance contracts continued

(e) Mortality, morbidity and lapse rates
Insurance liabilities allow for mortality and morbidity risk by making assumptions about the proportion of policyholders who die or become
sick. Allowance for future mortality has been made using the following percentages of the standard published tables below:

                                                                                                        2007                                2006

Term assurances:
Smoker                                                                                        126% TM92(5)                        95% TM92(5)
                                                                                               116% TF92(5)                       116% TF92(5)
Non-smoker                                                                                     58% TM92(5)                        58% TM92(5)
                                                                                               63% TF92 (5)                        74% TF92(5)
Critical illness                                                                                   CIBT02 (i)         Same as Term Assurance
Other life assurances                                                                       80% AM/F80ult                       80% AM/F80ult
Unitised life policies                                                                      80% AM/F80ult                       80% AM/F80ult
Pension policies                                                                            35% AM/F80ult                       35% AM/F80ult
Individual Income Protection                                                                60% AM/F80ult                       60% AM/F80ult
Individual pension annuities in payment                                                        RM/FV00 (ii)                   75% RM/FV92 (iii)
Group pension annuities in payment                                                       PCMA/PCFA00 (ii)              95% PM/FA92U2006 (iii)


(i) The percentages of the table used differ by sex and smoker status.

(ii) Age-related percentages of the mortality tables are used. Future improvements in mortality are based on the following percentages of the
     average of CMI’s Medium Cohort and Long Cohort:
     Males – 100% subject to a minimum of 1.5% per annum
     Females – 75% subject to a minimum of 1.25% per annum

(iii) Plus additional 0.25% per annum and 0.5% per annum for individuals and group males only respectively from 31 December 2003 onwards.

   Individual income protection sickness and recovery rates are based on percentages of the CMI 12 (male and female) published tables.
   Rates differentiate by smoker status, deferred period and occupational class.

   Critical illness morbidity rates are based on percentages of the published CIBT02 table. The percentages used vary by sex and smoker
   status. In addition, future deterioration in morbidity is allowed for by assuming claim rates increase by 1.25% per annum and 1.50% per
   annum for males and females respectively.

   Lapse rates for protection business are based on recent experience with a prudent margin.

(f) Apportionment of surplus between shareholders and with-profits policyholders
Shareholders are entitled to 100% of surplus emerging from companies within the Group, with the exception of surplus emerging in the two
with-profits funds.

(i) The Group’s main With-Profits Fund is within FPLP, and is open to new business. The Fund is run on a mutual basis and managed so that
    over time the working capital is sufficient to provide most of the risk capital but not to exceed the risk capital margin. The entitlements of
    shareholders to share in surplus differ for policies written before and after demutualisation on 9 July 2001.

   In respect of pre-demutualisation conventional with-profits policies, shareholders are entitled to one ninth of the cost of bonuses added to
   policies. In respect of pre-demutualisation non-profit and unitised business (excluding the investment element), shareholders are entitled
   to 60% of the surplus arising.

   Post-demutualisation with-profits policyholders are only entitled to surplus from the return on their investments; other sources of surplus
   are wholly owned by shareholders including policies written by FPLA and Friends Provident Pensions Limited, where the investment
   element is reinsured to the FPLP With-Profits Fund.


140 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


28. Insurance contracts continued

(ii) The With-Profits Fund of FPLA is closed to new business. The Fund’s policyholders are entitled to all the surplus of that fund. In addition,
     FPLA has a closed unitised with-profits fund. Shareholders are entitled to all profits from the unitised with-profit fund other than
     investment profits, which are wholly owned by with-profits policyholders. The investment element of the contract is wholly reinsured to
     the FPLP With-Profits Fund.

   The effect of this fund structure is that investment risk, in respect of assets backing with-profits policies, is largely borne by policyholders;
   shareholders bear 10% of the investment risk from conventional with-profits policies. Expense risk is borne by the shareholders, other
   than in the FPLA closed fund. Until 2009, the FPLP With-Profits Fund is charged a fixed amount for managing policies, adjusted by an
   inflation index, irrespective of actual costs. The charges will be reviewed with effect from the end of 2009 to reflect market rates at the
   time. Other forms of risk are shared between shareholders and policyholders as described above.




29. FPLP’s With-Profits Balance Sheet

FPLP’s with-profits business can be summarised as follows:
                                                                                                                           2007              2006
                                                                                                                            £m                £m

Total net assets                                                                                                         14,739            16,087
Less non-profit liabilities including long-term insurance capital requirements                                            (2,561)           (2,670)
Total regulatory assets                                                                                                  12,178            13,417
Additional assets arising on realistic basis                                                                                 219              265
Total assets                                                                                                             12,397            13,682
Policyholder liabilities:
  Asset shares                                                                                                           10,323            11,365
  Financial guarantees (net of charges)                                                                                      210              101
  Options (guaranteed annuities)                                                                                             628              747
Other liabilities                                                                                                            990            1,249
Total liabilities                                                                                                        12,151            13,462
Excess of assets over liabilities                                                                                            246              220


At 31 December 2007, the surplus of assets over liabilities initially amounted to £274m (2006: £254m) with a Risk Capital Margin (RCM) of
£246m (2006: £220m), the surplus assets have subsequently been reduced by £28m (2006: £34m) via a reduction in future guarantee
charges leaving the working capital at £246m (2006: £220m) fully covering the RCM. Adding back the shareholders’ share of future bonuses
totalling £94m (2006: £95m) and deducting adjustments to eliminate double counting of other assets of £2m (2006: £19m), the excess in
accordance with FRS 27 amounted to £338m (2006: £296m).

The main element of the liabilities is the asset shares of with-profits business. This represents the premiums received to date together with
the investment return earned less expenses and charges. This is mainly calculated on an individual policy basis using historic information and
in line with the company’s PPFM. Asset shares are closely matched since they move with the value of the underlying assets.

Policyholder liabilities (including options and guarantees) are then valued using a market consistent stochastic model. Included in other
liabilities are provisions for specific items such as mortgage endowment reviews and other liabilities of the fund. Realistic valuations also
allow for future profits of non-profit business written in the With-Profits Fund to be included. In accordance with FRS 27, the value of future
profits of non-profit business has been deducted from policyholder liabilities in the IFRS balance sheet.




                                                                                                Friends Provident Annual Report & Accounts 2007 141
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                               EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


29. FPLP’s With-Profits Balance Sheet continued                              The guarantee cost in respect of guaranteed annuity options is
                                                                             assessed using a market-consistent stochastic model and values
Options and guarantees are features of life assurance and pensions           both the current level of the guaranteed annuity rate benefit
contracts that confer potentially valuable benefits to policyholders.        (allowing for future improvements in annuitant mortality) and the
They are not unique to with-profits funds and can arise in non-              time value due to uncertainty in future interest rates. The guarantee
participating funds. They can expose an insurance company to two             cost in each scenario is the value of the excess annuity benefit
types of risk: insurance (such as mortality/morbidity) and financial         provided by the options, relative to an annuity purchased in the open
(such as market prices/interest rates). The value of an option or            market. In estimating the future open market annuity rate, the
guarantee comprises two elements: the intrinsic value and the time           model allows for stochastic variation in interest rates and for future
value. The intrinsic value is the amount that would be payable if the        mortality improvements. The stochastic interest rate assumption
option or guarantee was exercised immediately. The time value is             reflects that implied by current market interest rate derivative prices.
the additional value that reflects the possibility of the intrinsic value    Future annuitant mortality has been derived from the premium basis
increasing in future, before the expiry of the option or guarantee.          at which annuities can be purchased from Friends Provident
Under FSA rules all options and guarantees must be valued and                Pensions Limited, which allows for future mortality improvements.
included in policyholder liabilities. For funds within the FSA’s realistic
capital methodology, options and guarantees are valued on a market-          The guaranteed annuity options cost also depends upon other
consistent stochastic basis that takes into account both the time            factors such as policy discontinuance and tax-free cash take-up.
value and the intrinsic value of the options and guarantees.                 The factors are based on recent experience adjusted to reflect
                                                                             industry benchmarks and to anticipate trends in policyholder
The majority of the Group’s life and pensions options and guarantees         behaviour. A summary of the key assumptions is as follows:
are within FPLP’s With-Profits Fund. These are valued stochastically
and included in the liabilities. There are two main types of                 Policy discontinuances: lapse, early retirement and paid-up rates vary
guarantees and options in the FPLP With-Profits Fund: maturity               by policy type and period and have been based on recent experience.
guarantees and guaranteed annuity options. Maturity guarantees are
in respect of conventional with-profits business and unitised with-          Policy lapses for pensions are generally in the range of 1% to 4% pa
profits business and represent the sum assured and reversionary              (2006: 1% to 3% pa) with policy lapses for life business in the range
bonuses declared to date. The cost of these guarantees, net of               of 3% to 10% pa (13% pa for mortgage endowment and 20% pa for
charges, has been calculated at £210m (2006: £101m). For certain             with-profit bond policies) (2006: 3% to 9% pa (13% pa for mortgage
with-profits pension policies issued, there are options guaranteeing         endowment policies)). Paid-up rates for pensions are generally in the
the rates at which annuities can be purchased. The cost of these             range of 5% to 12% pa (2006: 7% to 11% pa) with life policies
guarantees has been calculated at £628m (2006: £747m).                       generally in the region of 0.5% to 2% pa (2006: 0.5% to 2% pa).
                                                                             Early retirement rates vary by age band and policy type and have
The cost of the with-profits guarantees is assessed using a                  been reviewed and amended in 2007 based on recent experience.
market-consistent stochastic model (using The Smith Model (TSM)
Plus as the scenario generator) and is calculated using 6,300                Tax-free cash option: where a guaranteed annuity option is more
simulations. The model has been calibrated using the gilt risk-free          valuable than the cash equivalent it is assumed that 18% to 27% of
curve assuming interest rates of between 4.1% and 4.6% pa                    the benefit is taken as tax-free, depending on type of business
(2006: between 3.9% and 5.3% pa) and implied volatilities in the             (2006: 18% to 27%). This is based on recent experience.
market. The capital return has been calibrated and compared to the
actual asset portfolio. For equities, the capital return volatility varies   There are also guarantees and options in respect of some of the
by year with 26% pa (2006: 20% pa) assumed in year 7, increasing             other life assurance business within the Group, but these are not
to 26% pa (2006: 23% pa) by year 14 and 27% pa (2006: 25% pa)                considered to be material to the Group’s future cash flows. In
by year 21. Volatility for property total returns varies by year with        addition, they have largely been matched with suitable assets and
15% pa assumed in year 7 (2006: 15% pa), increasing to 17% pa                there is no material exposure to market or interest rate changes.
(2006: 15% pa) by year 14 and 17% pa (2006: 15% pa) by year 21.              Provisions have been established using deterministic scenarios
                                                                             based on prudent assumptions.
The cost of guarantees also depends on management actions that
would be taken under various scenarios. The regular bonus rate is
set each year such that, by maturity, guaranteed benefits are
targeted as a prescribed fraction of the total asset share, leaving the
remaining portion of the asset share to be paid as final bonus. This
management action is in line with the company’s PPFM and is
programmed into the model.




142 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


30. Capital

(a) Overview
The Group’s Life & Pensions business manages its capital on both economic capital and regulatory bases:

The economic capital model helps in setting our own financial risk appetite and in actively managing financial risk. The economic capital model
compares total available FPLP capital resources, calculated on a realistic basis, with the risk capital required to cover unexpected losses.

The Group complies with all regulatory capital requirements; these include the Insurance Groups Directive (IGD) and individual company
regulatory requirements.

The Life & Pensions capital statement, drawn up in accordance with FRS 27, illustrates the financial strength of the Life & Pensions business
and is set out in section (b). Total available capital resources are calculated on a realistic basis for the FPLP With-Profits Fund and on a
regulatory basis for all other funds.

IGD looks at capital from a Group shareholder perspective and is a prudent measure in that surplus capital not immediately available to
shareholders, such as surplus capital in the long-term funds, is excluded from the calculation.

A reconciliation of IFRS Equity attributable to equityholders of the parent, capital resources per the Capital Statement and Life & Pensions
Capital on an IGD basis is set out below.

                                                                   2007                                                  2006
                                                 Capital         Capital                              Capital           Capital
                                              resources    requirements            Surplus         resources     requirements             Surplus
                                                     £m                £m               £m                £m               £m                £m

IFRS                                               3,762                 -            3,762            3,617                  -            3,617
Subordinated debt                                      4                 -                4                10                 -                10
Fund for future appropriations                       481                 -              481              439                  -              439
Entity resources excluded from
  Capital Statement (i)                            (451)                 -            (451)             (105)                 -             (105)
Regulatory prudence – Inadmissible
  assets and valuation differences (ii)          (1,548)                 -          (1,548)           (1,487)                 -           (1,487)
Life & Pensions Capital Statement                  2,248              690             1,558            2,474               642             1,832
FPLP With-Profits Fund resources
  calculated on a regulatory basis (iii)           1,741            1,404               337            1,713             1,195               518
Long-term fund surplus (iv)                        (796)                 -            (796)           (1,039)                 -           (1,039)
Other valuation differences                           27                 -               27              (62)                 -              (62)
Life & Pensions Capital on an IGD basis            3,220            2,094             1,126            3,086             1,837             1,249


Group IGD surplus (v)                                                     Estimate £1.3bn                                                  £1.1bn


(i) Corporate centre, Asset Management and IFA distribution businesses.
(ii) Largely goodwill, intangible assets and DAC less actuarial funding (for which credit cannot be taken on an IFRS basis).
(iii) FPLP With-Profits Fund resources are calculated on a realistic basis under IFRS and a regulatory basis under the IGD (see b(iv)).
(iv) Long-term fund surplus capital over and above capital requirements is excluded from capital resources on an IGD basis.
(v) Group IGD surplus includes Corporate centre, Asset Management and IFA distribution businesses.




                                                                                               Friends Provident Annual Report & Accounts 2007 143
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


30. Capital continued

(b) Capital statement
The capital statement in respect of the Group’s Life & Pensions business is set out below. This statement shows an analysis of the available
capital resources calculated on a realistic basis for the FPLP With-Profits Fund and calculated on a regulatory basis for all other funds. It also
shows the regulatory capital requirements and, in total, the overall surplus capital over regulatory requirements. In addition the statement
provides an analysis of policyholders’ liabilities.

At 31 December 2007
                                                                                                   Overseas        Life &                 Total
                                               UK with-         UK with-           UK non-            Life &    Pensions                 Life &
                                                 profits          profits     participating        Pensions shareholders’              Pensions
                                                 (FPLP)           (FPLA)              funds           funds        funds               business
                                                    £m               £m                 £m               £m           £m                    £m

Shareholders’ funds
Outside fund                                            -                 -                -                 -             865               865
Inside fund                                             -                 -           1,044                76                 -            1,120
                                                        -                 -           1,044                76              865             1,985
Other qualifying capital
Subordinated debt                                       -                 -                -                4                 -                 4
Preference shares                                       -                 -                -                 -             300               300
FFA                                                   338             143                  -                 -                -              481
                                                      338             143             1,044                80            1,165             2,770
Regulatory adjustments
Assets                                                 2                  -            (571)             (441)              (14)          (1,024)
Liabilities                                             -               (2)             189               409                 -              596
Shareholders’ share of future bonuses                 (94)                -                -                 -                -               (94)
Available capital resources                           246              141              662                48            1,151             2,248
Capital requirement
UK realistic basis                                    246                 -                -                 -                -              246
Other regulatory bases                                  -               20              384                40                 -              444
                                                      246               20              384                40                 -              690
Overall surplus capital over
    regulatory requirements                                                                                                                1,558
Analysis of policyholders’ liabilities
With-profits                                     11,568               197                  -                 -                 -          11,765
Unit-linked                                             -                 -          18,896            14,496                  -          33,392
Non-participating                                  2,493                42            3,179                 2                  -           5,716
Total                                             14,061               239           22,075            14,498                  -          50,873
`




144 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


30. Capital continued

At 31 December 2006
                                                                                                      Overseas             Life &            Total
                                                     UK with-       UK with-         UK non-            Life &          Pensions           Life &
                                                      profits         profits    participating        Pensions      shareholders’        Pensions
                                                      (FPLP)         (FPLA)             funds            funds             funds         business
                                                         £m              £m                £m              £m                 £m              £m

Shareholders’ funds
Outside fund                                                 -               -               -                 -            1,045           1,045
Inside fund                                                  -               -          1,211                30                  -          1,241
                                                             -               -          1,211                30             1,045           2,286
Other qualifying capital
Subordinated debt                                            -               -               -               10               300             310
Preference shares                                            -               -               -                 -                 -               -
FFA                                                       296            143                 -                 -                 -            439
                                                          296            143            1,211                40             1,345           3,035
Regulatory adjustments
Assets                                                     19                -           (725)            (323)                  -         (1,029)
Liabilities                                                  -             (1)            237               327                  -            563
Shareholders’ share of future bonuses       (95)             -               -               -                 -              (95)
Available capital resources                               220            142              723                44             1,345           2,474
Capital requirement
UK realistic basis                                        220                -               -                 -                 -            220
Other regulatory bases                                       -             21             368                33                  -            422
                                                          220              21             368                33                  -            642
Overall surplus capital over
  regulatory requirements                                                                                                                   1,832
Analysis of policyholders’ liabilities
With-profits                                           12,505            217                 -                 -                 -         12,722
Unit-linked                                                  -               -         16,954           11,323                   -         28,277
Non-participating                                       2,595              38           2,896                55                  -          5,584
Total                                                  15,100            255           19,850           11,378                   -         46,583


(i) Summary
As can be seen from the above table, the total available capital resources of the Group’s Life & Pensions business amounts to £2,248m
(2006: £2,474m), its regulatory capital requirements amount to £690m (2006: £642m) resulting in a surplus of available capital resources over
regulatory capital of £1,558m (2006: £1,832m).

Set out below are details of how the available capital resources have been calculated, the restrictions that are in existence over the available
capital resources, the basis of calculating the regulatory capital requirements and an explanation for the change in the available capital.




                                                                                                 Friends Provident Annual Report & Accounts 2007 145
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued




30. Capital continued                                                     The shareholders’ funds supporting the Life & Pensions business,
                                                                          but held outside the Life & Pensions funds are shown separately in
(ii) Basis of calculating available capital resources in                  the capital statement. It is the Group’s policy to ensure that each
Life & Pensions business                                                  subsidiary is adequately capitalised to support its life businesses and to
The available capital of the two UK with-profits funds has been           exceed regulatory capital requirements. The amount of shareholders’
determined in accordance with FSA regulations and includes the            funds available capital resources is £1,151m (2006: £1,345m).
FFA. The FFA represents the estimated surplus in the funds that has
not been allocated and is available to meet regulatory and other          (iii) Restrictions on available capital resources in
solvency requirements of the funds. Adjustments have been made            Life & Pensions business
to restate all assets and liabilities onto a regulatory basis.            The available capital is subject to certain restrictions as to its
                                                                          availability to meet capital requirements elsewhere in the Group. In
The majority of the Group’s life and pensions options and                 particular, no transfers from long-term funds can take place without
guarantees are within FPLP’s With-Profits Fund and details are set        an up to date actuarial valuation. The main restrictions on capital are
out in note 29. These are valued on a market consistent stochastic        set out below.
basis. Options and guarantees outside FPLP’s With-Profits Fund are
not considered to be material to the Group’s future cash flows.           UK With-Profits Fund in FPLP: the available surplus held in the FPLP
In addition they have largely been matched with suitable assets and       With-Profits Fund can only be applied to meet the requirements of
there is no material risk to market or interest rate changes.             the fund itself or be distributed to with-profits policyholders and
Provisions have been established using deterministic scenarios            shareholders. Shareholders are entitled to an amount not exceeding
based on prudent assumptions.                                             one-ninth of the amount distributed to policyholders in the form of
                                                                          bonuses on conventional with-profits policies. Non-profit business
The With-Profits Fund in FPLP has available capital of £246m              written in the FPLP With-Profits Fund has been securitised and
(2006: £220m) and has been calculated in accordance with the FSA’s        surpluses are initially used to repay £380m of floating rate loan
realistic capital regulations. In accordance with accounting rules, the   notes issued by the Group. At the end of 2007 £154m of these loan
realistic liabilities only represent amounts relating to policyholders    notes are outstanding. Any subsequent surplus may be distributed
and do not include the shareholders’ share of future bonuses.             40% to FPLP’s With-Profits Fund and 60% to shareholders. Arising
However, the shareholders’ share is treated as a deduction from           from this arrangement, the FPLP Non-Profit fund has loaned £72m
capital that is available to meet regulatory requirements and shown       (2006: £90m) to FPLP’s With-Profits Fund. The FPLP Non-Profit fund
as a separate adjustment in the capital statement.                        has also provided a contingent loan of £61m inclusive of accrued
                                                                          interest (with a facility for a further £39m) to the FPLP With-Profits
The available capital in the closed with-profits fund in FPLA amounts     Fund which is repayable out of future surpluses in the With-Profits
to £141m (2006: £142m). This has been calculated in accordance            Fund, subject to certain restrictions.
with the FSA’s regulatory capital requirements.
                                                                          UK With-Profits Fund in FPLA: the available surplus held in the
The available capital in the Group’s UK non-participating businesses      closed With-Profits Fund of FPLA can only be distributed to
has been determined in accordance with FSA regulations and                policyholders.
amounts to £662m (2006: £723m). Adjustments have been made
to restate all assets and liabilities on to a regulatory basis. The       UK non-participating funds: for non-participating business, surplus
regulatory adjustment to assets mainly consists of eliminating            can be distributed to shareholders subject to meeting the
deferred acquisition costs. The regulatory adjustment to liabilities      requirements of the business.
mainly represents the additional regulatory capital arising as a result
of the securitisation of a defined book of pre-demutualisation            Overseas life funds: the available surpluses in FPI and Lombard can
business in December 2004 and sterling reserves.                          be distributed to shareholders subject to meeting the requirements
                                                                          of the businesses.
The available capital in the Group’s overseas businesses written by
FPI and Lombard has been determined in accordance with local              Shareholders’ funds: the capital is generally available to meet
requirements and amounts to £48m (2006: £44m). FPI is based in            requirements anywhere in the Group. It remains the intention of
the Isle of Man and Lombard is based in Luxembourg. The analysis          management to ensure that there is adequate capital to exceed
of available capital is £18m FPI and £30m Lombard (2006: £19m FPI         the regulatory requirements of the Group’s life and pensions
and £25m Lombard). Adjustments have been made to restate all              businesses, to meet any net new business strain and to support
assets and liabilities onto local regulatory bases.                       the Group’s overall credit ratings. FPLP has guaranteed the £300m
                                                                          STICS issued in 2003 and the £500m STICS issued in 2005 by the
                                                                          parent company.




