Further Information

Corporate Activity

Former Resolution businesses and assets

Following Pearl’s acquisition of Resolution on 1 May 2008, Royal started the process of acquiring the following from Pearl:

• Scottish Provident International Life Assurance, a provider of life products and investment services which is based in the Isle of Man • the majority of the in-force UK protection business from Scottish Provident and Scottish Mutual Assurance • Phoenix Life Assurance Limited, formerly Abbey National Life, the products of which are distributed through Abbey’s national branch network • the new business operations of the companies mentioned above, with the exception of incremental business on policies retained by Pearl • the right to provide or procure the provision of all investment management and policy administration services of the assets described above.

On 3 June 2008, Royal London completed the transfer from Pearl of Scottish Provident International Life Assurance.

On 1 August 2008, Royal London completed the acquisition of Phoenix Life Assurance Limited and of Scottish Provident’s new business capabilities, in respect of individual life protection business.

The in-force protection business still to be acquired by Royal London will be transferred by means of schemes under Part VII of FSMA 2000. It is expected that such schemes will complete by the end of 2008. The value of the assets transferred will include the value of new business written during 2008.

The purchase price for these assets and businesses is £1.27bn, subject to post-completion consideration adjustments. In addition, Royal London provided £0.3bn of debt funding to Pearl, at a commercial rate, in support of their acquisition of Resolution plc.

The funding for this acquisition has been structured as an exchange of assets in the estate of the Royal London Long Term Fund, principally equities, for the tangible and intangible assets of the relevant Resolution businesses. In preparation for the acquisition, Royal London sold a substantial volume of equities ahead of the significant market falls in late 2007 and early 2008. The purchase is in part funded by the £397m of subordinated debt, which was raised in 2005 to support the development and growth of the Group.

These acquisitions will accelerate the Group’s progress against a number of strategic objectives. Our presence in the protection sector will be greatly enhanced; we will broaden our delivery to overseas markets, including access to the Hong Kong market; we will create greater operational economies of scale; and we will realise financial synergies from the combination of funds.

1 Financial performance

The financial results have been presented on both an International Financial Reporting Standards (IFRS) and a European Embedded Value (EEV) basis.

The result after tax on an IFRS basis is a loss of £236 million (2007 half year £305 million profit). The decrease in the IFRS result is largely due to negative investment returns in the first six months of 2008. This was compounded by a reduction in the scheme surplus (see note 5 to the IFRS financial information) of £114 million, reflecting investment performance, strengthening of mortality assumptions and increased scheme cost assumptions.

On an EEV basis the operating profit before tax for the period was £100 million (2007 half year £77 million). We believe this is the best indication of the underlying performance of the business as it excludes the volatility of investment markets.

The negative investment returns experienced during the period have impacted the financial strength of the Group. Whilst both regulatory and realistic excess working capital measures have reduced, the Group remains well capitalised to deliver the Group’s operational objectives.

Investment performance H1 2008

The UK economy continued to expand during the first quarter of 2008; this was followed by much weaker economic activity and higher inflation during the second quarter. All this points to a very high chance of recession (falling output) in the second half of the year, something we have not seen in the UK since 1992.

The housing market has continued to weaken, with prices now falling on an annual basis. In addition, inflation has risen further above target due to the rising cost of food and, more particularly, energy, the result of another round of utility bill increases. As a result of these events, the MPC put on hold any further rate reductions which they had been expected to make.

The UK equity market started the year off with mixed results – some positive followed by further negative results. By the end of the second quarter, markets had sold off in line with our expectations, as downside economic risks became more apparent – in the six months to 30 June 2008, the FTSE All Share delivered a negative return of -11.2%. Given the poor economic outlook in the UK, we expect that the property bear market, which began late last year, will be prolonged. In the six months to 30 June 2008 property has returned -6.0% as measured by the IPD property index. Bonds have also had a difficult year in 2008 with Gilt returns of -2.2% (as measured by the FTSE All Stocks Gilts index) and with corporate bond returns of -4.0% as measured by the iBoxx £ Non-Gilt index.

Royal London Fund The fund generated an investment return of -6.4% before tax (2007 half year 3.6%) in the period, driven by negative returns for all asset classes. This compares positively to the benchmark, which returned -6.5% year to date.

Scottish Life Fund The fund incurred a negative return of -4.4% before tax (2007 half year loss of -1.3%) in the period. The Scottish Life Fund holds a greater proportion of its investments in fixed interest bonds than the Royal London Fund; this has meant that the lower performance in the equity markets have had less impact in this fund.

