Note 3 - Notes to the Financial Statements - Group Consolidated Financial Statements - Annual Report and Accounts 2006

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3. OPERATING PROFIT INFORMATION

This supplementary information provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business.

For UK life and pensions business, operating profit represents:

the distribution of profit relating to non profit and shareholder net worth, grossed up for tax. The current distribution comprises:
- 7% of the embedded value of the SRC and Sub-fund (shareholder net worth – SNW) adjusted to remove the impact from the contingent loan between SRC and LGP, and the SNW of LGP; and
- 5% of the embedded value of the non profit business adjusted to remove the impact from the contingent loan between SRC and LGP;
the subordinated debt interest on the intra-group subordinated debt included within the SRC, until it was repaid in December 2006;
the shareholders’ share of the with-profits surplus recognised in the year, grossed up for tax.

An analysis of the distribution of profit relating to non profit and shareholder net worth is included in Note 3(iv).

Operating profit includes a longer term investment return on shareholders’, General insurance’s and Netherlands’ funds held outside a LTF. It excludes investment variances and the contribution from UK non profit business. The income statement comprises returns to shareholders and excludes policyholders’ returns.

(i) Reconciliation between operating profit and profit from ordinary activities after income tax
	Notes	2006 £m	2005 £m
From continuing operations
Life and pensions	(ii)	592	489
Investment management	(v)	133	103
General insurance	(vi)	9	14
Other operational income	(vii)	18	41
Operating profit		752	647
Investment return on SRC	(iii)	303	387
Net capital released from non profit business	(iii)	1,255	478
Distribution of operating profit from non profit business	(iii)	(422)	(349)
		1,888	1,163
Variation from longer term investment return		63	139
Property income attributable to minority interests		67	81
Profit from continuing operations before tax attributable to equity holders		2,018	1,383
Tax attributable to equity holders		(387)	(371)
Profit from continuing operations after tax		1,631	1,012
Profit from discontinued operations		–	13
Profit from ordinary activities after tax		1,631	1,025

(ii) Life and pensions operating profit
	Notes	2006 £m	2005 £m
Distribution relating to non profit and shareholder net worth	(iv)	388	312
Subordinated debt interest		34	37
Non profit business		422	349
With-profits business		95	66
UK		517	415
USA		58	52
Netherlands		7	18
France		10	4
		592	489

(iii) Contribution from UK non profit business
	2006 £m	2005 £m
Investment income	75	67
Interest expense and charges	(3)	(3)
Realised investment gains	215	191
Unrealised investment gains	16	132
Investment return on SRC	303	387
Net capital released from non profit business¹	1,255	478
Distribution of operating profit from non profit business	(422)	(349)
Contribution from UK non profit business before tax	1,136	516

1.: The net capital released from non profit business for 2006 has been impacted by the matters discussed in Note 2.

(iv) Distributions to shareholders from Society’s LTF

The transfer to shareholders from Society’s LTF is limited by a formula agreed with our regulator. The formula is the aggregate of the shareholders’ share of the with-profits surplus, a smoothed investment return of 7% on the embedded value of the SRC and Sub-fund and 5% on the embedded value of the non profit business of Society and LGP, adjusted to remove the impact from the contingent loan between SRC and LGP, and the SNW of LGP.

(iv) Distributions to shareholders from Society’s LTF
	2006 Non profit £m	2006 SNW £m	2005 Non profit £m	2005 SNW £m
Embedded value at end of year	1,643	3,828	2,387	1,762
Less: subordinated debt	–	–	–	(602)
Less: LGP shareholders’ fund	–	(1,280)	–	–
Contingent loan	571	(571)	–	–
Add back: pension deficit attributable to SNW	(5)	60	–	51
Add back: distributions	–	272	–	219
	2,209	2,309	2,387	1,430
Distribution formula – full year	5.0%	7.0%	5.0%	7.0%
Distribution after tax	110	162	119	100
Tax gross up at 30%	47	69	51	42
Distribution before tax	157	231	170	142

(v) Investment management operating profit
	2006 £m	2005 £m
Managed Pension Funds	96	74
Ventures	4	4
Property	6	4
Retail investments	11	7
Other external income	6	5
Other income	10	9
	133	103

(vi) General insurance operating profit, underwriting result and combined operating ratios
	Operating profit/ (loss) 2006 £m	Underwriting result 2006 £m	Combined operating ratio 2006 %	Operating profit 2005 £m	Underwriting result 2005 £m	Combined operating ratio 2005 %
From continuing operations
Household	(9)	(21)	111	7	(6)	101
Other business	18	13	89	7	1	101
	9	(8)	105	14	(5)	101

The combined operating ratio is:

Operating Profit Equation

(vii) Other operational income
	2006 £m	2005 £m
Shareholders’ other income
Investment return on ordinary shareholders’ equity	139	127
Interest expense	(106)	(75)
	33	52
Other operations¹	(2)	(5)
Unallocated corporate and development expenses	(13)	(6)
	18	41

1.: Principally the Regulated mortgage network and Cofunds.

(viii) Earnings per share
	Notes	Profit before tax 2006 £m	Tax charge 2006 £m	Profit after tax 2006 £m	Number of shares¹ 2006 £m	Earnings per share 2006 p
Operating profit from continuing operations	(i)	752	(212)	540	6,483	8.33
Variation from longer term investment return	(i)	63	(11)	52		0.80
Contribution from UK non profit business	(iii)	1,136	(164)	972		14.99
Profit from discontinued operations		–	–	–		–
Distributions on subordinated borrowings designated as equity				–		–
Profit attributable to ordinary equity holders/EPS²		1,951	(387)	1,564	6,483	24.12

	Notes	Profit before tax 2005 £m	Tax (charge)/ credit 2005 £m	Profit/ (loss) after tax 2005 £m	Number of shares¹ 2005 £m	Earnings per share 2005 p
Operating profit from continuing operations	(i)	647	(191)	456	6,474	7.04
Variation from longer term investment return	(i)	139	(32)	107		1.66
Contribution from UK non profit business	(iii)	516	(148)	368		5.68
Profit from discontinued operations		12	1	13		0.20
Distributions on subordinated borrowings designated as equity				(16)		(0.25)
Profit attributable to ordinary equity holders/EPS²		1,314	(370)	928	6,474	14.33

The number of shares in issue at 31 December 2006 was 6,532,261,961 (2005: 6,507,421,932).

1.: Weighted average number of shares.
2.: Earnings per share.

(ix) Group cash flow statement
The table below shows the cash flows in the year relating to the Group’s parent company.
	2006 £m	2005 £m
Dividends received:
UK life and pensions	380	533
General insurance	–	105
Investment management	50	69
Other	3	2
	433	709
Dividend distributions to ordinary equity holders of the Company during the year (Note 15)	(349)	(331)
Distributions during the year on subordinated borrowings designated as equity (Note 15)	–	(16)
Proceeds from issue of equity	15	1
Proceeds from issue of subordinated borrowings	–	397
Repayment of convertible bond	(525)	–
Working capital movements	(52)	(136)
Net cash (outflow)/inflow	(478)	624

Notes to the Financial Statements 1-10

3. OPERATING PROFIT INFORMATION

(iv) Distributions to shareholders from Society’s LTF