146 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued




30. Capital continued

(iv) Basis of calculating capital requirements for Life & Pensions business
Each Life & Pensions company has to hold sufficient capital to meet its regulatory capital requirements.

For the FPLP With-Profits Fund, the capital requirement is the risk capital margin (RCM) which amounts to £246m (2006: £220m). This is
calculated on a defined set of adverse scenarios prescribed by the FSA (the market risk scenarios tested are what would happen if property
prices fall by 12.5%, equity prices fall by 20%, corporate bonds spreads increase by 6.45%, fixed interest yields rise 0.80% and persistency
increases by 32.5%). The RCM is based on the asset mix at the year-end and takes into account hedging strategies and certain other actions
management would take in the event of particular adverse market conditions.

Under the realistic capital methodology, the capital requirement is the higher of the ‘twin peaks’ test of the realistic peak and the regulatory
peak. In the FPLP With-Profits Fund, the realistic peak applied in both 2007 and 2006. This has resulted in a With-Profits Insurance Capital
Component (WPICC) of £1,226m (2006: £961m) required to bring the regulatory peak of £1,563m (2006: £1,475m) in line with the realistic
peak of £nil (2006: £nil) as adjusted for the value of future transfers to shareholders to be deducted from the WPICC; this has resulted in a
surplus in the FPLP With-Profits Fund, on a regulatory basis, of £337m (2006: £514m).


                                              Realistic                                                                        Regulatory
                                          2007          2006                                                               2007         2006
                                           £m            £m                                                                 £m            £m

Available capital                           246           220           Surplus                                            1,987           1,933
Risk capital margin                        (246)          (220)         Long-term Insurance Capital requirements            (424)           (458)
Realistic peak                                 -              -         Regulatory peak surplus                            1,563           1,475
                                                                        With-Profits Insurance Capital Component          (1,226)           (961)
                                                                        Value of future transfers to shareholders            337             514


The capital cover to meet the regulatory solvency requirement of FPLP’s With-Profits Fund is provided from FPLP’s Non-Profit Fund and
shareholders’ fund, to the extent it is not met from the With-Profits Fund itself.

For the FPLA closed With-Profits Fund, the capital requirement has been calculated on a regulatory basis in accordance with FSA regulations
at £20m (2006: £21m).

For UK non-participating funds, the relevant capital requirement is the capital resources requirement determined in accordance with FSA
regulations. This, in total, amounts to £384m (2006: £368m).

For overseas business, local regulatory capital requirements are determined and these amount to £40m (2006: £33m). This is analysed as
£10m (2006: £9m) for FPI and £30m (2006: £24m) for Lombard.




                                                                                               Friends Provident Annual Report & Accounts 2007 147
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                     EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


30. Capital continued

(v) Movement in available capital
At 31 December 2007 total available Life & Pensions capital resources had decreased by £226m to £2,248m, as shown below.


                                                                                           Overseas            Life &          Total
                                             UK with-         UK with-         UK non-        Life &        Pensions          Life &
                                               profits          profits   participating    Pensions     shareholders’      Pensions
                                                (FPLP)           (FPLA)           funds       funds            funds       business
                                                  £m                £m              £m           £m               £m             £m

At 1 January 2007                                     220          142             724            44           1,344          2,474
New business strain                                      -           -             (221)         (85)               -          (306)
Surplus in year*                                       26           (1)            162            71               32           290
Principal assumption changes:
  - PS 06/14                                             -           -             138              -               -           138
  - Expense and lapse basis                              -           -              (51)            -               -           (51)
Transfers                                                -           -              (90)          18               72              -
Dividend and STICS interest                              -           -                 -            -            (297)         (297)
At 31 December 2007                                   246          141             662            48           1,151          2,248


* All tax items are included within Surplus in year.

At 31 December 2006 total available Life & Pensions capital resources had increased by £7m to £2,474m, as shown below.


                                                                                           Overseas            Life &          Total
                                              UK with-        UK with-         UK non-       Life &         Pensions         Life &
                                                profits         profits    participating   Pensions     shareholders’      Pensions
                                                (FPLP)          (FPLA)            funds       funds            funds       business
                                                   £m              £m                £m         £m                £m            £m

At 1 January 2006                                     236          118             814            56           1,243          2,467
New business strain                                      -           -             (297)         (35)               -          (332)
Surplus in year*                                       (16)         24             160            48               74           290
Principal assumption changes:
  - PS 06/14                                             -           -             123              -               -           123
  - Morbidity basis                                      -           -             123              -               -           123
Transfers                                                -           -             (200)         (25)            225               -
Dividend and STICS interest                              -           -                 -            -            (197)         (197)
At 31 December 2006                                   220          142             723            44           1,345          2,474


* All tax items are included within Surplus in year.




148 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


                                                                           Business unit management is responsible for putting in place the
31. Risk management objectives and policies for                            ongoing management and monitoring disciplines for risks and
mitigating risks                                                           activities under its control. Through these mechanisms, risks are
                                                                           identified in a timely manner, their financial implications assessed,
Overview                                                                   control procedures re-evaluated and, where appropriate, actions
The Group is exposed to market risk, credit risk and liquidity risk        agreed and implemented.
from its use of financial instruments and to these risks and
insurance risk through the issuing of insurance contracts. This note       The Group Asset Liability Committee reports to the Investment
presents information about the Group’s exposure to each of the             Committee. It comprises the executive directors of the Company,
above risks and the Group’s objectives, policies and processes for         together with senior managers from the Life & Pensions and Asset
measuring and managing risk. Further quantitative disclosures are          Management businesses, and supervises the application of agreed
included throughout these consolidated financial statements.               risk appetite in respect of asset liability matching for both
                                                                           shareholder and policyholder funds. It also reviews the investment
The Board has overall responsibility for the establishment and             of, and monitors market, liquidity and credit risk management in
oversight of the Group’s risk management framework and determines          relation to, shareholder funds and makes recommendations to the
overall risk management policy for the Group. The Board has                Investment Committee in respect of policy on foreign exchange and
established the Group Risk Committee (GRC), which is responsible           interest rate hedging.
for developing, sponsoring and monitoring the risk management
activities and processes of the companies within the Group.                The Audit and Compliance Committee (ACC) oversees how
                                                                           management monitors compliance with the Group’s risk
Within the UK Life & Pensions business, (FPL&P), where most of             management policies and procedures and reviews the adequacy of
the financial and insurance risks arise, the boards of the principal       the risk management framework in relation to the risks faced by the
operating companies (Life & Pensions boards) oversee the risk              Group. The ACC is supported in its oversight role by Internal Audit,
framework and FPLP’s Financial Risk Committee (FRC), which                 which undertakes both regular and ad hoc reviews of risk
includes executive directors and other relevant senior managers,           management controls and procedures, the results of which are
oversees the management of financial and insurance risks. Within           reported to the ACC.
the international business, FPIL and Lombard have risk committees
comprising executive directors and other relevant senior managers          (a) Quantitive risk exposure
that oversee their risk management processes for all risks and
                                                                           The Group manages its business financially on European Embedded
report into their respective boards. The Board of F&C, in conjunction
                                                                           Value (EEV), economic capital and regulatory bases.
with management, identifies the major risks in the asset
management business and reviews and agrees procedures to
                                                                           The Group’s quantitative exposure to a range of financial, insurance
control these risks, where possible.
                                                                           and other risks is illustrated in the EEV sensitivity analysis below,
                                                                           where the impacts of reasonably possible changes in risk variables
The GRC has authority, delegated by the Board, to approve policies
                                                                           are disclosed. The basis of preparation and limitations of the EEV
for the management of risk and delegates its authority where
                                                                           methodology are provided on page 177 of the EEV supplementary
appropriate. The operational boards of the Group’s core businesses
                                                                           information.
are authorised to determine their respective policies for the
management of risk, subject to the oversight of the GRC. The Life
                                                                           Life & Pensions
& Pensions boards have delegated their authority to the FRC for
                                                                           The table below shows the sensitivity of the embedded value
market, credit, liquidity and insurance risk policy. All risk management
                                                                           and the contribution from new business to changes in assumptions
policies are reviewed regularly by the relevant committee on at least
                                                                           at year end 2007, split by UK and International. The sensitivities
an annual basis, to ensure they remain relevant to the changing
                                                                           shown reflect movements in Life & Pensions EEV and corporate net
demands of the business and regulatory environment.
                                                                           assets only.

The financial and insurance risk processes are aligned to the
                                                                           For each sensitivity other future experience assumptions remain
business planning process, with risk being identified and evaluated
                                                                           unchanged, except where changes in economic conditions directly
in relation to the achievement of business objectives. The processes
                                                                           affect them. The assumptions underlying the statutory reserving
are run centrally by the Risk function in co-operation with key
                                                                           calculations remain unchanged in all sensitivities.
business units. Risks are recorded by the Risk function, which
co-ordinates quarterly reporting to the FRC. Risks within business
                                                                           Sensitivities shown in a single direction have broadly symmetrical
change activities are identified and evaluated by the management of
                                                                           impacts.
the change programme both in relation to the delivery of the
programme and in terms of the change programme’s effect on the
business as a whole.




                                                                                               Friends Provident Annual Report & Accounts 2007 149
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued



31. Risk management objectives and policies for mitigating risks continued

                                                                          Change in embedded value               Change in new business
                                                                                 (net of tax)                   contribution (gross of tax)
                                                                          UK         Int      Total             UK          Int      Total
Year ended 31 December 2007                                    Notes      £m         £m         £m              £m         £m          £m

Base EEV/VNB                                                             2,309        601        2,910          96          110          206
Market risk
1% increase in equity and property expected returns               (i)     n/a         n/a          n/a         n/a          n/a          n/a
1% increase in risk-free rates, with corresponding
  change in fixed-interest asset values                                   (180)        (13)       (193)          (6)          (3)         (9)
1% reduction in risk-free rates, with corresponding
  change in fixed-interest asset values                                   174          12          186            5            2           7
10% increase in market values of equity and
  property assets                                                (ii)      82          33          115         n/a          n/a          n/a
10% reduction in market values of equity and property assets     (ii)      (95)        (32)       (127)        n/a          n/a          n/a
10% reduction in sterling/overseas exchange rate                 (iii)     (16)        (41)        (57)        n/a          n/a          n/a
Insurance and other risk
5% reduction in annuitant mortality
  Before reinsurance                                                       (40)          -         (40)          (2)           -          (2)
  After reinsurance                                                        (24)          -         (24)          (2)           -          (2)
5% increase in annuitant mortality
  Before reinsurance                                                       38            -          38            2            -           2
  After reinsurance                                                        23            -          23            2            -           2
5% reduction in mortality and morbidity (excluding annuities)
  Before reinsurance                                                       21            3          24            8            1           9
  After reinsurance                                                          4           3           7            3            -           3
5% increase in mortality and morbidity (excluding annuities)
  Before reinsurance                                                       (22)         (3)        (25)          (8)          (1)         (9)
  After reinsurance                                                         (5)         (3)          (8)         (3)          (1)         (4)
1% increase in risk discount rates                               (iv)     (101)        (50)       (151)         (25)        (16)         (41)
Reduction in capital requirement to regulatory minimum           (v)      n/a         n/a           17         n/a          n/a          n/a
50% increase in capital requirements                                      n/a         n/a          n/a           (3)          (1)         (4)
10% increase in administrative expenses                                    (58)        (15)        (73)          (6)          (5)        (11)
10% reduction in administrative expenses                                   48          15           63            6            3           9
10% increase in lapses                                                     (30)        (30)        (60)         (12)          (8)        (20)
10% reduction in lapses                                                    36          33           69          12             8          20
10% increase in paid-up rates                                              (11)         (1)        (12)          (7)          (2)         (9)
10% reduction in paid-up rates                                             13            2          15            8            1           9


(i) As a market-consistent approach is used, equity and property expected returns only affect the derived risk discount rates and not the
     embedded value or contribution to profits from new business.
(ii) The movement in embedded value from a reduction in market values comprises a £3m (2006: £44m) fall in the value of shareholders’
     invested net assets and a £124m (2006: £108m) reduction in the value of in-force Life & Pensions business. Conversely, the effect of an
     increase in market values comprises a £3m (2006: £44m) rise in the value of shareholders’ invested net assets and a £112m (2006:
     £114m) increase in the value of in-force Life & Pensions business.




150 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                                ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


31. Risk management objectives and policies for mitigating risks continued

(iii) Currency risk is expressed in terms of total overseas exposure; the principal currencies the Group is exposed to are the Euro and US Dollar.
(iv) Although not directly relevant under a market-consistent valuation where the risk discount rate is a derived disclosure only, this shows the
      impact of a change in the average derived risk discount rate, to enable adjustments to be made to reflect differing views of risk.
(v) Required capital is set at the greater of regulatory capital and requirements arising from internal capital management policies. In aggregate
      the required capital is higher than the regulatory requirement by £200m (2006: £200m). This sensitivity shows the impact on embedded
      value of using the lower regulatory capital requirements.
(vi) No changes to reserving or pricing bases are modelled in reaction to insurance and other risk sensitivities.


                                                                              Change in embedded value                  Change in new business
                                                                                     (net of tax)                      contribution (gross of tax)
                                                                              UK          Int     Total                UK          Int        Total
Year ended 31 December 2006                                   Notes           £m          £m              £m          £m           £m           £m

Base EEV/VNB                                                               2,658          570          3,228          108           96         204
Market risk
1% increase in equity and property expected returns                (i)        n/a          n/a            n/a          n/a         n/a          n/a
1% increase in risk-free rates, with corresponding
  change in fixed-interest asset values                                     (129)         (13)           (142)          (7)         (2)          (9)
1% reduction in risk-free rates, with corresponding
  change in fixed-interest asset values                                      135           11            146            6            1            7
10% increase in market values of equity and property assets        (ii)      127           31            158           n/a         n/a          n/a
10% reduction in market values of equity and property assets       (ii)     (120)         (32)           (152)         n/a         n/a          n/a
10% reduction in sterling/overseas exchange rate                  (iii)       (14)        (38)            (52)         n/a         n/a          n/a
Insurance and other risk
5% reduction in annuitant mortality
  Before reinsurance                                                          (38)           -            (38)          (2)           -          (2)
  After reinsurance                                                           (38)           -            (38)          (2)           -          (2)
5% increase in annuitant mortality
  Before reinsurance                                                          36             -             36           2             -           2
  After reinsurance                                                           36             -             36           2             -           2
5% reduction in mortality and morbidity (excluding annuities)
  Before reinsurance                                                          26            3              29           9             -           9
  After reinsurance                                                             5           3               8           5             -           5
5% increase in mortality and morbidity (excluding annuities)
  Before reinsurance                                                          (27)          (2)           (29)          (7)           -          (7)
  After reinsurance                                                            (6)          (2)            (8)          (2)           -          (2)
1% increase in risk discount rates                                (iv)      (125)         (43)           (168)        (29)          (8)         (37)
Reduction in capital requirement to regulatory minimum            (v)         n/a          n/a             16          n/a         n/a          n/a
50% increase in capital requirements                                          n/a          n/a            n/a           (3)           -          (3)
10% increase in administrative expenses                                       (43)        (12)            (55)          (7)         (3)         (10)
10% reduction in administrative expenses                                      34           13              47           6            3            9
10% increase in lapses                                                        (29)        (27)            (56)        (15)          (6)         (21)
10% reduction in lapses                                                       34           31              65          11            7           18
10% increase in paid-up rates                                                  (9)          (1)           (10)          (8)           -          (8)
10% reduction in paid-up rates                                                10            1              11           4             -           4




                                                                                                  Friends Provident Annual Report & Accounts 2007 151
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                                 EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


31. Risk management objectives and policies for mitigating risks continued

Asset Management
The sensitivity analysis below is based on hypothetical changes in F&C’s significant market risk variables. This analysis measures the change
in fair value and cash flows of the Group’s financial instruments.

The estimated changes in fair values for changes in exchange rates are based on an instantaneous increase or decrease of 10.0% for
instruments at the reporting date, with all other variables remaining constant.

The estimated changes in fair values and cash flows for changes in market interest rates are based on an instantaneous increase or decrease
of 1.0% of the value at the reporting date, with all other variables remaining constant.

No other F&C financial or insurance risks are material to the FP Group.
                                                                                  Profit or loss sensitivity                Equity sensitivity
                                                                                31 December 31 December               31 December 31 December
                                                                                         2007             2006               2007             2006
                                                                                           £m                £m               £m               £m

10% increase in sterling/overseas exchange rates                                              1                 2                  7                 7
10% decrease in sterling/overseas exchange rates                                             (2)                (2)               (9)                (9)
1% increase in sterling market interest rates                                                 2                 1                  2                 1
1% decrease in sterling market interest rates                                                (2)                (1)               (2)                (1)


A summary of how each risk is mitigated is provided below with,               assets is to manage them so that they meet the capital requirements
where appropriate, additional quantitative information on the                 of the Group, and support its future strategic and operational objectives.
exposure to that risk.
                                                                              The Board sets appetite for market risk for each of the different asset
(b) Market risk                                                               classes. Consideration is given to the objectives of the asset pools to
Market risk is the risk of loss arising from a change in the values of,       which they relate and the nature of the liabilities backed by those assets.
or the income from, assets or in interest or exchange rates. A risk of        For example, in the Life & Pensions business, in relation to equity risk,
loss also arises from volatility in asset prices, interest rates, or          appetite varies from taking on the risk when it is beneficial to do so for
exchange rates. Market risk includes the following five elements:             assets backing with-profits business in with-profits funds to not actively
• Equity risk – the risk of financial loss arising from a change of or        pursuing risk for assets backing non-linked, non-profit policies. The
    volatility in equity prices or income                                     Financial Risk Committee, in consultation with management and the
• Foreign exchange risk – the risk of financial loss arising from a           Risk function, recommends appropriate risk appetite statements to the
    change of or volatility in exchange rates                                 Board and reviews risk appetite on a regular basis.
• Interest rate risk – the risk of financial loss arising from a change
    of or volatility in interest rates                                        For assets backing non-linked policyholder liabilities, market risk is
• Property risk – the risk of financial loss arising from a change of         managed by matching, where possible, the duration and profile of
    or volatility in real estate values or income                             assets to the policyholder liabilities they are backing. This helps
• Commodity risk – the risk of financial loss arising from a change           manage market risk to the extent that changes in the values of assets
    of or volatility in commodity prices.                                     are matched by a corresponding movement in the values of liabilities.

Market risk arises on guarantees and options offered on certain of            Shareholders’ earnings are further exposed to market risk to the
the Group’s products. As described within the section on policyholder         extent that the income from policyholder funds is based on the value
liabilities (see note 28), the Group is exposed to guarantees on bonus        of financial assets held within those unit-linked or with-profits funds.
additions that become more valuable as investment values fall. In
addition, the Group is exposed to guaranteed cash and annuity                 Within F&C, there is no net market risk in relation to customer
options on certain pension policies that become more valuable as              assets because the risk is fully borne by the clients concerned.
interest rates fall.                                                          Other assets and liabilities do not expose the Asset Management
                                                                              business to significant market risk. F&C actively pursues market risk
The Group manages market risk attaching to assets backing specific            in relation to the impact on management fees of movements in
policyholder liabilities and to assets held to deliver income and gains for   market variables such as equity prices and interest rates.
the shareholder. Within the unit-linked funds and with profit funds, the
Group manages market risk so as to provide a return in line with the          The following summarises the key actions undertaken by the Group
expectations of policyholders. The principal objective for shareholder        to manage all aspects of market risk:


152 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


31. Risk management objectives and policies for                           level of return from policyholder assets. For with-profit and unit-linked
mitigating risks continued                                                policies, the policyholders bear the majority of the investment risk
                                                                          and any change in asset values is matched by a broadly equivalent
The Group Board Investment Committee oversees investment policy           change in the liability. Charges which are expressed as a percentage
and strategy, which the Group actions primarily through the use of        of fund values are also impacted by movements in equity and
investment fund mandates. Day-to-day implementation of investment         property prices. Appetite for equity risk exposure for shareholder
policy and strategy is managed predominantly by F&C in line with          funds has reduced. Shareholder tactical equities were temporarily
these approved mandates, subject to monitoring by the Group.              hedged out by selling FTSE100 futures and have since been sold off.