2 IFRS and EEV financial information (Unaudited)

The interim results for the to 30 June 2008 are outlined below in two sections. The first section presents the Group’s statutory income statement and balance sheet on an IFRS basis, whilst the second section provides an overview of the Group’s EEV results for the first six months of 2008.

3 Consolidated income statement for the six months ended 30 June 2008 – IFRS basis

Six months Year ended ended 30 June 31 Dec 2008 2007 2007 Notes £m £m £m Revenues Gross earned premiums 375 382 722 Amounts paid to reinsurers (104) (85) (162) Net earned premiums 271 297 560 Fee income from investment and fund management contracts 63 64 130 Investment return (1,628) 632 865 Other operating income 20 125 111 Total revenues (1,274) 1,118 1,666

Policyholder benefits and claims Claims paid, before reinsurance 698 721 1,409 Reinsurance recoveries (23) (15) (35) Claims paid, after reinsurance 675 706 1,374 Decrease in contract liabilities, before reinsurance (1,276) (106) (285) Reinsurance ceded 19 (55) (148) Decrease in insurance contract liabilities, after reinsurance (1,257) (161) (433) Decrease / (increase) in non-participating value of in-force 155 (52) 10 business (Decrease) / increase in investment contract liabilities (789) 107 148 Total policyholder benefits and claims (1,216) 600 1,099

Operating expenses Administrative expenses 123 133 254 Investment management expenses 39 36 91 Amortisation charges and impairment losses on acquired PVIF 16 12 42 Investment return attributable to external unit holders (40) 12 7 Other operating expenses 117 212 Total operating expenses 255 195 406

Finance costs 19 15 33

Result before tax (332) 308 128

Tax (income) / expense 4 (96) 3(2)

Transfer (from) / to the unallocated divisible surplus (236) 305 130

Profit for the period - --

As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. Accordingly, there is no profit for the period shown in the income statement.

4 Consolidated statement of recognised income and expense for the six months ended 30 June 2008 – IFRS basis

Six months Year ended ended 30 June 31 Dec 2008 2007 2007 £m £m £m

Fair value gains on revaluation of property, plant and - 12 equipment Total income not recognised in the income statement - 12 transferred to the unallocated divisible surplus Net income and expense recognised in the income statement (236) 305 130 transferred to the unallocated divisible surplus

Total transfer (from) / to the unallocated divisible surplus (236) 306 132

5 Consolidated balance sheet as at 30 June 2008 – IFRS basis

30 June 30 June 31 Dec 2008 2007 2007 Notes £m £m £m ASSETS

Property, plant and equipment 42 68 84

Investment property 2,269 2,910 2,485

Intangible assets 686 632 633

Reinsurers’ share of insurance contract liabilities 429 357 448

Pension scheme asset 5 23 171 137

Current tax asset 8 67

Financial assets Financial investments 20,007 21,150 21,075 Loans and receivables, including insurance receivables 1,536 400 236 Cash and cash equivalents 1,630 1,214 2,025 Total financial assets 23,173 22,764 23,336

Total assets 26,630 26,908 27,130

LIABILITIES

Participating insurance contract liabilities 9,974 11,160 10,909 Participating investment contract liabilities 1,389 1,644 1,583 Unallocated divisible surplus 1,897 2,307 2,133 Non-participating value of in-force business (359) (576) (514) Participating contract liabilities 12,901 14,535 14,111

Non-participating insurance contract liabilities 2,746 2,584 2,652 Non-participating investment contract liabilities 9,459 8,260 8,919 Non-participating contract liabilities 12,205 10,844 11,571

Subordinated liabilities 6 397 396 396

Payables and other financial liabilities 626 479 378

Provisions 52 77 71

Other liabilities 161 150 164

Liability to external unit holders 255 282 301

Deferred tax liabilities 33 145 138

Total liabilities 26,630 26,908 27,130

6 Consolidated cash flow statement for the six months ended 30 June 2008 – IFRS basis

Six months ended Year ended 30 June 31 Dec 2008 2007 2007 Notes £m £m £m Cash flows from operating activities