Mandates are set for each relevant fund within each of the                The management of equity investments for FPL&P in the UK is
insurance legal entities within the Group taking account of the           largely undertaken on behalf of FPL&P by F&C. In its decision-
relevant factors outlined above. Unit-linked funds are managed in         making on equity investments, F&C will assess the extent of equity
line with their underlying objectives as set out in policyholder          risk required or allowed by the fund as set out in the fund objectives
contracts. The mandates set limits on the level of market risk            and relative to defined performance benchmarks. The methodology
permitted using some or all of the following mechanisms;                  followed by F&C to manage equity risk within each fund is an
• defined performance benchmarks,                                         integral part of the asset management approach adopted.
• a maximum proportion of the fund that can be held in equities
    and, for with-profit funds, a minimum level,                          (ii) Foreign exchange risk
• restrictions on the size of companies within which equity               The Group is exposed to foreign exchange risk through its
    investment can be held (eg potentially restricting UK equity          investment in foreign operations, fee income derived from financial
    to FTSE 100 stocks),                                                  instruments denominated in currencies other than its measurement
• defined asset allocations between UK and overseas equity                currency (pounds sterling), and revenues receivable in foreign
    exposure in specific regions,                                         currency. Exposure to foreign exchange risk through direct
• restrictions on the variation of the duration of the portfolio of       investment in overseas equities and debt securities is minimal due
    bonds from the benchmark duration.                                    to restrictions through limits placed by Investment mandates.
                                                                          Consequently, the Group is exposed to the risk that the exchange
Equity derivatives may be held to facilitate efficient portfolio          rate of its measurement currency relative to other currencies may
management or to reduce investment risk (without                          change in a manner that has an adverse effect on the value of the
disproportionately increasing other types of risk), and appropriate       Group’s financial assets and liabilities. This risk is accepted, in
approval must be obtained for their use. Currency forwards and            accordance with the agreed risk appetite, as being consequential
other derivatives may be held to manage currency risk, but only if        upon the Group following its agreed investment strategy.
permitted by individual fund mandates.
                                                                          For unit-linked contracts, currency risk is borne by the policyholder.
In addition to the mandates, the Group undertakes a programme of          As noted above, the shareholders are subject to currency risk only to
asset/liability management. For example, in order to manage the           the extent that income from policyholder funds is based on the value
impact of interest changes on profit, corporate bonds and gilts are       of the financial assets held in those funds. The liability for non-linked
held to match the duration of annuity and permanent health                insurance contracts in currencies other than sterling is immaterial.
insurance policies. This provides matching of cash flows and
valuation movements and is supplemented by the use of interest            The impact of exchange rate movements on F&C is minimised by
rate swaps to improve asset/liability matching as necessary.              repatriation of excess foreign currency funds to sterling, and by
                                                                          holding regulatory capital in the local currency.
In order to manage the exposure arising from guarantees and
options, the Group has purchased a number of derivatives, including       (iii) Interest rate risk
interest rate swaps, equity put options, interest rate swaptions, and     The Group is exposed to fair value interest rate risk where changes
equity futures to manage exposures to movements in equity prices          to interest rates result in changes to fair values rather than cash
or interest rates. Hedge accounting has not been applied to these         flows, for example fixed interest rate loans and assets. Conversely,
derivatives, as movements in the fair value of these instruments will     floating rate loans expose the Group to cash flow interest rate risk.
be offset by the movement in the valuation of the liability. As noted,    The Group holds both:
the majority of these guarantees arise within FPLP’s With-Profit          • Receiver interest rate swaps (where fixed payments are received
Fund and so any net fair value movement will be reflected in the                in return for floating payments being paid) – increases to interest
FFA rather than within shareholders’ funds.                                     rates increase cashflows payable and reduce fair value.
                                                                          • Payer interest rate swaps (where floating payments are received
The following provides additional information on the exposure to                in return for fixed payments being paid) – reductions to interest
equity and property risk, foreign exchange risk and interest rate risk:         rates reduce cashflows receivable and reduce fair value.

(i) Equity and property risk                                              However, both types of swaps are in place in order to mirror the
Equity and property risk, as defined above, are accepted in               effect of interest rates on the liabilities and so the net effect of
accordance with agreed risk appetite in order to achieve the desired      interest rate changes is minimal.


                                                                                              Friends Provident Annual Report & Accounts 2007 153
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                                EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


31. Risk management objectives and policies for                              The Group is averse to most other types of credit risk, in particular
mitigating risks continued                                                   that related to the default of derivative counterparties, reinsurers and
                                                                             deposit takers.
Bond related performance benchmarks within fund mandates are
set so that asset profiles match liability profiles as closely as            FPL&P is exposed to investment credit risk on its investment
possible. This mitigates against interest rate risk. Day to day              portfolio, primarily from investments in corporate bonds.
investment decisions around the management of interest rate risk             Creditworthiness assessment for new and existing investments is
                                                                             largely undertaken on behalf of FPL&P by F&C. In their decision
and its impact on the value of FPL&P’s investments are largely
                                                                             making, F&C will assess the extent of investment credit risk allowed
undertaken on behalf of FPL&P by F&C, within the boundaries set
                                                                             by each fund as set out in the fund mandates and relative to defined
by fund mandates. In its decision making on gilt and corporate bond
                                                                             performance benchmarks.
investments, F&C will assess the extent of interest rate risk allowed
by the fund as set out in the fund objectives and relative to the
                                                                             The global ‘credit crunch’ has had a minimal impact as FPL&P has
defined performance benchmarks. The methodology followed by
                                                                             very little exposure to the higher risk end of the market. Shareholder
F&C to manage interest rate risk within each specific fund is an             exposure to directly held asset-backed securities is £770m, virtually
integral part of the asset management approach adopted.                      all of which are at investment grade. Total exposure to US sub-prime
                                                                             mortgage backed securities within the Group’s investment portfolio
FPL&P may also be exposed to interest rate risk on its strategic             is less than £5m.
investments, or any debt issuance. As part of any proposal for
strategic investment or debt capital raising, the interest rate risk to      Derivatives purchased over the counter expose FPL&P to substantial
which FPL&P is exposed will be given careful consideration as one            credit risk unless this risk is appropriately managed. The Asset
of the factors impacting on the final recommendation. Any proposed           Liability Management function is responsible for recommending
non F&C managed investments or debt raising with significant                 derivative strategies to the Board, and putting into place the
interest rate risk will be reviewed by Group Risk. Ultimate approval         appropriate internal management processes. FPL&P will endeavour
for any strategic investments or debt raising rests with FP plc Board.       only to transact over-the-counter derivatives with highly rated
                                                                             counterparties.
(c) Credit risk
                                                                             FPL&P is exposed to reinsurance counterparty risk of three
Credit risk is the risk of loss due to the default of a company,
                                                                             different types:
individual or country. Credit risk includes the following seven
                                                                             • as a result of debts arising from claims made by FPL&P but not
elements:
                                                                                 yet paid by the reinsurer
• Investment credit risk – financial loss arising from a change in the
                                                                             • from reinsurance premium payments made to the reinsurer in
   value of an investment due to a rating downgrade, default, or
                                                                                 advance, and
   widening of credit spreads
                                                                             • as a result of reserves held by the reinsurer which would have
• Derivative counterparty risk – financial loss arising from a
                                                                                 to be met by FPL&P in the event of default.
   derivative counterparty’s default, or the deterioration of the
   derivative counterparty’s financial position                              In addition, there is potential for FPL&P’s credit risk exposure to
• Reinsurance counterparty risk – financial loss arising from a              increase significantly under adverse insurance risk events, eg if FPL&P
   reinsurer’s default, or the deterioration of the reinsurer’s financial    received a large number of claims for which it needed to recover
   position                                                                  amounts from its reinsurers. In order to mitigate reinsurance
• Deposit risk – financial loss arising from a deposit institution’s         counterparty risk, FPL&P will give due consideration to the credit
   default, or the deterioration of the deposit institution’s financial      quality of a reinsurer before incepting a reinsurance treaty. To facilitate
   position                                                                  this process, a list of acceptable reinsurers is maintained within Life &
• Loan risk – financial loss arising from a debtor’s inability to repay      Pensions Finance.
   all, or part, of its loan obligations to the Group or the deterioration
   of the debtor’s financial position                                        FPL&P is exposed to credit risk on the balances deposited with
• Country risk – financial loss arising from economic agents in a            banks in the form of cash, certificates of deposit and money market
   sovereign foreign country, including its government, being unable         instruments. Money market instruments issued by parties other
   or unwilling to fulfil their international obligations due to a           than banks such as commercial paper are also covered under this
   shortage of foreign exchange or another common reason such as             heading. Given the high credit quality of the deposit institutions and
   currency inconvertibility                                                 the short-dated nature of these credit risk exposures, the primary
• Settlement risk – financial loss arising from the failure or               risk to FPL&P under this heading is concentration risk; this is
   substantial delay of an expected settlement in a transfer system          mitigated by limiting holding in any one issuer to 5%.
   to take place, due to the party other than FPL&P defaulting/not
   delivering on its settlement obligations.                                 FPL&P is exposed to loan risk in several different areas, the most
                                                                             material of which are:
The Life & Pensions business will take on investment credit risk and         • loans to IFAs as part of strategic investments
loan risk when it is deemed financially beneficial to do so in support       • stocklending arrangements
of the Group’s strategic objectives. F&C actively pursues credit risk        • other strategic loans
in relation to the impact on management fees of credit events.               • loans to appointed representatives


154 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


31. Risk management objectives and policies for                           Credit rating                             Limit
mitigating risks continued                                                AAA                                       £1,000m
                                                                          AA                                        £750m
• loans to brokers                                                        A                                         £600m
• agency debt (including debt arising as a result of clawback of          BBB                                       £100m
  commission)                                                             Below investment grade                    £20m
• policyholder debt
• rental income due.                                                      The exposure to individual counterparties is limited to specific
                                                                          percentages of total non-linked assets in the long term fund, based
In general, these quantitative credit exposures are relatively low but    on regulatory categorisation of counterparties. These are typically
they can bear relatively high likelihoods of default.                     less than 3% of non-linked assets.

FPL&P is exposed to country risk in a number of key areas, the            Concentrations of credit risk might exist where the Group has
most significant of which is bonds issued by foreign governments          significant exposure to a group of counterparties with similar
in non-domestic currency.                                                 economic characteristics that would cause their ability to meet
                                                                          contractual obligations to be similarly affected by changes in
The management of country risk on the creditworthiness of our             economic and other conditions.
investments is largely undertaken on behalf of FPL&P by F&C.
                                                                          F&C is exposed to a concentration of credit risk to the extent of
Settlement risk is a form of credit risk that arises at the settlement
                                                                          timing differences between the recognition of income for services
of a transaction, as a result of a counterparty, failing to perform its
                                                                          rendered and the timing of receipt of management fees from clients.
obligations to FPLP. FPLP is exposed to settlement risk in the
following key areas:
                                                                          The amount disclosed in the balance sheet in respect of financial
• bank transfers, including foreign exchange transactions
                                                                          assets represents the Group’s maximum exposure to credit risk.
• the purchase or sale of investments
• the purchase or sale of property
• the purchase, sale or expiry of exchange-traded derivatives or          F&C’s treasury policy limits the exposure, to any one counterparty
    the transfer of periodic payments under these contracts               (in respect of cash and cash equivalents), to £25m, recognising that
• the settlement of derivative contracts.                                 each counterparty used has been approved by the F&C Credit
                                                                          Committee. There is no net credit risk in relation to client assets as
Settlement risk on assets that form part of F&C funds is managed          this risk is borne fully by the clients concerned.
as an integral part of the asset management approach adopted.
                                                                          An indication of the Group’s exposure to credit risk is the quality of
Objectives in managing credit risk                                        the investments and counterparties with which it transacts. The
                                                                          Group is most exposed to credit risk on debt and other fixed income
To mitigate credit risk:                                                  securities, derivative financial instruments, deposits with credit
• Investment mandates for many funds will have a prescribed               institutions, reinsurance arrangements and cash and cash
   minimum credit rating of bonds that may be held. Investing in a        equivalents. Debt and other fixed income securities mainly comprise
   diverse portfolio reduces the impact from individual companies         government bonds and corporate bonds. Given the nature of the
   defaulting.                                                            Group’s investments in government bonds the credit risk associated
• Counterparty limits are set for investments, cash deposits,             with these is considered small and the Group therefore focuses on
   foreign exchange trade exposure and stock lending.                     monitoring the quality of its corporate bonds.
• All derivative transactions are covered by collateral, with minor
   exceptions.                                                            The following table gives an indication of the level of
• The Group regularly reviews the financial security of its               creditworthiness of those categories of assets which neither past
   reinsurers.                                                            due nor impaired and are most exposed to credit risk using
                                                                          principally ratings prescribed by Standard & Poor’s and Moody’s.
The counterparty and individual issuer credit rating limits excluding
                                                                          Assets held within unit-linked funds have been excluded from the
linked funds, and hence exposure to credit risk, by individual
                                                                          tables below as the credit risk on these assets is borne by the
regulated entity are as follows:
                                                                          policyholders rather than the shareholders.




                                                                                             Friends Provident Annual Report & Accounts 2007 155
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


31. Risk management objectives and policies for mitigating risks continued

At 31 December 2007                         AAA             AA           A          BBB            BB            B     Not rated         Total
                                             £m             £m          £m           £m            £m           £m           £m            £m

Corporate bonds                             2,153         2,959       1,787          395            23            7          133         7,457
Derivative financial instruments                 -         155             -            -            -             -             -         155
Reinsurance assets                               -        1,979            -            1            -             -            35       2,015
Deposits with credit institutions                -           9           37             -            -             -            9           55
Cash and cash equivalents                   1,019          963          250             -            -             -             6       2,238


At 31 December 2006                          AAA            AA           A          BBB            BB            B     Not rated          Total
                                              £m            £m          £m           £m            £m           £m           £m            £m

Corporate bonds                             2,641         1,676       2,424          652             7            7          210         7,617
Derivative financial instruments                 -         181            1             -             -            -             -         182
Reinsurance assets                               -          85             -            -             -            -             -          85
Deposits with credit institutions              13           39           93             -             -            -             -         145
Cash and cash equivalents                     566          772          292             -             -            -             6       1,636


It is FPLP policy to make no new investment in non-rated assets in the non-linked fund.

The following tables show the amounts of insurance receivables and loans that were impaired and the amounts of insurance receivables and
loans that were either past due or but not impaired at the end of the year. No other financial assets were either past due or impaired at the
end of the year. Assets held in unit-linked funds have been excluded from the tables.

At 31 December 2007                                                                                                Insurance
                                                                                                                 receivables             Loans
Financial assets that are neither past due nor impaired                                                                82.3%            100.0%
Financial assets that are past due:
  0 – 3 months past due                                                                                                14.9%                  -
  3 – 6 months past due                                                                                                 0.4%                  -
  6 – 12 months past due                                                                                                1.6%                  -
Impaired financial assets for which provision is made                                                                   0.8%                  -
Total (£m)                                                                                                                550               15

At 31 December 2006                                                                                                 Insurance
                                                                                                                  receivables            Loans
Financial assets that are neither past due nor impaired                                                                89.8%           100.0%
Financial assets that are past due:
  0 – 3 months past due                                                                                                 7.6%                  -
  3 – 6 months past due                                                                                                 1.9%                  -
  6 – 12 months past due                                                                                                0.5%                  -
Impaired financial assets for which provision is made                                                                   0.2%                  -
Total (£m)                                                                                                                421               15


For over-the-counter derivative transactions undertaken by FPL&P, collateral is received from the counterparty if the sum of all contracts held
with the counterparty are in-the-money (ie is an asset of FPL&P). The Group has a legal right to this collateral if the counterparty does not
meet its obligations. It is repayable if the contract terminates or the contract’s fair value falls. Contractual agreements between the Group and
each counterparty exist to protect the interests of each party, taking into consideration minimum threshold, asset class of collateral pledged
and the frequency of valuation. At 31 December 2007 the fair value of such collateral held was £143m (2006: £181m). No collateral received
from the counterparty has been sold or repledged.

156 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                   ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


31. Risk management objectives and policies for mitigating risks continued

Reinsurance assets include an amount of £1,611m which relates to a reinsurance agreement with Swiss Re. The asset is secured by a
collateral arrangement offering protection should any counterparty supporting the Reinsurance Agreement default. An Investment
Management Agreement exists between the Group and Swiss Re to govern the suitability of collateral assets. As at 31 December 2007 the
value of such collateral was £1,614m.

(d) Liquidity risk
Liquidity risk is the risk that an entity, although solvent, either does not have sufficient financial resources available to it in order to meet its
obligations when they fall due, or can secure them only at excessive cost.

The Group faces two key types of liquidity risk:
• shareholder liquidity risk (liquidity within funds managed for the benefit of shareholders, including shareholders’ interests in long-term
   funds) and
• policyholder liquidity risk (liquidity within funds managed for the benefit of policyholders).

Longer-term shareholder liquidity risk will be taken on when it is deemed financially beneficial for the organisation to do so, or where the
taking of this liquidity risk is in support of strategic objectives. Short-term shareholder liquidity risk is avoided due to the need to satisfy
dividend expectations, and to meet the needs of the business, whilst having a limited timeframe to raise capital. Policyholder liquidity risk is
not accepted, over either a short or longer-term timeframe, in all but the most extreme scenarios (the exception being the property funds
where a six month notice period is required for switches and withdrawals). The same is true for liquidity risk in F&C’s investors’ funds.

The Group is exposed to shareholder liquidity risk in a number of key areas. For example:
• the ability to support the liquidity requirements arising from new business
• the capacity to maintain dividend payments/loan repayments and interest etc
• the ability to cope with the liquidity implications of strategic initiatives, such as merger and acquisition activity
• the capacity to provide financial support across the Group
• the ability to fund its day-to-day cash flow requirements.

The overall objective of shareholder liquidity risk management is to ensure that there is sufficient liquidity over short (up to one year) and
medium time horizons to meet the needs of the business.

For policyholder funds, liquidity risk arises from a number of potential areas, including:
• a short-term mismatch between cash flows assets and cash flow requirements of liabilities
• having to realise assets to meet liabilities during stressed market conditions
• investments in illiquid assets such as property and private placement debt
• higher than expected level of lapses/surrenders caused by economic shock, adverse reputational issues or other events
• higher than expected payments of claims on insurance contracts
• the implementaion of temporary restrictions for the withdrawal of funds, as recently applied by extending the notice periods of switches
   and withdrawals from Property Funds.

Exposure to policyholder liquidity risk can be split between non-linked and linked funds. As a general rule, the Group is more likely to be
significantly impacted by policyholder liquidity risk on non-linked funds, as opposed to linked funds where policyholder benefits are expressed
directly as units held in an underlying fund.

The overall objective of policyholder liquidity risk management is to ensure that sufficient liquid funds are available to meet cash flow
requirements under all but the most extreme scenarios.

Liquidity risk is managed in the following way:
• Forecasts are prepared regularly to predict required liquidity levels over both the short and medium term.
• Committed third party funding facilities are held to enable cash to be raised in a relatively short time-span.
• Credit risk of cash deposits is managed by applying counterparty limits and imposing restrictions over the credit ratings of third parties
   with whom cash is deposited.
• Assets of a suitable maturity and marketability are held to meet policyholder liabilities as they fall due.
• Limits are set on the level of investment in securities that are not readily realisable. These are typically restricted to 5% of non-linked assets.

Where contracts have a surrender value (ie the policy is theoretically payable on demand) the following table shows the current surrender
value in the within one year or payable on demand column. Otherwise it indicates the undiscounted expected contractual net cash flows in
respect of financial and insurance liabilities.
                                                                                                   Friends Provident Annual Report & Accounts 2007 157
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                               EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


31. Risk management objectives and policies for mitigating risks continued
                                                                                                      Contractual undiscounted cash flows
                                                                                                 Within 1 year
                                                                                   Carrying        or payable                          More than
                                                                                      value       on demand           1– 5 years         5 years
Year ended 31 December 2007                                                             £m                 £m                £m              £m

Insurance contracts                                                                   13,607             8,263               911             5,540
Investment contracts                                                                  37,266            37,570                  -               69
Loans and borrowings:
  Principal                                                                              738               108                13               617
  Interest                                                                                  -               38               149               150
  Due to reinsurers                                                                    1,611               128               485             2,218
Net asset value attributable to unit holders                                             909               909                  -                 -
Insurance payables and other payables                                                    559               559                  -                 -

                                                                                                       Contractual undiscounted cash flows
                                                                                                 Within 1 year
                                                                                    Carrying       or payable                           More than
                                                                                      value       on demand           1–5 years           5 years
Year ended 31 December 2006                                                              £m                £m               £m                £m

Insurance contracts                                                                   13,762             8,746               893             5,315
Investment contracts                                                                  32,821            32,737                  1              213
Loans and borrowings:
  Principal                                                                            1,130               468                28               644
  Interest                                                                                   -              57               160               211
Net asset value attributable to unit holders                                             941               941                  -                 -
Insurance payables and other payables                                                    516               508                  4                 4
Lombard deferred consideration                                                             75               75                  -                 -


Amounts expected to be settled from the fund for future appropriation are excluded from the analysis above as there is no contractual
obligation to settle the liability. Of the carrying amount on the balance sheet in respect of the FFA, £433m (2006: £380m) is expected to be
settled more than 12 months after the balance sheet date.

The Group has issued fixed rate subordinated loan notes repayable in 2016, with the option of extending the term to 2026 (at a floating rate).
This has provided the Group with long-term flexible funding at a fixed rate of interest.


(e) Policy cash flow risk (including insurance risk)
Policy cash flow risk consists of the following four main areas:
Insurance risks:
• mortality risk – risk of loss arising due to policyholder deaths experience being different from expectations; or for annuities, risk of
   annuitants living longer than expected (called annuity longevity risk);
• morbidity risk – risk of loss arising due to policyholder health experience being different from expectations.

Other risks:
• policyholder decision risk – risk of loss arising from experience of actual policyholder behaviour (eg lapses, option take-up) being different
   from expectations;
• expense risk – risk of loss due to expense experience being different from expectations.

The Life & Pensions business actively pursues mortality risk (other than annuitant mortality risk) and morbidity risk in those areas where it
believes it has a competitive advantage in managing these risks to generate shareholder value (without compromising the interests of
policyholders, and the need to treat customers fairly). Annuitant mortality risk, policyholder decision risk and expense risk are taken on when it
is deemed financially beneficial for the organisation to do so, or where the taking of these risks is in support of the Group’s strategic objectives.
158 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                               ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


31. Risk management objectives and policies for                            Income protection
mitigating risks continued                                                 The two main risks related to income protection are an increase in the
                                                                           frequency of claims (the inception rate) and an increase in the average
Underpinning the Group’s management of policy cash flow risk is:           length of the claim (a reduction in recovery rate). Most income
• adherence to an approved underwriting policy that takes into             protection policies are regular premium with the premium and cover
  account the level of risk that the Group is prepared to accept;          fixed at inception. Some group policies allow premiums to be reviewed
• controls around the development of products and their pricing;           but the premium rates are usually guaranteed for three years.
  and
• regular analysis of actual mortality, morbidity and lapse                Annuities
  experience which feeds into the development of products and              If annuitants live longer than expected on average, profits will
  policies. If the analysis changes expectations of future liability       reduce. In most cases the annuity is guaranteed payable for a fixed
  cashflows, periodic adjustments are made to asset cashflows to           term and many policies are written so that when the first life dies
  maintain the asset liability match.                                      the benefit continues, often at a reduced level. These features tend
                                                                           to reduce the volatility of results to random fluctuations in
Risks in excess of agreed underwriting limits may be reinsured.            experience but not the impact of a general increase in longevity.
The Group’s objective is to purchase reinsurance in the most
cost-effective manner from reinsurers whose creditworthiness is            Deferred annuities are subject to a similar risk from the impact of
deemed appropriate.                                                        longevity, the only difference being that the risk of adverse impact is
                                                                           greater given that the annuity is payable further into the future.
Substantially all insurance contracts, and the majority of the             However, most of these policies are with-profits and the impact
combined insurance and investment contract portfolio, are written in       would be offset by a reduction in the FFA, with relatively little
the UK and so results are sensitive to changes in the UK insurance         resulting impact on shareholder profits.
market and tax regime. Otherwise the Group sells a diverse range of
products to a diverse group of people.                                     Annuity risk of the Group has significantly reduced through a
                                                                           reinsurance agreement with Swiss Re on policies valued at £1,611m
Note 28 describes the main insurance contracts written by the              at 31 December 2007.
Group and the basis of setting assumptions in measuring insurance
liabilities which will take into account the risks above. The following    (ii) Policyholder decision risk
sections describe how policy cash flow risks are managed and               Persistency experience varies over time as well as from one type of
provide an indication of the sensitivity of reported profit to the risk.   contract to another. Factors that will cause lapse rates to vary over
Each sensitivity has been calculated independently of the remaining        time include changes in investment performance of the assets
risks (ie correlations between risks have been ignored).                   underlying the contract where appropriate, regulatory changes that
                                                                           make alternative products more attractive, customer perceptions of
F&C insurance contracts are all annuity contracts with guaranteed          the insurance industry in general and the Group in particular, and the
payment during the life time of the annuitant at a specified level or      general economic environment.
with a specified escalation factor. They are 100 per cent reinsured to
Friends Provident Pensions Limited.                                        The valuation of the Group’s guarantees and options is described in
                                                                           note 28. As stated in that note, the cost of guaranteed annuity
(i) Mortality and morbidity risk                                           options is dependent on decisions made by policyholders such as
Life assurance                                                             policy discontinuance and tax-free cash take-up. These assumptions
Most insurance policies other than annuities and deferred annuity          are set by reference to recent experience.
policies include life assurance. When pricing policies, an assumption
is made as to the likelihood of death and this assumption is               (iii) Expense risk
reviewed as part of the annual valuation of policies. To the extent        Though under IFRS 4 expense risk is not a component of insurance
that actual mortality experience is worse than that anticipated in         risk, it is an important policy cash flow risk in the context of
pricing (and subsequently in the insurance liability valuation) a loss     insurance and investment contracts.
will be made. The risk is greater for those policies such as term
assurance where the maturity or surrender benefit is small in relation     The whole of the impact of changes in expense levels is borne by
to the death benefit. Other policies which have a savings element,         shareholders with the following exceptions. In 2009 the charges
such as endowment assurance have significant liabilities relating to       made to the FPLP With-Profits Fund for managing policies will be
the maturity benefit, particularly as the policy approaches maturity.      reviewed to reflect market rates at the time. Pre-demutualisation
Contractual terms for unit-linked and unitised with-profits products       with-profits policyholders will bear the impact of any resulting
include provision for increases in mortality charges.                      changes to charges. Also FPLA closed fund with-profits
                                                                           policyholders bear the full expense risk for the fund.
Critical illness
The Group writes a number of critical illness policies that pay out in     Contractual terms for unit-linked and unitised with-profits products
the event of a policyholder’s ill health. As for life assurance, the       include provision for increases in charges. Certain expenses (such as
amount payable on ill health can be significantly higher than the          fees/commissions) are fixed at the time a contract is written.
amount payable if the policy is surrendered.

                                                                                               Friends Provident Annual Report & Accounts 2007 159
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                               EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


32. Investment contracts

Movement in investment contracts liabilities
                                                                                                                        2007             2006
                                                                                                                         £m               £m

At 1 January                                                                                                           32,821           27,857
Premiums                                                                                                                6,014            5,725
Claims                                                                                                                 (3,320)          (3,046)
Investment return, annual management charges and other expenses                                                         1,751            2,285
At 31 December                                                                                                         37,266           32,821
Analysed as follows:
Unit-linked contracts                                                                                                  32,151           27,066
Policies with DPF                                                                                                       5,002            5,700
Other                                                                                                                    113               55
Total investment contracts liabilities                                                                                 37,266           32,821


None of the movement in liabilities is attributable to changes in credit risk of the liabilities.

Included in the carrying amount above, £35,574m (2006: £31,365m) is expected to be settled more than 12 months after the balance sheet date.

Unit-linked liabilities are based on the fair value of the underlying assets. Liabilities relating to policies with DPF are determined using
methods and principles consistent with insurance contracts as set out in note 28. There is no significant difference between carrying values
and maturity values of investment contract liabilities.




33. Loans and borrowings

                                                                                                                        2007             2006
                                                                                                    Coupon %             £m               £m

Subordinated liabilities:
£260m F&C floating rate subordinated loan notes due 2026 (i)                                            Various          258              258
£10m Lombard undated subordinated loans                                                                 Various             4              10
Debenture loans:
£280m Box Hill Life Finance plc securitisation notes – class A-1 due 2016 (ii)                  3m LIBOR +0.20             54             198
£100m Box Hill Life Finance plc securitisation notes – class A-2 due 2019 (ii)                  3m LIBOR +0.23           100              100
£230m F&C Commercial Property Trust secured bonds due 2017 (iii)                                          5.23           229              229
£18m Friends Provident plc loan notes due 2011 (iv)                                             3m LIBOR – 0.75            18              18
£26m Friends Provident plc loan notes due 2012 (v)                                              3m LIBOR – 0.75            26                -
Convertible bonds:
£290m Friends Provident plc convertible bonds due 2007                                                    5.25              -             283
Reinsurance:
€35m Lombard financial reinsurance treaty                                                   3m EURIBOR +2.12               17              24
€16m Friends Provident Financial Reinsurance treaty                                         3m EURIBOR +1.75               11                -
Amounts due to reinsurers (vi)                                                                                          1,611                -
Other:
Amounts owed to credit institutions (overdraft facilities)                                                                 21              10
Total loans and borrowings                                                                                              2,349            1,130



160 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


33. Loans and borrowings continued

Unless otherwise stated below, the carrying values of interest-bearing loans and borrowings closely approximate fair value.

(i) Subordinated loan notes issued in December 2006 and initially recognised net of issue costs of £2m. The loan notes are redeemable in
    2026. For the period 20 December 2006 to 19 December 2016, interest accrues at a rate of 6.75% per annum, payable annually in
    arrears. For the period 20 December 2016 to 20 December 2026, interest accrues at a rate of 2.69% above 3m LIBOR per annum,
    payable quarterly in arrears.

(ii) On 16 December 2004 FPLP raised £380m of core regulatory capital in the form of floating rate secured notes through a securitisation of
     the cash flows expected to emerge from a book of life insurance policies. The total cost of funds is approximately 5.5% per annum. The
     repayment of principal on the notes started on the 15 April 2006 and every year thereafter, dependent on the surplus emerging from the
     book of life insurance policies. For the purpose of securitisation, two special purpose vehicles were established, namely Box Hill Life
     Finance plc and Box Hill Loan Finance Limited. Both companies have been treated as Group companies for the purposes of the
     consolidated accounts. On 16 December 2004 Box Hill Life Finance plc issued the two classes of floating rate secured notes. The notes
     benefit from a financial guarantee provided by Ambac Assurance UK. Interest is payable quarterly in arrears on 15 January, April, July and
     October each year.

   In 2006, £82m of the notes were repaid, with a further £144m repaid in April 2007.

(iii) Issued in February 2005. The carrying value is initially recognised net of amortised issue costs of £1m.

(iv) Issued on 16 April 2006 in respect of the 2005 earn-out payment relating to the acquisition of Lombard in 2005, in addition to a cash
     payment of £40m. Interest is payable quarterly in arrears at a rate of 3m LIBOR – 0.75%.

   The Notes are repayable on 18 April 2011 or at the Noteholders request on any interest payment date falling six months or more after the
   date of issue of the Notes.

(v) Issued on 16 April 2007 in respect of the 2006 earn-out payment relating to the acquisition of Lombard in 2005, in addition to a cash
    payment of £49m. Interest is payable quarterly in arrears at a rate of 3m LIBOR – 0.75%.

   The Notes are repayable on 18 April 2012 or at the Noteholders request on any interest payment date falling six months or more after the
   date of issue of the Notes.

(vi) During April 2007 Friends Provident Pensions Limited (FPP) entered into a reinsurance treaty with Windsor Life Assurance Company
     Limited, a subsidiary of Swiss Re. The agreement, which took effect from 1 January 2007, reinsures the mortality and investment risk,
     but not expense risk, of 100% of FPP’s in-force post demutualisation annuity books as at 31 December 2006. Business written after
     31 December 2006 is not reinsured under the treaty. The liability due to Swiss Re represents future reassurance premiums payable and is
     accounted for as a financial liability at fair value through the income statement, thereby avoiding a mismatch with the assets backing the
     liability. Reassurance premium payments are funded from the fixed return on an investment in a collateralised HSBC Amortising Note,
     purchased with a transfer of the assets previously tracking the annuity policies.

   Included in this carrying amount is £1,489m that is expected to be settled more than 12 months after the balance sheet date.




                                                                                                Friends Provident Annual Report & Accounts 2007 161
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


33. Loans and borrowings continued

Total interest-bearing loans and borrowings are repayable as follows:
                                                                                                                         2007             2006
                                                                                                                          £m               £m

Within one year or on demand                                                                                              196                  311
Between one and two years                                                                                                 117                    -
Between two and three years                                                                                               111                    -
Between three and four years                                                                                              105                    -
Between four and five years                                                                                                 99                  24
In more than five years                                                                                                 1,721                  795
Total loans and borrowings                                                                                              2,349             1,130


Included in the carrying amount above, £2,109m (2006: £687m) is expected to be settled more than 12 months after the balance sheet date.

Total interest expenses for financial liabilities not measured at fair value through the income statement, which arises solely from interest
bearing loans and borrowings is £141m (2006: £88m).




34. Net asset value attributable to unit holders

The movements in the value of third-party interests in open-ended investment companies and unit trusts that are consolidated by the
Group are as follows:


                                                                                                                         2007             2006
                                                                                                                          £m               £m

At 1 January                                                                                                              941                  751
Share of total return in the period                                                                                         42                 131
Share of distributions in period                                                                                           (19)                (17)
Amount received on issue of shares                                                                                        389                  297
Amount paid on cancellation of shares                                                                                    (444)             (429)
Acquired upon funds coming into scope (i)                                                                                    -                 208
Disposed upon funds going out of scope (i)                                                                                   -                   -
At 31 December                                                                                                            909                  941


(i) Third party interests in F&C managed funds which were either consolidated by the Group for the first time at 31 December 2007 or
    deconsolidated in 2007, as the Group holding was above 50% or below 50% respectively at 31 December 2007.




35. Provisions
                                                                                                                         2007             2006
Analysis of total provisions                                                                                               £m                  £m
Pension deficits (note 10)                                                                                                  27                  77
Other provisions                                                                                                          119                  138
                                                                                                                          146                  215




162 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


35. Provisions continued

                                                                              Review of
                                                                              mortgage
                                                                            endowment              Future
                                                                                   sales     consideration            Other               Total
Analysis of other provisions                                                         £m                £m               £m                  £m

At 1 January 2007                                                                      20               75                43               138
Charged in the year                                                                     4                 -               24                28
Acquisition of subsidiaries                                                            21               (58)              36                 (1)
Released in the year                                                                   (2)                -                (1)               (3)
Utilised in the year                                                                  (17)                -              (26)              (43)
At 31 December 2007                                                                    26               17                76               119


Included in the carrying amount above, £45m (2006: £31m) is expected to be settled more than 12 months after the balance sheet date.

(a) Review of mortgage endowment sales
Provision has been established for the estimated likely cost of redress, including administrative costs, arising from the review of the
suitability of mortgage endowment policies. In addition to the accounting provision of £26m (2006: £20m), an actuarial reserve of £9m
(2006: £17m) was held in the insurance contracts provision of FPLP’s With-Profits Fund in respect of estimated further complaints.

The majority of the mortgage endowment redress provision is expected to be settled in the next 12 months.

(b) Future consideration
Provision has been established for the estimated future consideration payable on acquisition of Pantheon Financial Limited and Quadrant
Caldwell Drake Limited, further details of acquisitions are shown in note 42.

(c) Other
Other provisions consist of £12m (2006: £14m) in respect of vacant properties, £8m (2006: £9m) in respect of potential claims on share
entitlements not claimed following demutualisation, £1m (2006: £3m) in respect of the estimated likely cost of redress arising from a review
of other sales, £4m in respect of irrecoverable VAT on Investment Trust management fees (2006: £nil), lapse provisions within Sesame £25m
(2006: £nil) and other £26m (2006: £17m). In addition to the accounting provision in respect of other sales, an actuarial reserve of £1m
(2006: £23m) is held within insurance contract liabilities.



36. Insurance payables, other payables and deferred income

                                                                                                                       2007               2006
                                                                                                                        £m                 £m

Creditors arising out of direct insurance operations                                                                    127                161
Creditors arising out of reinsurance operations                                                                           13                18
Accruals and deferred income                                                                                            112                 99
Investments purchased for subsequent settlement                                                                         100                 78
Deferred front end fees                                                                                                 118                 66
Employee benefits                                                                                                         36                33
Other payables                                                                                                          171                127
Total insurance payables, other payables and deferred income                                                            677                582


All insurance payables and other payables are repayable within a period of one year except for deferred front end fees of which £89m
(2006: £42m) is expected to be settled more than 12 months after the balance sheet date.


                                                                                             Friends Provident Annual Report & Accounts 2007 163
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


37. Movement in capital and reserves

                                                            Equity attributable to equity holders of the parent
                                Share            Share             Other                                        Minority
                               capital        premium          reserves            STICS           Total        interest                 Total
                                  £m               £m                £m              £m               £m             £m                    £m

At 1 January 2007                  214            2,051              542              810             3,617              548            4,165
Total recognised income
  and expense for the year            -                 -            (38)               52               14                (3)             11
Dividends on equity shares            -                 -           (168)                -             (168)             (42)            (210)
Interest paid on STICS                -                 -               -              (52)             (52)                -              (52)
Appropriations of profit              -                 -           (168)              (52)            (220)             (42)            (262)
Share based payments                  -                 5             10                 -               15                 6              21
Lombard earn-out                     3                57                -                -               60                 -              60
Change in participation
  in subsidiary                       -                 -               -                -                 -                1                1
Conversions of convertible
  bonds                             17                259               -                -              276                 -             276
Acquisitions of subsidiaries          -                 -               -                -                 -              52               52
At 31 December 2007                234            2,372              346              810             3,762              562            4,324



                                                            Equity attributable to equity holders of the parent
                                 Share            Share            Other                                            Minority
                                capital        premium         reserves             STICS              Total        interest             Total
                                   £m               £m                £m               £m                £m              £m               £m

At 1 January 2006                  214            2,038              436              810             3,498              442            3,940
Total recognised income
  and expense for the year            -                 -            258                52              310               92              402
Dividends on equity shares            -                 -           (164)                -             (164)              (46)            (210)
Interest paid on STICS                -                 -               -              (52)             (52)                -              (52)
Appropriations of profit              -                 -           (164)              (52)            (216)              (46)            (262)
Share based payments                  -               13              12                 -               25                7               32
Change in participation
  in subsidiary                       -                 -               -                -                 -              53               53
At 31 December 2006                214            2,051              542              810             3,617              548            4,165


Details of the authorised and issued share capital of the Company are set out in note 38, the analysis of other reserves is set out in note 39
and details of STICS are set out in note 40.




164 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


38. Share capital and share premium

(a) Allotted, called up and fully paid share capital of the Company

                                                                                                                        2007             2006
                                                                                                                         £m               £m

Authorised
2,500m (2006: 2,500m) ordinary shares of 10 pence                                                                        250               250
Allotted, called up and fully paid
2,341m (2006: 2,139m) ordinary shares of 10 pence                                                                        234               214


The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at
meetings of the Company. In respect of the Company’s shares that are held by the Group (Treasury shares), all rights are suspended until
those shares are reissued. Treasury shares are available for use to settle liabilities in respect of share options for employee share schemes,
at which point they are redesignated as ordinary shares.

There are no restrictions on the transfer of ordinary shares in the Company other than those imposed from time to time by laws and regulations.

(b) Changes to share capital and share premium during the year
                                                           Treasury               Ordinary                              Share           Share
                                                             shares                shares               Total          capital       premium
                                                         number (i)               number              number              £m              £m

At 1 January 2006                                       40,108,255          2,099,036,704      2,139,144,959             214             2,038
Employee share schemes                                 (17,478,172)            17,478,172                     -              -               13
At 31 December 2006                                     22,630,083          2,116,514,876      2,139,144,959             214             2,051
Employee share schemes                                  (4,505,799)             4,505,799                     -              -                5
Allocation on Lombard earn-out payment                             -           32,382,520          32,382,520               3                57
Conversion of convertible bonds (ii)                               -         169,590,604         169,590,604               17              259
At 31 December 2007                                     18,124,284          2,322,993,799      2,341,118,083             234             2,372

(i) Following demutualisation in 2001, share and cash entitlements that were not claimed were placed into two trusts. On 9 July 2004 the
    trusts were wound up and 61.4m shares and £25m cash were transferred to the Company for nil consideration in exchange for it
    accepting liability for any future claims in respect of demutualisation entitlements (which must be made by 9 July 2013) and a
    commitment to endow the Friends Provident Foundation, a registered charity, with cash or shares to a value of £20m.

   The Company set up a provision of £10m, based on a best estimate, in respect of possible future claims from policyholders (which will
   only be paid out in cash). To satisfy the commitment to the charitable trust, 14.9m shares with a fair value of £20m (£1.35 a share) were
   transferred in 2004 to the Friends Provident Foundation for nil consideration. The combined effect of these transactions resulted in an
   increase in the share premium of £15m. At 31 December 2007 claims made and settled since the provision was established amounted to
   £1.8m (2006: £1.5m).

   The remaining 46.5m shares were designated as Treasury shares. These shares do not carry any voting rights or entitlement to dividends
   and are available for use to settle liabilities in respect of share options for employee share schemes, at which point they are redesignated
   as ordinary shares.

   Since the end of the year 202,732 Treasury shares have been redesignated as ordinary shares to satisfy liabilities in respect of various
   employee share schemes. As at 18 March 2008, the Company had 2,323,196,531 ordinary shares in issue and 17,921,552 Treasury shares.

(ii) The allotment of 169.6m shares on conversion of convertible bonds into ordinary shares in 2007, resulting in additional share premium
     of £259m.

(c) Options
Outstanding options under the Group’s option schemes at 31 December 2007 are set out in note 11.


                                                                                             Friends Provident Annual Report & Accounts 2007 165
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


39. Other reserves

                                                                                                                      Foreign
                                                                                                                     currency
                                                                                 Retained       Convertible       translation
                                                                                 earnings           bonds             reserve             Total
                                                                                      £m                £m                £m                £m

At 1 January 2007                                                                      506                51               (15)             542
Loss for the year                                                                      (108)                -                 -            (108)
Actuarial gains on defined benefit schemes                                               27                 -                 -              27
Foreign exchange adjustments                                                               -                -               42               42
Dividends                                                                              (168)                -                 -            (168)
Share based payments                                                                     10                 -                 -              10
Conversion of convertible bonds                                                          51               (51)                -                -
Other                                                                                     1                 -                 -                1
At 31 December 2007                                                                    319                  -               27              346


                                                                                                                       Foreign
                                                                                                                      currency
                                                                                  Retained       Convertible        translation
                                                                                  earnings           bonds             reserve             Total
                                                                                       £m               £m                  £m              £m

At 1 January 2006                                                                      390                51                 (5)            436
Profit for the year                                                                    276                  -                 -             276
Actuarial losses on defined benefit schemes                                              (8)                -                 -               (8)
Foreign exchange adjustments                                                               -                -              (10)              (10)
Dividends                                                                              (164)                -                 -            (164)
Share based payments                                                                     12                 -                 -              12
At 31 December 2006                                                                    506                51               (15)             542




40. Step-up Tier one Insurance Capital Securities
                                                                                                 2003 STICS       2005 STICS               Total
                                                                                                        £m               £m                 £m

At 1 January 2006                                                                                        299               511              810
Interest payable in the year                                                                              21                31               52
Interest paid in the year                                                                                 (21)             (31)              (52)
At 31 December 2006                                                                                      299               511              810
Interest payable in the year                                                                              21                31               52
Interest paid in the year                                                                                 (21)             (31)              (52)
At 31 December 2007                                                                                      299               511              810


The Company has issued two STICS. These are identified as the 2003 STICS and the 2005 STICS. Under IFRS, it is necessary to treat STICS
as equity as there is no requirement to settle the obligation in cash or another financial asset. Interest and dividends on instruments classified
as equity are not treated as expenses but as an appropriation of profit. The Group considers that the commercial intent of the instruments is
debt, accordingly the interest is included in the underlying profit calculation of the Group.




166 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


40. Step-up Tier one Insurance Capital Securities continued

2003 STICS:
On 21 November 2003, the Company issued £300m of STICS, which bear interest from November 2003 to November 2019 at a rate of
6.875%. The STICS have no maturity date but will be redeemable at the option of the Company on 21 November 2019, thereafter on the
coupon payment date falling on or nearest successive fifth anniversaries of this date. The STICS are perpetual securities and are not
redeemable at the option of the holders at any time. The STICS are irrevocably guaranteed on a subordinated basis by FPLP. The guarantee
is intended to provide holders with rights against FPLP in respect of the guaranteed payments which are as near as possible equivalent
to those which they would have had if the STICS had been directly issued preference shares of FPLP. For each coupon period after
20 November 2019, the STICS will bear interest that is reset every five years. The STICS are carried at £299m, being £300m principal less
capitalised issue costs of £3m, plus interest due of £2m not yet paid to STICS holders. Interest is payable in equal instalments in arrears on
21 May and 21 November of each year.

2005 STICS:
On 27 June 2005, the Company issued £500m of STICS, which bear interest from 30 June 2005 to 30 June 2015 at a rate of 6.292%. The
STICS have no maturity date but will be redeemable in whole or part at the option of the Company on 1 July 2015, thereafter on every fifth
anniversary of this date. The STICS are perpetual securities and are not redeemable at the option of the holders at any time. The STICS are
guaranteed on a limited and subordinated basis by FPLP. For each coupon period after 1 July 2015, the STICS will bear interest that is reset
every five years. The STICS are carried at £511m, being £500m principal less capitalised issue costs of £5m, plus interest due of £16m not
yet paid to STICS holders. Interest is payable in arrears on 30 June of each year.




41. Contingent liabilities and commitments

(a) Past sales
The Group has made provision for the estimated cost of settling complaints in respect of past sales. Although the provisions are regularly
reviewed, the final outcome could be different from the provisions established as these costs cannot be calculated with certainty and are
influenced by external factors beyond the control of management. Such uncertainties include future regulatory actions, media attention
and investment performance. The majority of the uncertainty relates to endowment mortgages although a number of other products are
being reviewed as an ongoing process. It is expected that the majority of endowment cases requiring compensation will be settled in the
next year.



(b) Operating leases where the Group is lessee
The Group leases a number of properties under operating leases. These leases typically run for a period of 50 years, with an option of
renewal at the end of the lease. Lease terms include annual escalation clauses to reflect current market conditions.

The future minimum rentals payable under non-cancellable leases are as follows:


                                                                    2007                                                2006
                                             Land and                                             Land and
                                             buildings             Other             Total        buildings            Other              Total
                                                   £m                £m                £m               £m               £m                £m
Within one year                                      14                 6               20               13                 4                17
Between one and five years                           52                 6               58               49                 7                56
In more than five years                              65                 -               65               75                 -                75
Total operating lease payables                      131               12              143               137               11              148




                                                                                             Friends Provident Annual Report & Accounts 2007 167
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


41. Contingent liabilities and commitments continued

(c) Sub-lease receivables
Future minimum rentals receivable under non-cancellable operating leases at the year-end are as follows:

                                                                                                                               Premises
                                                                                                                       2007               2006
                                                                                                                        £m                 £m

Within one year                                                                                                           3                  -
After one year but not more than five years                                                                               6                 5
More than five years                                                                                                      2                 1
Total sub-lease receivables                                                                                              11                 6




42. Business combinations

(a) Pantheon Financial and Sesame acquisitions
On 14 May 2007 the Group acquired 100% of the voting rights of Pantheon Financial, a non-listed group of companies, incorporated in the
United Kingdom. Details of the consideration and assets and liabilities acquired can be seen in the table below.


Pantheon Financial                                                                           Book value          Fair value Total fair value
                                                                                          on acquisition       adjustments on acquisition
                                                                                                     £m                 £m               £m

Intangible assets:
  Distribution agreements                                                                                  -              7                 7
  Customer relationships                                                                                   -              2                 2
  Brand                                                                                                    -              1                 1
Net assets                                                                                                2                -                2
Deferred tax liability                                                                                     -             (3)                (3)
Net assets                                                                                                2               7                 9
Goodwill arising on acquisition                                                                                                            24
Total                                                                                                                                      33
Discharged by:
  Cash                                                                                                                                     17
  Estimated further consideration (i)                                                                                                      15
  Acquisition cost                                                                                                                          1
Total consideration                                                                                                                        33


(i) The future consideration represents three further annual payments that are linked to Pantheon Financial’s performance. The value of £15m
    is based on Pantheon Financial meeting 100% of their plan numbers and is capped at £58m.

The impact of Pantheon Financial on the results for 2007 has been to increase profit before tax by £1m.




168 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                                 ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


42. Business combinations continued

On 1 June 2007 the Group acquired 100% of the voting rights of Sesame, a non-listed group of companies, incorporated in the United
Kingdom. Details of the consideration, and assets and liabilities acquired can be seen in the table below.

As part of the purchase agreement the Group financed the repayment of a £75m loan due to the vendor company. As permitted by IFRS 3
Business Combinations this has been treated as consideration.

Sesame Group                                                                                      Book value         Fair value Total fair value
                                                                                               on acquisition      adjustments on acquisition
                                                                                                          £m                £m               £m

Intangible assets:
  Customer relationships                                                                                      -               20                20
  Software                                                                                                    -                 1                 1
  Brand                                                                                                       -                 1                 1
Net assets                                                                                                   60                 3               63
Deferred tax liability                                                                                        -                (7)               (7)
                                                                                                             60               18                78
Goodwill arising on acquisition                                                                                                                   8
Total                                                                                                                                           86
Discharged by:
  Cash                                                                                                                                          84
  Acquisition costs                                                                                                                               2
Total consideration                                                                                                                             86


The impact of Sesame on the results for 2007 has been to increase profit before tax by £10m.

The fair value of net assets acquired in respect of both companies shown in the 2007 interim report were reported on a provisional basis due to
the close proximity of the acquisitions to the interim reporting date. Since publication of the interim report, the fair values have been finalised.

(b) F&C managed investment funds
In 2007 the FPLP with-profits fund invested in two new funds, set-up and managed by F&C. The funds are consolidated despite the Group’s
interest being less than 50%, as control is deemed to exist through the fund manager (F&C). In each case, the fair value of the assets
acquired was equal to the consideration paid.

F&C Event Driven Limited
In June 2007, the Group invested £35m and acquired a 47% interest in the ordinary share capital of F&C Event Driven Limited. This is a new
investment fund set up by F&C in June 2007 and is a closed-end investment company, domiciled in Guernsey. The fund is listed on the
London Stock Exchange and invests in a portfolio of listed and unlisted hedge funds, each of which primarily follows an Event Driven Strategy.

F&C European Capital Partners LP
In April 2007, the Group invested £9m in F&C European Capital Partners LP, a new investment fund set up by F&C. The fund invests in
European mid-market enterprises and primarily holds investment in funds, but also invests directly into private companies. The Group’s
percentage holding at 31 December 2007 is 40%.




                                                                                                 Friends Provident Annual Report & Accounts 2007 169
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


42. Business combinations continued

(c) The AUB Commercial Property Company Limited (AUB) acquisition
In October 2007, the Group acquired the entire share capital of The AUB Commercial Property Company Limited (‘AUB’) for the sum of £74m.
AUB is a limited company incorporated on the Island of Guernsey and invests in a portfolio of commercial properties located throughout the
United Kingdom. The Group’s investment is held by FPLP linked funds. £1m of goodwill has been recognised on the acquisition.

The impact of AUB on the results for 2007 has been to decrease profit before tax by £4m.

(d) Quadrant Caldwell Drake Limited

On 26 June 2007, the Pantheon Financial group of companies purchased the entire share capital of Quadrant Caldwell Drake Limited (QCD),
an Independent Financial Advisor for £5m. £4m of goodwill has been recognised on this acquisition.

(e) Lombard acquisition
The final earn-out payment in connection with the acquisition of Lombard was settled in April 2007 and amounted to €126m. Of this sum
€87m was settled in shares and €39m in loan notes. The final earn-out payment was €15m higher than estimated at the 2006 year-end and
has been added to goodwill. The total consideration in respect of Lombard amounted to €566m (£394m) as follows:

Date                                                                                                                    €m                £m

January 2005 initial consideration                                                                                      265               187
April 2005 first earn-out payment                                                                                         90               62
April 2006 second earn-out payment                                                                                        85               59
April 2007 final earn-out payment                                                                                       126                86
Total                                                                                                                   566               394



43. Directors’ shareholdings

The interest of directors, their spouses and children under the age of 18 in the shares of Friends Provident plc and its subsidiary F&C Asset
Management plc are shown below:

                                                          Friends Provident plc                           F&C Asset Management plc
                                                       Ordinary shares of 10 pence                        Ordinary shares of 0.1 pence
                                         Movement in                                         Movement in
                                        shareholdings                                       shareholdings
                                          after 31 Dec           31 Dec           31 Dec      after 31 Dec           31 Dec           31 Dec
                                                2007 (i)           2007           2006 (ii)         2007 (i)           2007           2006 (ii)
Executive
Alain Grisay                                            -             -                -                  -       1,438,676          326,153
Ben Gunn                                              262       121,948          105,546                  -               -                 -
Jim Smart                                               -        19,205                -                  -               -                 -
(appointed 1 January 2007)
Non-executive
Alison Carnwath                                         -        10,000            10,000                 -           8,651             8,651
Lady Judge                                              -        17,865            17,865                 -               -                  -
Ray King                                                -        10,000            10,000                 -               -                  -
Sir Adrian Montague                                     -         6,281             6,018                 -               -                  -
Sir Mervyn Pedelty                                      -               -                -                -                -                    -
Gerhard Roggeman                                        -               -                -                -                -                    -
(appointed 19 June 2007)

(i) Changes to directors’ interests during the period 1 January 2008 to 18 March 2008 comprise shares acquired through the Group’s share
     incentive plan.
(ii) or date of appointment if later.


170 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the consolidated accounts continued


44. Related parties

In the ordinary course of business, the Group and its subsidiary undertakings carry out transactions with related parties, as defined by IAS 24
Related party disclosures. Material transactions for the year are set out below.

The principal subsidiary undertakings of the Group and its interest in associates and joint venture are shown in notes 19 and 20 respectively.

(a) Key management personnel compensation
Key management personnel consists of the Group’s directors, the Managing Directors and Chief Executives of the Group’s business units,
the Group’s principal actuary and other key executive board directors of the Group’s listed subsidiary, F&C Asset Management plc.

In aggregate the compensation paid to key management is as set out below:

                                                                                                                     2007                 2006
                                                                                              Number                  £m                   £m

Short-term employee benefits                                                                         21                7.0                  6.5
Post-employment benefits (excluding defined benefit scheme)                                           3                0.4                  2.0
Termination benefits                                                                                   -                  -                   -
Share based payments                                                                                 10                4.5                  1.7
Total key management personnel compensation
  charged to the income statement                                                                                     11.9                 10.2
Post employment benefits – defined benefit schemes                                                    7                1.2                  3.3
Total key management personnel compensation                                                                           13.1                 13.5


‘Post-employment benefits – defined benefit schemes’ comprises the change in value of key management personnel accrued pension
benefits from the beginning of the relevant financial year to the end of that year. This is consistent with the amounts disclosed as ‘increase in
transfer value during the year’ in the table on page 70 of the Remuneration Report of the Board. Details of pension schemes and share
schemes operated by the Group, and in which key management personnel participate are given in notes 10 and 11.

There were no balances outstanding at the year-end with key management (2006: £nil).
                                                                                                                     2007                 2006
                                                                                              Number                  £m                   £m

Payments during the year by key management in respect of
  policies issued or managed by the Group                                                             8                0.1                  0.1
Payments during the year to key management in respect of
  policies issued or managed by the Group                                                             2                   -                (0.9)
The sum assured or fund balance of those policies at 31 December                                     10                2.1                  2.7


All these transactions were completed on terms that were no better than those available to staff.




                                                                                              Friends Provident Annual Report & Accounts 2007 171
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Notes to the consolidated accounts continued


44. Related parties continued

(b) Other related parties
Details of the Group’s investments in associates and joint venture are given in note 20 to the accounts. Details of the Group’s pension
schemes, whose assets are managed by F&C, are provided in note 10.

Transactions made between the Group and related parties were made in the normal course of business. Loans from related parties are made
on normal arm’s length commercial terms.

Services provided to related parties

                                                                                            2007                          2006
                                                                         Income earned          Receivable Income earned       Receivable
                                                                                in year        at year end        in year     at year end
                                                                                    £m                 £m             £m              £m

Associates                                                                              2                 -               3               3
Employee pension schemes                                                                1                3                1                -
Other related parties                                                                  39               13               34               9
Total                                                                                  42               16               38               12



Services provided by related parties

                                                                                            2007                          2006
                                                                         Income earned          Receivable Income earned       Receivable
                                                                                in year        at year end        in year     at year end
                                                                                    £m                 £m             £m              £m

Joint venture                                                                          27                 -              23                -
Other related parties                                                                   8                7               13                -
Total                                                                                  35                7               36                -


Other related parties include Eureko BV who hold in excess of 10% of the ordinary share capital of F&C and is entitled to F&C board
representation. The £9m unsecured subordinated loan by Eureko BV to F&C was repaid on 20 December 2006.




45. Post balance sheet events

The Group announced on 31 January 2008 the outcome of a significant strategic review. The proposed strategy will see the Group focus on
core segments of the UK and International life and pensions market and will no longer seek to build a presence in the UK wealth
management sector, including Wraps.

As a result, the Group will be devising strategies for the three businesses which no longer fit within the new strategy – F&C Asset
Management, Lombard, Pantheon Financial, and the Wraps business will be discontinued. As these strategies have not yet been devised it
is not possible to quantify the impact.




172 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                            ABBREVIATIONS AND DEFINITIONS




Statement of directors’ responsibilities in relation                   Respective responsibilities of directors and auditor
to the European Embedded Value basis                                   As described in the statement of directors’ responsibilities, the
supplementary information                                              directors’ responsibilities include preparing the supplementary
                                                                       information on the EEV basis in accordance with the EEV Principles.
The directors of Friends Provident plc have chosen to prepare          Our responsibilities, as independent auditor, in relation to the
supplementary information in accordance with the European              supplementary information are established in the United Kingdom
Embedded Value Principles issued in May 2004 by the CFO Forum          by the Auditing Practices Board, by our profession’s ethical guidance
(the EEV Principles), as supplemented by the Additional Guidance on    and the terms of our engagement.
European Embedded Value Disclosures issued in October 2005.
When compliance with the EEV Principles is stated, those principles    Under the terms of engagement we are required to report to the
require the directors to prepare supplementary information in          Company our opinion as to whether the supplementary information
accordance with the Embedded Value Methodology (EVM)                   has been properly prepared in accordance with the EEV Principles
contained in the EEV Principles and to disclose and explain any non-   using the methodology and assumptions set out on pages 177 to
compliance with the EEV Guidance included in the EEV Principles.       179. We also report if we have not received all the information and
                                                                       explanations we require for this audit.
In preparing the EEV supplementary information, the directors have:
• prepared the supplementary information in accordance with the        Basis of audit opinion
    EEV Principles;                                                    We conducted our audit having regard to International Standards on
• identified and described the business covered by the EVM;            Auditing (UK and Ireland) issued by the Auditing Practices Board.
• applied the EVM consistently to the covered business;                An audit includes examination, on a test basis, of evidence relevant
• determined assumptions on a realistic basis, having regard to        to the amounts and disclosures in the supplementary information.
    past, current and expected future experience and to any relevant   It also includes an assessment of the significant estimates and
    external data, and then applied them consistently;                 judgements made by the directors in the preparation of the
• made estimates that are reasonable and consistent;                   supplementary information, and of whether the accounting policies
• described the basis on which business that is not covered            applied in the preparation of the supplementary information are
    business has been included in the supplementary information,       appropriate to the Group’s circumstances, consistently applied and
    including any material departures from the accounting framework    adequately disclosed.
    applicable to the Group financial statements.
                                                                       We planned and performed our audit so as to obtain all the
                                                                       information and explanations which we considered necessary in
Independent Auditor’s report to Friends Provident                      order to provide us with sufficient evidence to give reasonable
plc on the European Embedded Value basis                               assurance that the supplementary information is free from material
supplementary information                                              misstatement, whether caused by fraud or other irregularity or error.
                                                                       In forming our opinion, we also evaluated the overall adequacy of
Independent Auditor’s report                                           the presentation of the supplementary information.
We have audited the EEV basis supplementary information (the
supplementary information) of Friends Provident plc on pages           Opinion
174 to 192 in respect of the year ended 31 December 2007. The          In our opinion, the EEV basis supplementary information for the year
supplementary information has been prepared in accordance with         ended 31 December 2007 has been properly prepared in accordance
the European Embedded Value Principles issued in May 2004 by           with the EEV Principles using the methodology and assumptions set
the CFO Forum as supplemented by the Additional Guidance on            out on pages 177 to 179.
European Embedded Value Disclosures issued in October 2005
(together the EEV Principles) using the methodology and                KPMG Audit Plc
assumptions set out on pages 177 to 179. The supplementary             Chartered Accountants
information should be read in conjunction with the Group financial     London
statements which are on pages 74 to 172.                               18 March 2008

This report is made solely to the Company in accordance with the
terms of our engagement. Our audit work has been undertaken so
that we might state to the Company those matters we have been
engaged to state in this report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our audit work,
for this report, or for the opinions we have formed.




                                                                                          Friends Provident Annual Report & Accounts 2007 173
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Summary consolidated income statement on an EEV basis
For the year ended 31 December 2007




                                                                                                                       2007             2006
                                                                                                     Notes              £m               £m

Life & Pensions
Contribution from new business                                                                     2(b), 3(a)           206               204
Contribution from existing business:
  Expected return                                                                                                       187               207
  Experience variances                                                                                                   (20)               7
  Operating assumption changes                                                                                          (361)               (9)
Development costs                                                                                                        (50)             (26)
Expected return on shareholders’ net assets within the Life & Pensions business                                           64               51
Other net expenses                                                                                                        (5)                -
Life & Pensions underlying profit                                                                       2(a)              21              434
Asset Management underlying profit                                                                                        78               89
Expected return on net pension liability                                                                                   8                9
Expected return on corporate net assets                                                                                   (9)             (10)
Corporate costs                                                                                                          (14)             (13)
Operating assumption changes for corporate costs                                                                         (68)                -
Underlying profit before tax                                                                                              16              509
Investment return variances                                                                                              (45)            (174)
Effect of economic assumption changes                                                                                    (12)             181
Non-recurring items                                                                                       4               38              (17)
Amortisation of non-covered business acquired intangible assets                                                          (45)             (43)
Impairment of Asset Management acquired intangible assets                                                                   -             (58)
(Loss)/profit before tax                                                                                                 (48)             398
Tax                                                                                                                        9             (101)
(Loss)/profit after tax                                                                                                  (39)             297
Attributable to:
  Ordinary shareholders of the parent                                                                                    (59)             308
  Minority interest                                                                                                       20              (11)
(Loss)/profit after tax                                                                                                  (39)             297


                                                                                                                       2007             2006
Earnings per share                                                                                   Notes            pence            pence
Basic (loss)/earnings per share                                                                           5             (2.7)            14.6
Diluted basic (loss)/earnings per share                                                                   5             (2.8)            14.2
Underlying (loss)/earnings per share                                                                      5             (4.5)            16.4


EEV underlying profit is based on expected investment return and excludes: (i) amortisation and impairment of non-covered business
acquired intangible assets (ii) effect of economic assumption changes (iii) non-recurring items; and is stated after deducting interest payable
on STICS. Management consider that underlying profit better reflects the performance of the Group and focus on this measure of profit in its
internal monitoring of the Group’s EEV results.




174 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                         ABBREVIATIONS AND DEFINITIONS




Consolidated statement of recognised income and expense on an EEV basis
For the year ended 31 December 2007




                                                                                                                    2007              2006
                                                                                                                     £m                £m

Actuarial gains/(losses) on defined benefit plans net of tax                                                           30                (8)
Foreign exchange adjustments                                                                                           42                (2)
Net gains/(losses) recognised directly in equity                                                                       72               (10)
(Loss)/profit after tax                                                                                               (39)             297
Total recognised income and expense for the year                                                                       33              287
Attributable to:
  Ordinary shareholders of the parent                                                                                   2              300
  Minority interest                                                                                                    31               (13)
Total recognised income and expense for the year                                                                       33              287




Consolidated movement in ordinary shareholders’ equity on an EEV basis
For the year ended 31 December 2007



                                                                                                                    2007              2006
                                                                                                                     £m                £m

Total recognised income and expense for the year attributable to ordinary shareholders of the parent                    2              300
Dividends on equity shares                                                                                           (168)            (164)
Share based payments (impact on EEV reserves)                                                                          10               12
Earn-out payments                                                                                                       2               (87)
(Decrease)/increase in EEV reserves for the year                                                                     (154)              61
Share capital issued on conversion of convertible bonds                                                              276                  -
Share based payments (impact on share capital and share premium)                                                        5               13
Net addition to ordinary shareholders’ equity                                                                        127                74
At 1 January                                                                                                       3,520             3,446
At 31 December                                                                                                     3,647             3,520




                                                                                          Friends Provident Annual Report & Accounts 2007 175
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                EEV SUPPLEMENTARY INFORMATION




Consolidated balance sheet on an EEV basis
At 31 December 2007




                                                                         2007             2006
                                                                          £m               £m

Assets
Value of in-force Life & Pensions business                               1,870            2,031
Intangible assets                                                         684              665
Property and equipment                                                     81               80
Investment properties                                                    2,371            2,426
Investment in associates and joint venture                                 14               15
Deferred tax assets                                                        55                 -
Financial assets                                                        47,710           45,150
Deferred acquisition costs                                                 12               11
Reinsurance assets                                                       2,015              98
Current tax assets                                                          4               30
Insurance and other receivables                                           672              647
Cash and cash equivalents                                                4,782            3,581
Total assets                                                            60,270           54,734


Liabilities
Insurance contracts                                                     13,607           13,762
Fund for future appropriations                                            464              439
Financial liabilities
  – Investment contracts                                                36,823           32,451
  – Loans and borrowings                                                 3,090            2,045
Net asset value attributable to unit holders                              909              941
Provisions                                                                243              187
Deferred tax liabilities                                                  231              166
Current tax liabilities                                                   113              116
Insurance payables, other payables and deferred income                    571              559
Total liabilities                                                       56,051           50,666


Equity attributable to:
  Ordinary shareholders of the parent                                    3,647            3,520
  Minority interest                                                       572              548
Total equity                                                             4,219            4,068
Total equity and liabilities                                            60,270           54,734




176 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results


1. Methodology                                                          The shareholders’ net worth includes the corporate debt of the Group.
                                                                        This debt is valued at market value, consistent with the EEV guidance.
1.1 Basis of preparation
                                                                        EEV and other balance sheet items denominated in foreign
The EEV results presented in this document have been prepared           currencies have been translated to sterling using the appropriate
in accordance with the European Insurers’ Chief Financial Officers      closing exchange rate. The new business contribution and other
Forum’s EEV Principles issued in May 2004 and the Additional            income statement items have been translated using an average
Guidance issued in 2005. They provide supplementary information         exchange rate for the relevant period.
for the year ended 31 December 2007.
                                                                        1.2 Covered business
The EEV basis of reporting is designed to recognise profit as it is
earned over the term of the policy. The total profit recognised over    The covered business incorporates the Life & Pensions business
the lifetime of the policy is the same as that recognised under the     defined as long-term business by UK and overseas regulators.
IFRS basis of reporting, but the timing of recognition is different.
                                                                        The Asset Management business, IFA distribution businesses and
The reported embedded value provides an estimate of the value           the Asset Hub are excluded from the definition of covered business.
of shareholders’ interest in the covered business, excluding any        For the purposes of segmentation the IFA distribution businesses
value that may be generated from future new business. This value        and the Asset Hub are included within UK Life & Pensions.
comprises the sum of the shareholders’ net worth, the provision
for future corporate costs and the value of existing business.          1.3 Allowance for risk
The shareholders’ net worth is the net assets attributable to
                                                                        The allowance for risk in the shareholder cash flows is a key feature
shareholders, and is represented by the sum of required capital
                                                                        of the EEV Principles. The EEV guidance sets out three main areas
and free surplus. The value of existing business is the present value
                                                                        available to allow for risk in an embedded value:
of the projected stream of future distributable profits available to
                                                                        • the risk discount rate;
shareholders from the existing business at the valuation date, on
                                                                        • the allowance for the cost of financial options and guarantees;
a best estimate basis allowing for risk, adjusted for the cost of
                                                                        • the cost of holding both prudential reserves and any additional
holding required capital.
                                                                            required capital.

The supplementary information should be read in conjunction with
                                                                        The market-consistent approach has been used to allow for risk in
the Group’s IFRS results. These contain information regarding the
                                                                        all three areas.
Group’s financial statements prepared in accordance with IFRS
issued by the International Accounting Standards Board and adopted
                                                                        1.4 Deriving risk discount rates
for use in the EU.
                                                                        A market-consistent embedded value has been calculated for each
The results for covered business as reported under EEV principles       product line by valuing the cash flows in line with the prices of
are combined with the results for the remainder of the business         similar cash flows traded on the open market.
reported in accordance with IFRS, except where EEV principles
dictate otherwise. In particular the EEV principles have been applied   In principle, each cash flow is valued using the discount rate
to reflect Step-up Tier one Insurance Capital Securities (STICS) as     consistent with that applied to such a cash flow in the capital
debt rather than equity.                                                markets. For example, an equity cash flow is valued using an equity
                                                                        risk discount rate, and a bond cash flow is valued using a bond risk
In addition, a pro forma embedded value is reported showing             discount rate. If a higher return is assumed for equities, the equity
ordinary shareholders’ funds on an EEV basis adjusted to include        cash flow is discounted at this higher rate.
the F&C listed subsidiary at market value.
                                                                        In practice, for liabilities where the payouts are either independent
Shareholders’ net assets on an EEV basis for the Group consist of       or move linearly with market movements, a method known as the
the following:                                                          ‘certainty equivalent approach’ has been applied whereby all
• Life & Pensions net assets;                                           assumed assets earn the risk-free rate and all cash flows are
• the Group’s share of its investment in the Asset Management           discounted using the risk-free rate. This gives the same result as
   business (including the net pension liability) on an IFRS basis;     applying the method in the previous paragraph.
• corporate net assets;
• the net pension asset of FPPS on an IAS 19 basis;                     A market-consistent cost of financial options and guarantees and a
• the provision for future corporate costs;                             market-consistent cost of holding required capital have also been
• the present value of future profits attributable to shareholders      calculated. The cost of financial options and guarantees includes
   from existing policies of the Life & Pensions business.              additional allowance for non-market risk within FPLP’s With-Profits
                                                                        Fund. An additional provision has been made for operational risks.




                                                                                            Friends Provident Annual Report & Accounts 2007 177
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


1. Methodology continued                                                  1.6 Required capital and the cost of capital
                                                                          Required capital is set at the greater of regulatory capital and
These are described in more detail below.
                                                                          requirements arising from internal capital management policies,
                                                                          which include economic risk capital objectives. The economic risk
For presentational purposes, a set of risk discount rates has been
                                                                          capital is determined from internal models, based on the Company’s
derived for each product line, and for in-force and new business,
                                                                          risk appetite.
by calculating the risk discount rate under a traditional embedded
value approach that gives the same value as that from the market-
                                                                          In aggregate, required capital is higher than regulatory requirements
consistent embedded value determined above. These derived risk
                                                                          by approximately £200m (2006: £200m). Capital requirements under
discount rates are a function of the assumptions used (eg equity risk
                                                                          EEV amounted to £668m (2006: £652m).
premium and corporate bond spreads). However, as the market-
consistent approach is used, these assumptions do not impact the
                                                                          The EEV includes a deduction for the cost of holding the required
level of embedded value: a higher equity risk premium results in an
                                                                          capital. Frictional costs, being the tangible costs of holding capital,
exactly compensating higher risk discount rate.
                                                                          have been allowed for on a market-consistent basis. These consist
                                                                          of the total taxation and investment expenses incurred on locked-in
1.5 Financial options and guarantees                                      shareholder capital and reflect the cost to an investor of holding an
The material financial options and guarantees are those in the            asset through investment in a life company, rather than investing in
FPLP With-Profits Fund, in the form of the benefits guaranteed to         the asset directly.
policyholders and the guaranteed annuity rates associated with
certain policies.                                                         No adjustment has been made for any agency cost, this
                                                                          representing the potential markdown to value that investors will
The risk to shareholders is that the assets of the With-Profits Fund      apply because they do not have direct control over their capital. Any
are insufficient to meet these guarantees. While shareholders are         adjustment would be subjective and different investors will have
entitled to only a small share of profits in the With-Profits Fund (via   their own views of what adjustment, if any, should be made.
one ninth of the cost of bonus), they can potentially be exposed to
the full cost if fund assets are insufficient to meet policyholder        1.7 Non-market risk
guarantees. The time value cost of this asymmetry, known as the           An investor can diversify away the uncertainty around the return on
burnthrough cost, is modelled stochastically, as it will only occur in    non-market risks, such as mortality and expenses. Hence in a
some adverse scenarios. The burnthrough time value cost is                shareholder valuation the allowance for non-market risk is made
calculated as the difference between the average value of                 through the appropriate choice of best estimate experience
shareholder cash flows under a number of market-consistent                assumptions and the impact of non-market risks on the level, and
scenarios, and the intrinsic shareholder value using risk-free            hence the cost, of capital.
assumptions included within the deterministic model.
                                                                          In choosing best estimate assumptions the allowance for non-
The burnthrough cost has been assessed using a stochastic model           market risk has been reviewed. However, best estimate
derived from the current Realistic Balance Sheet (RBS) model. This        assumptions may fail to represent the full impact on shareholder
model has been calibrated to market conditions at the valuation           value where the impact of fluctuations in experience is asymmetric;
date. Allowance has been made under the different scenarios for           that is where adverse experience has a higher impact on
management actions, such as altered investment strategy,                  shareholder value than favourable experience. The areas identified
consistent with the RBS model. The burnthrough cost would be              as having such asymmetries are the burnthrough cost and
markedly higher without the hedging activities currently undertaken.      operational risk.

The burnthrough cost at 31 December 2007 of £48m (2006: £50m),            The impact of variations in non-market risks to shareholders of
is split between £23m (2006: £30m) market risk and £25m                   meeting guarantees of the FPLP With-Profits fund have been taken
(2006: £20m) non-market risk. The non-market risks include lapses,        into account in the burnthrough cost calculation.
annuitant longevity, and operational risk within the With-Profits Fund.
The allowance for non-market risks is made by consideration of the        In addition, a provision of £87m (2006: £85m) has been set up for
impact of extreme scenarios from our economic capital model.              operational risks in the shareholders’ funds. This provision has been
                                                                          calculated by comparing the mean impact of variations in operational
Significant amounts of new with-profits business are no longer            risk, as modelled in the economic capital calculations, with the
written and the guarantee levels offered are lower, hence there is no     existing allowance for operational risk in specific accounting
material impact of the burnthrough cost in the contribution to profits    provisions and embedded value projection assumptions.
of new business.




178 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                            ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


1. Methodology continued                                                 Productivity gains have been assumed within the EEV in respect
                                                                         of International business in anticipation of future business growth.
This provision of £87m is equivalent to a 0.4% pa (2006: 0.4% pa)        The Lombard EEV has been reduced by £15m (2006: £13m) for a
increase in the risk discount rate for UK Life & Pensions business       projected expense overrun for the period to 2013.
and 0.8% pa (2006: 0.8% pa) for International Life & Pensions
business. This impacts both embedded value and the contribution          (c) Development costs
from new business.                                                       Development costs reported in this year’s financial statements
                                                                         represent investments made to improve future EEV profits.
1.8 Expenses
                                                                         In the future development costs will only include costs related to
The EEV guidance requires companies to actively review expense           developing wholly new products or entering wholly new markets.
assumptions, and include an allowance for holding company                As a consequence future costs of £20m per annum that would
(corporate) costs and service company costs.                             otherwise have been treated as development costs have been
                                                                         capitalised and reclassified as maintenance expenses.
(a) Corporate costs
Corporate costs relate to those costs incurred at the corporate level    1.9 New business
that are not directly attributable to the Life & Pensions or the Asset
Management businesses.                                                   New business within the covered business includes:
                                                                         • premiums from the sale of new contracts;
Under EEV methodology, corporate costs are classified as either          • payments on recurring single premium contracts, including
ongoing costs or development and one-off costs. For 2007, £12m             Department for Work and Pensions rebate premiums, except
(2006: £6m) of corporate costs were regular ongoing corporate              existing stakeholder-style pensions business where, if a regular
costs and £2m (2006: £7m) were development or one-off costs. The           pattern in the receipt of premiums for individuals has been
ongoing corporate costs have increased to include corporate costs in       established, the regular payment is treated as a renewal of an
relation to group businesses, previously held outside EEV, and have        existing contract and not new business;
been capitalised under EEV. The impact is a provision of £97m            • non-contractual increments on existing policies; and
(2006: £47m).                                                            • new entrants in the group pensions business.

(b) Service costs                                                        The EEV new business definition is consistent with the quarterly
Service company costs are included in the EEV expense assumption         New Business disclosure.
calculations. Included within these are the fees charged by F&C
for investment management services to the covered Life &
Pensions business.

Profits of IFA subsidiaries in respect of covered Life & Pensions
business are not capitalised under the EEV methodology as
those subsidiaries are separate cash generating units and run
autonomously. Instead, these profits, which are immaterial, are
brought into the consolidated income statement on an IFRS basis.

F&C service fee profits in respect of covered Life & Pensions
business are not capitalised under the EEV methodology, as F&C
is a separate business segment within the Group and the
arrangement between F&C and the Life & Pensions business is on
an arm’s length basis. Instead, these profits, approximately £11m
(2006: £11m) are brought into the consolidated income statement
on an IFRS basis, and F&C is brought into the pro forma embedded
value at market value.




                                                                                            Friends Provident Annual Report & Accounts 2007 179
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                       EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


2. Segmental analysis

(a) Life & Pensions EEV profit
Year ended 31 December 2007                                             2007                                          2006
                                                         UK     International         Total             UK     International        Total
                                             Notes       £m               £m            £m              £m               £m          £m

Contribution from new business            2(b), 3(a)     96              110           206             108               96          204
Contribution from existing business:
  Expected return                                       149               38           187             173               34          207
  Experience variances (i)                               (20)               -           (20)              9               (2)           7
  Operating assumption changes (i)                      (337)            (24)         (361)               1             (10)           (9)
Development costs                                        (41)              (9)          (50)            (26)               -          (26)
Expected return on shareholders’ net assets
within the Life & Pensions business                      63                1            64              50                1           51
Other net expense                                         (5)               -            (5)              -                -              -
Life & Pensions EEV
 underlying profit before tax                            (95)            116            21             315              119          434
Investment return variances                    3(e)     (205)              (6)        (211)           (179)               (7)        (186)
Effect of economic assumption changes                    (21)              9            (12)           187                (7)        180
Non-recurring items                               4      15                 -           15                2                -            2
Amortisation of non-covered business acquired
  intangible assets                                       (3)               -            (3)              -                -              -
Life & Pensions EEV (loss)/profit before tax            (309)            119          (190)            325              105          430
Attributed tax credit/(charge)                  3(f)    129             (124)             5           (103)             (18)         (121)
Life & Pensions EEV (loss)/profit after tax             (180)              (5)        (185)            222               87          309


(i) The UK experience variances and operating assumption changes mainly comprise the adverse impact of persistency assumption changes
    of £(133)m and £(238)m from the capitalisation of development costs (based on £20m pa). The remaining variances include £(9)m from
    allowing for the strengthening of annuitant mortality improvements, £12m from the reinsurance of post-demutualisation annuity business
    in FPP to Swiss Re, £16m burnthrough variance and £(5)m of other variances.



(b) New business margin
Year ended 31 December 2007                                             2007                                          2006
                                                         UK     International         Total             UK     International        Total
                                                         £m               £m            £m              £m               £m          £m
Contribution from new business                           96              110           206             108               96         204

Present Value of New Business
 Premiums (PVNBP)                                      4,442           3,220         7,662           4,162            2,912       7,074
Margin – PVNBP                                           2.2%             3.4%          2.7%            2.6%            3.3%         2.9%


PVNBP equals new single premiums plus the expected present value of new regular premium business.




180 Friends Provident Annual Report & Accounts 2007
              PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


2. Segmental analysis continued

(c) Pro forma embedded value
At 31 December 2007                                                                                                       2007              2006
                                                                                                                           £m                £m

Ordinary shareholders’ equity on an EEV basis                                                                            3,647             3,520
Adjustment to the value of the listed Asset
  Management business to market value                                                                                        78              140
Pro forma embedded value                                                                                                 3,725             3,660
Pro forma embedded value per share (i)                                                                                   £1.60             £1.73


(i) Based on the number of issued ordinary shares as disclosed in note 38(b) of the IFRS financial statements.

(d) Summary consolidated balance sheet on an EEV basis
At 31 December 2007                                                 2007                                                  2006
                                              Segmental       Intra-group                          Segmental        Intra-group
                                                analysis          debt (iv)           Total          analysis           debt (iv)           Total
                                                     £m                £m               £m                £m                £m               £m
Life & Pensions – long-term funds                     640                  -            640                778                 -             778
Life & Pensions – shareholders’ funds                 400              850            1,250                419              795            1,214
Life & Pensions net assets                          1,040              850            1,890              1,197              795            1,992
Corporate net assets                                  409             (850)            (441)               (33)            (795)            (828)
Shareholders’ invested net assets (i)               1,449                  -          1,449              1,164                 -           1,164
Attributable net asset value of the
  Asset Management business
  net of minority interest (ii), (iii)                421                  -            421                394                 -             394
Net pension asset/(liability) of Friends
  Provident Pension Scheme                              4                  -               4               (22)                -              (22)
Shareholders’ net worth                             1,874                  -          1,874              1,536                 -           1,536
Provision for future corporate costs                                                     (97)                                                 (47)
Value of in-force Life & Pensions business                                            1,870                                                2,031
Ordinary shareholders’ net assets
  on an EEV basis                                                                     3,647                                                3,520
Called-up share capital                                                                 234                                                  214
Share premium account                                                                 2,372                                                2,051
EEV reserves                                                                          1,041                                                1,255
Ordinary shareholders’ equity
  on an EEV basis                                                                     3,647                                                3,520


(i) Within shareholders’ invested net assets is £36m of goodwill and £29m of other acquired intangible assets in relation to the purchase of
    the Group’s two IFA distribution businesses, Sesame and Pantheon Financial.

(ii) The attributable net asset value of the Asset Management business includes goodwill of £344m (2006: £333m), investment management
     contracts net of related tax, £93m (2006: £104m) and software of £1m (2006: £1m).

(iii) The attributable net asset value of the Asset Management business includes the value of the net pension liability of that business on an
      IAS 19 Employee Benefits basis, and is net of related tax. The net pension asset of Friends Provident Pension Scheme (FPPS) is also
      stated on an IAS 19 basis, and is net of related deferred taxation.



                                                                                                Friends Provident Annual Report & Accounts 2007 181
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


2. Segmental analysis continued

(iv) Intra-group long-term debt is analysed as follows:


                                                                                              Debt                         Interest payable
                                                                                      2007             2006              2007             2006
                                                                                       £m               £m                £m               £m
Due from FPLP to Friends Provident plc                                                 795               795               46                46
Due from Sesame to Friends Provident Distribution Holdings Ltd                          55                  -                -                 -
                                                                                       850               795               46                46




(e) Life & Pensions net assets segmental information by business segment
                                                                     2007                                                2006
                                                      UK   International             Total               UK      International             Total
At 31 December 2007                                   £m             £m                £m                £m                £m               £m

Life & Pensions net assets                         1,049               (9)           1,040             1,167               30             1,197
Value of in-force Life & Pensions business         1,260              610            1,870             1,491              540             2,031
                                                   2,309              601            2,910             2,658              570             3,228




3. Life & Pensions EEV profit

(a) Contribution from new business
The contribution from new business is calculated using economic assumptions at the beginning of the period. The contribution from new
business using end-of-period economic and operating assumptions was £189m (2006: £196m) which in 2007, includes the impact of
capitalising £20m of development costs as maintenance.

The contribution from new business is quoted after cost of required capital and share incentives. The table below gives the contribution
before cost of capital and share based payments.
                                                                                                                         2007             2006
                                                                                                                          £m               £m

Contribution from new business before cost of capital and share based payments                                            218               212
Cost of share based payments                                                                                                (3)               (2)
Cost of capital                                                                                                             (9)               (6)
Contribution from new business                                                                                            206               204



(b) Profit from existing business – Life & Pensions
Profit from existing Life & Pensions business comprises the expected return on the value of in-force business at the start of the period plus
the impact of any changes in the assumptions regarding future operating experience, changes in the reserving basis (other than economic
assumption changes) and profits and losses caused by differences between the actual experience for the period and the assumptions used
to calculate the embedded value at the end of the period.

The expected return on the value of in-force business is the difference between the expected return on the assets backing the liabilities and
the expected return on the market-consistent value of the liabilities. Effectively, this approach is similar to applying an unwind in the risk
discount rate to the value of the in-force business at the beginning of the year. However, the risk discount rate to be used is a rate
appropriate over the period of return only, which is not necessarily equal to the overall in-force risk discount rate averaged across all future
durations above.




182 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                             ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


3. Life & Pensions EEV profit continued

(c) Development costs – Life & Pensions
Development costs represent investments made to improve future EEV profits, for example by reducing expenses or increasing future new
business volumes. In particular, the Life & Pensions costs represent investment in developing advanced electronic trading systems,
e-commerce related activities, and new business service automation and improvement.

(d) Expected return on shareholders’ net assets
The expected return on shareholders’ net assets held within the Life & Pensions business comprises the return on the shareholders’ net
assets held by the life assurance companies within that business, using the investment return assumptions used to calculate the embedded
value at the beginning of the period.

The expected return on corporate net assets is the expected investment return on assets held by Friends Provident plc and its non-life
subsidiaries. It excludes the expected return on the net pension liability and the result of the F&C business, which are shown separately in
the summary consolidated income statement.

(e) Investment return variance
The split of the investment return variance in the Life & Pensions EEV profit is shown in the table below:
                                                                                                                       2007               2006
                                                                                                                        £m                 £m

In respect of net assets at the start of year                                                                            (38)              (16)
In respect of covered business                                                                                          (105)             (122)
Investment return variances after tax                                                                                   (143)             (138)
Investment return variances before tax                                                                                  (211)             (186)


The investment return variance of £(38)m (2006: £(16)m) after tax relates to shareholder net assets. The investment return variance in
respect of covered business comprises £(59)m (2006: £(110)m) after tax, relating to assets backing policyholder liabilities, and £(46)m
(2006: £(12)m) after tax, relating to the value of the in-force business.

(f) Attributed tax charge
EEV profits are calculated net of tax and then grossed up at the effective rate of shareholder tax. Except for the expected return on
shareholders’ net assets and tax rate assumption changes, the full standard rate of UK corporation tax has been used to gross up after tax
profits on UK business and appropriate tax rates have been used for the International business.

                                                                                                                       2007               2006
                                                                                                                        £m                 £m

Contribution from new business                                                                                            61               51
Profit from existing business                                                                                            (56)              55
Development costs                                                                                                        (16)               (8)
Expected return on shareholders’ net assets within the Life & Pensions business                                           21               16
Other net expenses                                                                                                         2                   -
Other non-recurring and non-underlying items                                                                               3                   1
Investment return variances                                                                                              (67)              (48)
Effect of economic assumption changes                                                                                     (2)              54
International tax rate assumption change                                                                                  88                   -
UK tax rate change                                                                                                       (22)                  -
Prior year tax adjustments                                                                                               (17)                  -
Attributed tax charge                                                                                                     (5)              121




                                                                                             Friends Provident Annual Report & Accounts 2007 183
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                           EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


4. Non-recurring items

                                                                                                                        2007             2006
                                                                                                                         £m               £m

Terminated merger income (less related costs)                                                                              34                    -
Corporate non-recurring item                                                                                               34                    -
Closure of Appointed Representatives Sales Channel                                                                          -                (2)
Provision for past sales                                                                                                   15                4
Life & Pensions non-recurring items                                                                                        15                2
Asset Management integration costs                                                                                          -                (7)
Asset Management Reinvestment Plan costs                                                                                   (7)             (12)
Asset Management Investment Trust VAT costs                                                                                (4)                   -
Asset Management non-recurring items                                                                                      (11)             (19)
Total non-recurring items                                                                                                  38              (17)


Explanations of the non-recurring items are set out in note 3 to the Group’s IFRS financial statements.




5. Earnings per share

Earnings per share have been calculated based on EEV underlying profit after tax and profit after tax attributable to ordinary shareholders of
the parent. The directors believe the underlying earnings per share figure gives a better indication of operating performance.


Basic and underlying earnings per share                                                       2007                               2006
                                                                                 Earnings         Per share         Earnings         Per share
                                                                                      £m             pence               £m             pence

(Loss)/profit after tax attributable to ordinary shareholders of the parent            (59)               (2.7)          308              14.6
Investment return variances                                                             45                2.1            174               8.2
Effect of economic assumption changes                                                   12                0.5            (181)             (8.5)
Amortisation and impairment of non-covered business
  acquired intangible assets                                                            45                2.1            101               4.7
Non-recurring items                                                                    (38)               (1.8)            17              0.8
Tax credit on items excluded from underlying profit                                    (96)               (4.5)           (32)             (1.5)
Minority interest on items excluded from underlying profit                              (5)               (0.2)           (40)             (1.9)
Underlying (loss)/profit after tax attributable to ordinary shareholders
  of the parent                                                                        (96)               (4.5)          347              16.4


                                                                                                                       2007              2006
                                                                                                                    millions           millions

Weighted average number of ordinary shares                                                                             2,152             2,111




184 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


5. Earnings per share continued

Diluted basic earnings per share
                                                                     2007                                                 2006
                                                                Weighted                                              Weighted
                                                                 average                                               average
                                                               number of               2007                          number of              2006
                                                    2007         ordinary               Per              2006          ordinary               Per
                                                Earnings           shares             share           Earnings          shares              share
                                                     £m          millions             pence                £m          millions            pence

(Loss)/profit after tax attributable to
  ordinary shareholders of the parent                 (59)           2,152               (2.7)             308            2,111              14.6
Dilution (i)                                           (1)                -              (0.1)              16              164               (0.4)
Diluted (loss)/profit after tax attributable
  to ordinary shareholders of the parent              (60)           2,152               (2.8)             324            2,275              14.2


(i) Details of dilution are set out in note 15(c) to the Group’s IFRS financial statements.

6. Intangible assets on an EEV basis

                                                                                                  Investment
                                                                                                 management
                                                                                   Goodwill         contracts             Other             Total
Carrying amounts                                                                       £m                 £m                £m                £m
At 31 December 2007                                                                      380               254                50              684

At 31 December 2006                                                                      333               284                48              665

(a) Goodwill
Goodwill is the only intangible asset which has an indefinite useful life and has been allocated as follows:

                                                                                                                           2007              2006
                                                                                                                            £m                £m

Asset Management                                                                                                            344               333
Pantheon Financial                                                                                                            28                    -
Sesame                                                                                                                         8                    -

At 31 December 2007, there is no indication that goodwill has been impaired. In accordance with IAS 36 Impairment of Assets, goodwill is
assessed for possible impairment each year by comparing the carrying value of goodwill for each segment with its recoverable amount.

There has been no goodwill impairment charge in 2007 (2006: £nil).

(b) Investment management contracts
See note 16 in the IFRS financial statements.

(c) Other intangible assets


                                                                                                                           2007              2006
                                                                                                                            £m                £m

UK Life & Pensions                                                                                                            38               39
International Life & Pensions                                                                                                 11                 8
Asset Management                                                                                                               1                 1
Total other intangible assets                                                                                                 50               48



                                                                                                 Friends Provident Annual Report & Accounts 2007 185
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                            EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


7. Reconciliation of movement in pro forma embedded value

                                                                   International    Total Life &
                                                      UK Life &           Life &      Pensions
                                                      Pensions         Pensions             EEV       Other    Total EEV
                                                            £m               £m              £m         £m            £m

Pro forma embedded value at 31 December 2006
  as originally stated                                    2,638             590           3,228         432          3,660
Adjustment (i)                                              20              (20)               -          -              -
                                                          2,658             570           3,228         432          3,660
Contribution from new business                              96              110             206           -           206
Contribution from existing business
  – Expected return                                        149               38             187           -           187
  – Experience variances                                    (20)               -            (20)          -            (20)
  – Operating assumption changes                           (337)            (24)           (361)          -           (361)
  – Expected transfer to net assets                           -                -               -          -              -
Development costs                                           (41)              (9)           (50)          -            (50)
Expected return on shareholders’ net assets                 63                1              64           -            64
Other net expense                                            (5)               -              (5)         -             (5)
Operating assumptions changes for corporate costs             -                -               -        (68)           (68)
Other underlying items                                        -                -               -         63            63
Underlying EEV profit before tax                            (95)            116              21          (5)           16
Non-recurring items                                         15                 -             15          23            38
Investment return variances                                (205)              (6)          (211)        166            (45)
Effect of economic assumption changes                       (21)              9             (12)          -            (12)
Other non-underlying items                                   (3)               -              (3)       (42)           (45)
EEV loss before tax                                        (309)            119            (190)        142            (48)
Tax                                                        129             (124)              5           4              9
EEV loss after tax                                         (180)              (5)          (185)        146            (39)
Net movement recognised directly in the statement
  of recognised income and expense                            -              28              28          44            72
Minority interest                                             -                -               -        (31)           (31)
Dividends on ordinary shares                               (250)               -           (250)         82           (168)
Share based payments                                          -                -               -         15            15
Earn-out payments                                             -                -               -          2              2
Conversion of convertible bond                                -                -               -        276           276
Acquisitions                                                75                 -             75         (75)             -
Adjustment to the value of the listed Asset
  Management business to market value                         -                -               -        (62)           (62)
Allocation of service company charges                       14                 -             14         (14)             -
Allocation of OLAB surplus to International L&P              (8)              8                -          -              -
Total movement in EEV                                      (349)             31            (318)        383            65
Pro forma embedded value at 31 December 2007              2,309             601           2,910         815          3,725


(i) Re-allocation of net assets between businesses




186 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                      ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


Pro forma EEV comprises the EEV of the entire Group, incorporating the Group’s share of F&C at market value of £497m (2006: £531m).
‘Other’ consists predominantly of Asset Management business and corporate items.




8. Reconciliation of net worth and value of in-force business for Life & Pensions

                                                                                                                                   Total
                                                                                                               Value of           Life &
                                                                Free        Required         Total net          in-force        Pensions
                                                             surplus          capital          worth           business             EEV
                                                                 £m              £m                £m                £m              £m
Shareholders’ capital and reserves
  At 1 January 2007                                              545             652             1,197            2,031             3,228
Contribution from new business                                  (237)             44              (193)             338               145
Expected return                                                   22              24                46              128               174
Experience variances, operating assumption changes,
  development costs, other expenses and
  non-recurring items                                             99              (41)              58              (359)            (301)
Expected profit – transfer to net worth                          219              (17)             202              (202)                -
Investment return variances and economic
  assumption changes                                            (108)               6             (102)              (52)            (154)
Prior year tax adjustments                                        17                -               17                  -              17
Tax rate assumption changes                                      (21)               -              (21)              (45)             (66)
Life & Pensions EEV profit after tax                               (9)            16                  7             (192)            (185)
Acquisitions                                                      75                -               75                  -              75
Foreign exchange adjustments                                       (3)              -                (3)              31               28
Transfer of assets                                                14                -               14                  -              14
Dividend                                                        (250)               -             (250)                 -            (250)
Shareholders’ capital and reserves
  At 31 December 2007                                            372             668             1,040            1,870             2,910


All items in the table above are shown net of tax.




                                                                                         Friends Provident Annual Report & Accounts 2007 187
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                          EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


9. Value of in-force Life & Pensions business on an EEV basis

At 31 December 2007                                                                                                    2007              2006
                                                                                                                        £m                £m

Value of in-force allowing for market risk (excluding
  time value of options and guarantees)                                                                                2,057            2,215
Time value cost of options and guarantees
  (including the impact of non-market risks)                                                                             (48)              (50)
Cost of required capital, plus excess economic
  capital requirements                                                                                                   (52)              (49)
Provision for operational risks                                                                                          (87)              (85)
Value of in-force Life & Pensions business                                                                             1,870            2,031




10. Equity attributable to equity holders of the parent

Ordinary shareholders’ equity on an EEV basis reconciles to equity attributable to equity holders of the parent on an IFRS basis as follows:


                                                                                                                       2007              2006
                                                                                                                        £m                £m

Ordinary shareholders’ equity on an EEV basis                                                                          3,647            3,520
Less items only included on an EEV basis:
  Value of in-force Life & Pensions business                                                                          (1,870)          (2,031)
  Provision for future corporate costs                                                                                    97               47
  Adjustment of long-term debt to market value                                                                           (59)             105
Add items only included on an IFRS basis:
  Goodwill                                                                                                               353              283
  Other intangible assets                                                                                                 69               68
  Acquired PVIF                                                                                                          249              257
  STICS treated as equity                                                                                                810              810
  Deferred acquisition costs                                                                                           1,081            1,100
  Deferred front end fees                                                                                               (102)              (45)
  IFRS reserving and other IFRS adjustments                                                                             (513)            (497)
Equity attributable to equity holders of the parent on an IFRS basis                                                   3,762            3,617




188 Friends Provident Annual Report & Accounts 2007
                PARENT COMPANY ACCOUNTS                                           ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


11. Maturity profile of Value of In-force (VIF) by proposition

As at 31 December 2007 Total          1–5       6–10   11–15   16–20   21–25         26–30       31–35       36–40          41+

UK
With-Profits Fund           322       149       105      42      18       6              2            -           -            -
Protection                  242       125        82      21      10       3              1            -           -            -
Investments                 157           70     46      22      11       5              2            1           -            -
Pensions                    456       137       127      92      56      28             11            4           1            -
Annuities                     7            2      2       2       1        -              -           -           -            -
UK other                     76           29     32      15        -       -              -           -           -            -
UK total                   1,260      512       394     194      96      42             16            5           1            -
                                          41%    32%     15%      8%      3%             1%           0%          0%           0%


International
FPI                         225       128        56      26      11       4               -           -           -            -
Lombard                     385       148        91      58      36      22             14            8           5            3
International total         610       276       147      84      47      26             14            8           5            3
                                          45%    24%     14%      8%      4%             2%           1%          1%           1%


Total VIF                  1,870      788       541     278     143      68             30          13            6            3
                                          42%    29%     15%      7%      4%             2%           1%          0%           0%



As at 31 December 2006 Total          1–5       6–10   11–15   16–20   21–25        26–30       31–35        36–40          41+

UK
With-Profits Fund           386       188       116      47      22       9              3            1           -            -
Protection                  379       250        83      30      11       4              1            -           -            -
Investments                 188           72     59      30      15       7              3            1           1            -
Pensions                    436       127       116      86      56      31             14            5           1            -
Annuities                    29           25      2       1       1        -              -           -           -            -
UK other                     73           32     28      12       1        -              -           -           -            -
UK total                   1,491      694       404     206     106      51             21            7           2            -
                                          47%    27%     14%      7%      4%             1%           0%          0%           0%


International
FPI                         212       116        56      26      10       3              1            -           -            -
Lombard                     328       129        76      49      30      19             11            7           4            3
International total         540       245       132      75      40      22             12            7           4            3
                                          46%    24%     14%      7%      4%             2%           1%          1%           1%


Total VIF                  2,031      939       536     281     146      73             33          14            6            3
                                          46%    26%     14%      7%      4%             2%           1%          0%           0%




                                                                               Friends Provident Annual Report & Accounts 2007 189
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


12. EEV assumptions

(a) Principal economic assumptions – deterministic
Economic assumptions are actively reviewed and are based on the market yields on risk-free assets at the valuation date.


                                                                                                                           2007              2006
UK and International (excluding Lombard):                                                                                    %                 %

Risk-free rate (i)                                                                                                           4.6               4.6
Investment returns before tax:
  Fixed interest                                                                                                         4.6-5.9          3.9–5.9
  Equities                                                                                                                   7.6               7.6
  Properties                                                                                                                 6.6               6.6
Future expense inflation:
  UK business                                                                                                                4.5               4.3
  International business                                                                                                     4.5               4.3
UK and OLAB corporation tax rate                                                                                          30/28                 30
Isle of Man corporation tax rate (ii)                                                                                     30/28                     0


(i) For UK and FPI business the risk-free rate is set with reference to the gilt yield curve at the valuation date. For annuity business a term-
    dependent rate allowing for the shape of the yield curve is used as this can significantly impact value. For other business, a rate based on
    the annualised 15-year gilt yield is used.

(ii) Isle of Man corporation tax rate is 0%. It has been assumed that all distributable profits will be repatriated as dividends and hence a full
     UK rate has been applied.


                                                                                                                           2007              2006
Lombard:                                                                                                                     %                 %

Risk-free rate                                                                                                               4.7               4.1
Investment returns before tax:
  Fixed interest                                                                                                         4.7-5.7          4.1–5.1
  Equities                                                                                                                   7.7               7.1
  Cash                                                                                                                       4.1               3.7
Future expense inflation                                                                                                     4.1               4.0
Tax rate                                                                                                                    29.6              25.2


The key exchange rates used in respect of Lombard business were a closing exchange rate of 1 Euro = £0.734 (2006: 1 Euro = £0.674) and
an average exchange rate over the year of 1 Euro = £0.678.

Margins are added to the risk-free rates to obtain investment return assumptions for equity and property. For corporate fixed interest
securities the investment return assumptions are derived from an AA-bond yield spread, limited to the actual return on the underlying assets.
As a market-consistent approach has been followed, these investment return assumptions affect only the derived risk discount rates and not
the embedded value result.




190 Friends Provident Annual Report & Accounts 2007
               PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the EEV results continued


12. EEV assumptions continued

Maintenance expenses for UK and International business (excluding Lombard) are assumed to increase in the future at a rate of 1% per
annum in excess of the assumed long-term rate of retail price inflation. This is derived from the difference between the risk-free rate of
return and the average of the FTSE Actuaries over five-year index-linked gilt yield at 5% and 0% inflation.

For Lombard the risk-free rate is the average of the 10–15 year and the over 15 year yields using the EuroMTS indices. The investment return
assumption is the weighted average (based on an assumed asset mix) of returns on fixed interest securities, equities and cash. The Lombard
investment return assumption is shown gross of tax, but net of fund management charges.

Derived risk discount rates by product type
Average derived risk discount rates are shown below for the embedded value and the contribution from new business. The average derived
risk discount rate for the in-force has increased over 2007, for annuities particularly, owing mainly to widening corporate bond spreads.
A more detailed split of the derived risk discount rates is given in the following table.

At 31 December 2007
                                    UK with-profits                                                                        International
                                          business          UK annuity          Other UK      Average UK            Sterling           Euro
Embedded value                                   %                  %                  %               %                   %             %

Risk-free rate                                    4.6                 4.6              4.6              4.6              4.6                 4.7
Market risks (non-options)                        3.1               15.8               2.2              2.6              1.2                 2.1
Options – market risks                            2.4                   -                -              0.3                 -                   -
Options – non-market risks                        2.7                   -                -              0.3                 -                   -
Other non-market risks                            0.4                 0.4              0.4              0.4              0.8                 0.8
Risk discount rate                               13.2               20.8               7.2              8.2              6.6                 7.6




At 31 December 2006                   UK with-profits                                                                           International
                                            business         UK annuity         Other UK       Average UK            Sterling                Euro
Embedded value                                     %                %                 %                %                   %                   %

Risk-free rate                                    4.6                 4.6              4.6              4.6              4.6                 4.1
Market risks (non-options)                        2.7                 7.6              1.6              2.2              1.4                 2.1
Options – market risks                            2.6                   -                -              0.3                 -                   -
Options – non-market risks                        1.8                   -                -              0.2                 -                   -
Other non-market risks                            0.4                 0.4              0.4              0.4              0.8                 0.8
Risk discount rate                               12.1               12.6               6.6              7.7              6.8                 7.0


With-profits and annuity business are subject to more investment risk than the remaining business, and so the appropriate risk discount rates
are higher.

At 31 December 2007                                                                                                        International
                                                                                                        UK          Sterling           Euro
Contribution from new business                                                                           %                 %             %

Risk-free rate                                                                                          4.6              4.6                 4.1
Market risks                                                                                            2.8              0.7                 2.6
Non-market risks                                                                                        0.4              0.8                 0.8
Risk discount rate                                                                                      7.8              6.1                 7.5




                                                                                             Friends Provident Annual Report & Accounts 2007 191
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                                EEV SUPPLEMENTARY INFORMATION




Notes to the EEV results continued


12. EEV assumptions continued

At 31 December 2006                                                                                                                 International
                                                                                                              UK            Sterling             Euro
Contribution from new business                                                                                %                   %                %

Risk-free rate                                                                                                4.6                4.6               4.1
Market risks                                                                                                  2.2                1.1               2.1
Non-market risks                                                                                              0.4                0.8               0.8
Risk discount rate                                                                                            7.2                6.5               7.0


(b) Principal economic assumptions – stochastic
The cost of options and guarantees is determined using The Smith Model Plus economic scenario generator. The model is calibrated to
market conditions at the valuation date and correlations between the asset classes are derived from historic data, consistent with the model
used for the Realistic Balance Sheet.

Risk-free rates are calibrated to the Gilt yield curve. Equity volatility is calibrated to replicate the implied volatility of FTSE 100 put options held
by the FPLP With-Profits Fund. Property is calibrated to 15% initial volatility and a 6.5% pa running yield.


Sample implied volatilities by asset class
At 31 December 2007                                                                                       Term (years)
                                                                                              5              15                  25                 35

15-year risk-free zero coupon bonds                                                       7.9%              5.1%              4.6%               4.7%
15-year corporate bonds                                                                 10.5%               9.9%             10.0%             10.2%
Equity                                                                                  25.4%              25.8%             25.8%             27.8%
Property                                                                                15.4%              16.5%             17.9%             18.4%

At 31 December 2006                                                                                        Term (years)
                                                                                              5               15                 25                 35

15-year risk-free zero coupon bonds                                                      7.1%               4.7%              4.6%              5.1%
15-year corporate bonds                                                                  9.4%               8.6%              8.3%              8.8%
Equity                                                                                  17.1%             18.2%              19.6%             20.8%
Property                                                                                15.1%             16.4%              17.9%             19.0%


The volatility represents the variation of return around the average for the particular asset class. Bonus rates are set at levels which fully utilise
the assets supporting the in-force business over its lifetime and are consistent with the economic assumptions and the Group’s bonus policy.

(c) Other assumptions
Other assumptions (for example mortality, morbidity, persistency and expenses) are a reflection of our best estimate of the likely behaviours,
outcomes or circumstances in the future. Typically the estimates are made on an annual basis following experience investigations based on
the data available at the time both from our own book of business and externally sourced information.

The aim is to set assumptions at a level that reflects recent experience, unless there are reliable indicators that suggest their adoption would
result in a significant variance compared to these assumptions in the future. In some instances, there may be little or no direct experience to
use in setting assumptions and the future outcome is therefore uncertain.

In terms of future improvements in annuitant mortality, these have been assumed to be in accordance with the ‘medium cohort’ projections
(with certain amendments) published by the CMI in 2002. The amendments are to use 75% of these projections for females and to introduce
a minimum annual rate of improvement in future mortality - for males this is assumed to be 1% pa and for females 0.75% pa.

13. Sensitivities

Sensitivities of the EEV results to revised assumptions are given in note 31 to the IFRS financial statements.


192 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                    ABBREVIATIONS AND DEFINITIONS




Parent company balance sheet
At 31 December 2007




                                                                                                               2007              2006
                                                                                            Notes               £m                £m

Fixed assets investments
Investments in Group undertakings                                                                2            4,371             4,746
Other financial assets                                                                                            44               88
                                                                                                              4,415             4,834
Current assets
Amounts owed by Group undertakings                                                                                 3                2
Other debtors                                                                                                     12               23
Total debtors                                                                                                     15               25
Cash at bank                                                                                                    210               180
                                                                                                                225               205
Creditors: amounts falling due within one year
Convertible bonds                                                                                3                 -             (283)
Loan notes                                                                                       3               (44)             (18)
Amounts owed to Group undertakings                                                                               (15)             (17)
                                                                                                                 (59)            (318)
Net current assets/(liabilities)                                                                                166              (113)
Total assets less current liabilities                                                                         4,581             4,721
Creditors: amounts falling due after more than one year
Provisions                                                                                       4                (8)             (84)
Total creditors falling due after more than one year                                                              (8)             (84)
Total assets less liabilities                                                                                 4,573             4,637
Capital and reserves
Called-up share capital                                                                          5              234               214
Share premium                                                                                    5            2,372             2,051
Other equity                                                                                     6              810               810
Revaluation reserve                                                                              7              750             1,266
Retained earnings                                                                                7              407               296
Equity shareholders’ funds                                                                                    4,573             4,637


The financial statements were approved by the Board of directors on 18 March 2008.

Sir Adrian Montague                           Jim Smart
Executive Chairman                            Chief Financial Officer




                                                                                     Friends Provident Annual Report & Accounts 2007 193
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                             EEV SUPPLEMENTARY INFORMATION




Notes to the parent company accounts


1. Accounting policies                                                     investments recognised in the profit and loss account, as the
                                                                           investments are revalued. Deferred taxation is calculated at the rates
1.1 Basis of preparation                                                   at which it is expected that the tax will arise, and discounted to take
                                                                           into account the likely timing of payments and pattern of expected
Friends Provident plc (the Company) is a limited liability company,        realisation of investments. Deferred taxation is recognised in the
incorporated in the UK, whose shares are publicly traded.                  profit and loss account for the period, except to the extent that it is
                                                                           attributable to a gain or loss that is recognised directly in the
The financial statements have been prepared in accordance with             statement of total recognised gains and losses.
applicable accounting standards and under the historical cost
convention as modified by the revaluation of investments as set out        1.2.3 Valuation of investments
in note 1.2.3.                                                             Investments are shown in the balance sheet as follows:
                                                                           (i) Unlisted investments are valued by the directors, having regard
The Company has continued to present individual financial                        to their likely realisable value.
statements prepared on a UK Generally Accepted Accounting                  (ii) Listed and other quoted investments, including those in
Practice basis as permitted by section 226(A) and Schedule 4 to the              participating interests, are carried at bid value at the balance
Companies Act 1985 and has adopted the exemption of omitting the                 sheet date.
profit and loss account as permitted by section 230 of that Act.           (iii) Shares in Group undertakings are stated at current value.
                                                                                 Revaluation gains, and their reversal, and temporary diminutions
All accounting policies have been reviewed for appropriateness in                in value are recognised as a transfer to the revaluation reserve.
accordance with Financial Reporting Standards.                                   Revaluation losses and their reversal, are recognised in the
                                                                                 profit and loss account.
FRS29 (IFRS7) Financial Instruments: Disclosures was effective
from 1 January 2007. The Company is exempt from the standard as            1.2.4 Share based payments
the disclosures are contained within the notes to the Group
                                                                           The Company operates share based payment schemes for
consolidated financial statements.
                                                                           employees of the Group, depending on eligibility. The fair value
                                                                           of these equity-settled share based payments is measured at the
In accordance with FRS1, the Company is exempt from the
                                                                           grant date, and the cost is borne by the subsidiary companies.
requirement to prepare a cash flow statement on the grounds that
                                                                           The fair value is added to the cost of the Company’s investments
this is provided in its consolidated financial statements.
                                                                           in its subsidiary undertakings and a corresponding credit is made
                                                                           to reserves.
1.2 Significant accounting policies
1.2.1 Investment return                                                    1.2.5 Interest-bearing loans and borrowings
Investment return excludes revaluation of Group investments, and           Borrowings are recognised initially at cost, being the fair value of
includes dividends, interest, rents, gains and losses on the realisation   the consideration received, net of transaction costs incurred, and
of assets and unrealised gains and losses. Such income includes any        subsequently stated at amortised cost. Any difference between the
withholding tax but excludes other tax credits, such as attributable       proceeds, net of transaction costs, and the redemption value is
tax credits. Income from fixed-interest securities together with           recognised in the profit and loss account over the period of the
interest, rents, and associated expenses are accounted for in the          borrowings, using the effective interest method.
period in which they accrue. Dividends are included in the profit and
loss account when the securities are listed as ex-dividend. Realised       Convertible notes that can be converted to share capital at the
gains or losses on investments are calculated as the difference            option of the holder, where the number of shares issued does not
between the net sale proceeds and original cost. Unrealised gains          vary with changes in their fair value, are accounted for as compound
and losses on investments represent the difference between the             financial instruments. Compound financial instruments are split and
valuation of investments at the balance sheet date and their original      recorded respectively within each of its two components, equity and
cost, or if they have been previously revalued, the valuation at the       liability. Transaction costs that relate to the issue of a compound
last balance sheet date. The movement in unrealised gains and              financial instrument are also allocated to the equity and liability
losses recognised in the period also includes the reversal of              components in proportion to the allocation of proceeds. The equity
unrealised gains and losses recognised in earlier accounting periods       components of the convertible notes are calculated as the excess of
in respect of disposals in the current period.                             the issue proceeds over the present value of the future interest and
                                                                           principal payments, discounted at the market rate of interest
1.2.2 Taxation                                                             applicable to similar liabilities that do not have a conversion option.
Taxation is based on profits and income for the period as determined       The equity component is recognised and included in shareholders’
in accordance with the relevant tax legislation, the movement in           equity, net of tax effects. The fair value of the liability component is
deferred tax and adjustments to prior periods’ tax. Provision is made      recorded on an amortised cost basis until extinguished on
for deferred taxation liabilities, using the liability method, on all      conversion or maturity of the bonds.
material timing differences, including revaluation gains and losses on




194 Friends Provident Annual Report & Accounts 2007
            PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Notes to the parent company accounts continued


1. Accounting policies continued

The interest expense recognised in the profit and loss account under interest payable is calculated using the effective interest rate method.

1.2.6 Foreign currencies
Monetary assets and liabilities held in foreign currencies at the balance sheet date are expressed in sterling at rates ruling on that date.
Income and expenditure denominated in foreign currencies are translated at rates ruling at the date on which the transaction occurs. All
resulting exchange gains and losses are included within the part of the profit and loss account in which the underlying transaction is reported.



2. Investments in Group undertakings

                                                                                        Subsidiary        Loans to Group               Total
                                                                                      undertakings          undertakings        investments
                                                                                               £m                     £m                 £m

Current value
At 1 January 2007                                                                              4,441                   305              4,746
Additions                                                                                        163                      -               163
Repayment of capital                                                                             (17)                    (5)               (22)
Revaluations                                                                                    (516)                     -               (516)
At 31 December 2007                                                                            4,071                   300              4,371
Cost
At 1 January 2007                                                                              3,176                   305              3,481
Additions                                                                                        163                      -               163
Repayment of capital                                                                             (17)                    (5)               (22)
At 31 December 2007                                                                            3,322                   300              3,622


Additions include £103m relating to the acquisition of Sesame and Pantheon Financial (see note 42 to the Group’s consolidated financial
statements) by subsidiary undertaking Friends Provident Distribution Holdings Limited, £31m investment in The Asset Hub Limited, £13m
investment in F&C, £5m in share based payment transactions with Friends Provident Management Services Limited (FPMS) and a further
£11m in respect of future consideration for Lombard (see note 4).

Investments in Group undertakings on a historical cost basis are valued at £3,322m (2006: £3,176m).

The principal subsidiary undertakings of the Company as at 31 December 2007 are set out in note 19 to the Group’s consolidated financial
statements. A list of all subsidiary undertakings is filed at UK Companies House with the Company’s Annual Return.




                                                                                             Friends Provident Annual Report & Accounts 2007 195
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                         EEV SUPPLEMENTARY INFORMATION




Notes to the parent company accounts continued


3. Convertible bonds and loan notes

The convertible bonds were converted into ordinary shares in 2007 (see note 38 to the Group’s consolidated financial statements).
The carrying amount at 31 December 2006 was £283m.

The loan notes were issued as part consideration for Lombard (see note 33 to the Group’s consolidated financial statements).



4. Provisions

                                                                                  Future consideration              Share
                                                                                          for Lombard        entitlements           Total
                                                                                                   £m                 £m              £m

At 1 January 2006                                                                                    146                9            155
Adjustment to consideration                                                                           (12)               -            (12)
Utilised in the year                                                                                  (59)               -            (59)
At 31 December 2006                                                                                   75                9             84
Increase in consideration                                                                             11                 -            11
Utilised in the year                                                                                  (86)              (1)           (87)
At 31 December 2007                                                                                     -               8               8


The share entitlement provision represents expected future claims on share entitlements not claimed following demutualisation.

Total creditors amount to £67m (2006: £402m).



5. Share capital and share premium

Details of the Company’s share capital and share premium are set out in note 38 to the Group’s consolidated financial statements.



6. Other equity

Other equity consists of Step-up Tier one Insurance Capital Securities (STICS) of £810m (2006: £810m) that were issued in 2003 and 2005.
Details of the Company’s STICS are set out in note 40 to the Group’s consolidated financial statements.




196 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                           ABBREVIATIONS AND DEFINITIONS




Notes to the parent company accounts continued


7. Reserves
                                                                                                             Revaluation          Retained
                                                                                                                 reserve          earnings
                                                                                                                     £m                £m

At 1 January 2007                                                                                                   1,266                 296
Profit for the financial year                                                                                             -               186
Dividend                                                                                                                  -            (168)
Share based payments                                                                                                      -                 5
Revaluation of investments                                                                                            (428)                 -
Transfer                                                                                                               (88)                88
At 31 December 2007                                                                                                   750                 407


In accordance with the Companies Act 1985, the directors have considered the valuation of all fixed assets and are satisfied that the
aggregate value of all assets is not less than the book value as stated in the Company’s balance sheet on page 193. Therefore, in accordance
with the Companies Act 1985 Section 275, certain losses on fixed assets have been treated as unrealised losses. In order to reflect this, a
transfer of £88m has been made between the revaluation reserve and the profit and loss account. In 2006, a transfer of £92m was made to
the revaluation reserve. Transfers to the revaluation reserve include a £42m decrease in the current value of F&C Asset Management plc.



8. Directors and employees

The Company does not directly employ any staff. The directors and employees who provide services to the Company are employed by, and
receive their remuneration from FPMS, a Group undertaking. Included within the management recharges from FPMS for 2007 is an
allowance for directors’ and employees’ emoluments in respect of their services to the Company.

Full details of directors’ emoluments are contained in the Remuneration Report of the Board, set out on page 68 to the Group’s consolidated
financial statements.



9. Related party transactions

The Company is exempt from the requirements of FRS 8, concerning the disclosure of transactions with other companies that qualify as related
parties within the Group, as the Company’s financial statements are presented together with the Group’s consolidated financial statements.

Details of key management transactions are set out in note 44 to the Group’s consolidated financial statements.



10. Guarantees

The Company has given a guarantee to its subsidiary undertaking, FPMS for at least 12 months from the date of approval of its financial
statements.




                                                                                           Friends Provident Annual Report & Accounts 2007 197
FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS                                                                            EEV SUPPLEMENTARY INFORMATION




Abbreviations and definitions



Abbreviations
ABI             Association of British Insurers                            GAAP           Generally Accepted Accounting Practice

ABS             Asset Backed Securities                                    HMRC           HM Revenue and Customs

AGM             Annual General Meeting                                     HNWI           High Net Worth Individual

ALM             Asset Liability Management                                 IAS            International Accounting Standard

APE             Annualised Premium Equivalent                              IFA            Independent Financial Adviser

DPF             Discretionary Participation Features                       IFRS           International Financial Reporting Standard

EEV             European Embedded Value                                    IRR            Internal Rate of Return

EPS             Earnings Per Share                                         LDI            Liability Driven Investment

ESOS            Executive Share Option Scheme                              LIBOR          London Interbank Offered Rate

EURIBOR         Euro Interbank Offered Rate                                LTIP           Long Term Incentive Plan

F&C             F&C Asset Management plc                                   LTRP           Long Term Remuneration Plan

FFA             Fund for Future Appropriations                             OLAB           Overseas Life Assurance Business

FPI             Friends Provident International                            ORC            Operational Risk Committee

FPLA            Friends Provident Life Assurance Limited                   PPFM           Principles and Practices of Financial Management

FPLP            Friends Provident Life & Pensions Limited                  PVIF           Present Value of In-force

FPMS            Friends Provident Management Services Limited              PVNBP          Present Value of New Business Premiums

FPP             Friends Provident Pensions Limited                         RBS            Realistic Balance Sheet

FPPS            Friends Provident Pension Scheme                           RCM            Risk Capital Margin

FRC             Financial Risk Committee                                   RPI            Retail Prices Index

FRS             Financial Reporting Standard                               STICS          Step-up Tier one Insurance Capital Securities

FSA             Financial Services Authority                               TSR            Total Shareholder Return



Definitions
EEV underlying profit is based on expected investment return               Internal Rate of Return (IRR) is equivalent to the discount rate at
and excludes: (i) amortisation and impairment of non-covered               which the present value of the after tax cash flows expected to be
business acquired intangible assets (ii) effect of economic                earned over the lifetime of the business written is equal to the
assumption changes (iii) non-recurring items; and is stated after          capital invested to support the writing of the business. All
deducting interest payable on STICS.                                       assumptions and expenses in the calculation of IRR are consistent
                                                                           with those used for calculating the contribution from new business.
IFRS underlying profit is based on longer-term investment return
and excludes: (i) policyholder tax (ii) returns attributable to minority   Cash payback on new business is the time at which the value of
interests in policyholder funds (iii) non-recurring items (iv)             the expected cash flows, after tax, is sufficient to have recouped
amortisation and impairment of acquired intangible assets and              the capital invested to support the writing of the business. The
present value of acquired in-force business; and is stated after           cash flows are discounted at the appropriate risk-discount rate, and
deducting interest payable on STICS.                                       calculated on the same assumptions and expense basis as those
                                                                           used for the contribution from new business.
Present Value of New Business Premiums (PVNBP) represents
new single premiums plus the expected present value of new                 Margins are defined as the pre-tax contribution from new business
business regular premiums.                                                 generated by each product type, divided by the new business
                                                                           volume for that product. Contribution is calculated using economic
Annualised Premium Equivalent (APE) represents annualised                  assumptions at the beginning of the period, and is quoted after the
new regular premiums plus 10% of single premiums.                          cost of required capital, share based payments and including an
                                                                           apportionment of fixed acquisition expenses across products.




198 Friends Provident Annual Report & Accounts 2007
             PARENT COMPANY ACCOUNTS                                                              ABBREVIATIONS AND DEFINITIONS




Shareholder Information


Registrar                                                                The Registrar offers the following share
                                                                         dealing services
Equiniti
Aspect House                                                             By post:
Spencer Road                                                             If dealing by post, you will need to complete a form and
Lancing                                                                  send it to the Registrar rather than just instruct them in
West Sussex                                                              writing of your request. The form is available on our
BN99 6DA                                                                 website www.friendsprovident.com/investor or can be
                                                                         requested from the postal sharedealing helpline on
Telephone:                                                               0871 384 2248.
0871 384 2056 (UK)
+44 121 415 7109 (overseas)                                              By telephone:
(Monday to Friday 8.30 am to 5.30 pm)                                    Call Shareview Dealing, a telephone dealing service
                                                                         provided by the Registrar, on 0845 300 2946
Website: www.shareview.co.uk
                                                                         (Monday to Friday 8.00 am to 6.00 pm)
Shareholder enquiries
                                                                         Please have your Shareholder Account Number
You should contact the Registrar if you:                                 to hand.
• have any questions regarding your shareholding
                                                                         By internet:
• have any questions regarding your
                                                                         Shareview Dealing is also available online at
  dividend payments
                                                                         www.friendsprovident.com/shareholderservices
• wish to participate in the dividend re-investment plan
• have lost your Friends Provident Share Account                         Please have your Shareholder Account Number
  statement or share certificate                                         to hand.
• have changed your name or address
                                                                         Latest share price information
• wish to transfer your shares into someone else’s                       www.friendsprovident.com/shareprice
  name or joint names



Dividend Re-investment Plan (DRIP)
Through Equiniti, Friends Provident operates a DRIP as a simple and economic facility to enable you to grow your shareholding in Friends
Provident plc. Shares are purchased using your cash dividend, through a low cost dealing arrangement. Before making a decision to join the
DRIP, you should first read the terms and conditions which are available to download and view at www.friendsprovident.com/dividends or
by contacting the Registrar on 0871 384 2056. To join the DRIP, simply complete the online application form available at
www.friendsprovident.com/dividends or call the Registrar on 0871 384 2056.



Important dates
Shares go ex dividend                       16 April 2008
Record date                                 18 April 2008
Annual General Meeting                      22 May 2008
Payment date of 2007 final dividend         27 May 2008

Cautionary statement
Certain statements contained in this document constitute ‘forward-looking statements’. Such forward-looking statements involve risks,
uncertainties and other factors, which, from time to time, may cause the actual results, performance or achievements of Friends
Provident plc, its subsidiaries and subsidiary undertakings, or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors
include, among others, adverse changes to laws or regulations; risks in respect of taxation; unforeseen liabilities from product reviews;
asset shortfalls against product liabilities; changes in the general economic environment; levels and trends in mortality, morbidity and
persistency; restrictions on access to product distribution channels; increased competition; and the ability to attract and retain personnel.
These forward-looking statements are made only as at the date of this document and, save where required in order to comply with the
Listing Rules, there is no obligation on Friends Provident plc to update such forward-looking statements.




                                                                                               Friends Provident Annual Report & Accounts 2007 199

				
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