Transfer (from) / to the unallocated divisible surplus (236) 305 130

Adjustments for non-cash items 572 (149) 417 Adjustments for non-operating items 19 15 33 Acquisition of investment property (17) (63) (189) Acquisition of financial investments (13,289) (10,246) (23,152) Proceeds from disposal of investment property 84 49 260 Proceeds from disposal of financial investments 13,439 10,288 23,456 Changes in operating receivables (1,276) (209) (45) Changes in operating payables 238 200 71 Change in liability to external unit holders (46) 16 35 Net cash from operating activities before tax (512) 206 1,016 Tax paid (10) (8) (11) Net cash flows from operating activities (522) 198 1,005 Cash flows from investing activities Acquisition of property, plant and equipment (15) (2) (9) Acquisition of Group entities (net of cash and cash equivalents acquired) 150 -(14) Proceeds from disposal of property, plant and equipment 12 -1 Net cash flows from investing activities 147 (2) (22) Cash flows from financing activities Proceeds from issue of other debt and finance lease - - 44 liabilities Repayments of other debt and finance lease (1) (1) (3) liabilities Interest paid (19) (15) (33) Net cash flows from financing activities (20) (16) 8 Net (decrease) / increase in cash and cash (395) 180 991 equivalents Cash and cash equivalents at beginning of period 2,025 1,034 1,034 Cash and cash equivalents at end of period 7 1,630 1,214 2,025

An integral part of the operations of the Group is the management of a portfolio of investment assets. Cash flows relating to the purchase and sale of these assets have been treated as operating cash flows for the purposes of the cash flow statement.

7 1. Basis of preparation

The IFRS financial information for the period ended 30 June 2008 has been prepared on the basis of the accounting policies set out in the Group’s Annual Report and Accounts for the year ended 31 December 2007. Those accounting policies are consistent with IFRSs issued by the International Accounting Standards Board as adopted by the European Commission for use in the European Union. The Group has not applied International Accounting Standard 34, ‘Interim Financial Reporting’ in preparing the 2008 IFRS financial information, as this standard is not mandatory for the Group.

The IFRS financial information for the six months to 30 June 2008 and 2007 is unaudited but has been reviewed by the auditors, PricewaterhouseCoopers LLP. The IFRS financial information for the full year 2007 has been taken from the Group’s 2007 Annual Report and Accounts, which have been delivered to the Registrar of Companies. The auditors have reported on the 2007 Annual Report and Accounts and their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985.

2. Acquisitions

Following the acquisition of Resolution plc (Resolution) by Pearl Group Limited (Pearl) on 1 May 2008, the Group started the process of acquiring certain Resolution assets from Pearl, as follows: - • 100% of the voting equity instruments of Scottish Provident International Life Assurance Limited (SPILA), a provider of life products and investment services, which is based in the Isle of Man; • the majority of the in-force UK protection business from Scottish Provident and Scottish Mutual Assurance; • 100% of the voting equity instruments of Phoenix Life Assurance Limited (PLAL), formerly Abbey National Life, the products of which are distributed through Abbey’s national branch network; • the new business operations of the companies above, with the exception of incremental business on policies retained by Pearl; and • the right to provide or procure the provision of all investment management and policy administration services of the assets described above.

The acquisition of SPILA was completed during the period and is described further in section (a) below. The acquisition of PLAL, the new business operations and the investment management rights was completed after the period end and is described further below in section (b).

The in-force business still to be acquired by the Group will be transferred to the Parent company under transfers undertaken in accordance with Part VII of the Financial Services and Markets Act 2000, subject to receiving the necessary approvals. These transfers are expected to be completed before the end of the year.

As at 30 June 2008, the Group had advanced the consideration in respect of the assets acquired after the balance sheet date, including the assets to be acquired by Part VII transfer. Consequently, the balance sheet as at 30 June 2008 includes an amount of £1,158m within loans and receivables in respect of this consideration.

8 a) SPILA

The effective date of acquisition of SPILA was 3 June 2008. The results of the SPILA companies have been included in the consolidated financial statements of the Group with effect from that date, contributing £1m to the Group result before tax. The acquisition of SPILA has given rise to goodwill on acquisition of £4m, calculated as follows:

Purchase cost:

£m Cash paid 110 Attributable costs 1 Total consideration 111

The assets and liabilities at the date of the acquisition were: Carrying Fair value Fair value value and accounting policy adjustments £m £m £m Assets Acquired PVIF on investment contracts - 17 17 Acquired PVIF on insurance contracts - 27 27 Intangible assets 4 (4) - Financial investments 858 - 858 Loans and receivables, including insurance receivables 18 - 18 Cash and cash equivalents 260 - 260 Total assets 1,140 40 1,180

Liabilities Non-participating insurance contract liabilities 436 - 436 Non-participating investment contract liabilities 629 - 629 Non-participating contract liabilities 1,065 - 1,065 Payables and other financial liabilities 8-8 Other liabilities 5(5) - Total liabilities 1,078 (5) 1,073

Total net assets acquired 62 45 107

Goodwill arising on the acquisition 4

9 The assets and liabilities as at the acquisition date shown in the table above are stated at their provisional values and may be amended in the financial statements for the year to 31 December 2008, in accordance with paragraph 62 of IFRS 3, ‘Business Combinations’.

Unaudited pro-forma combined revenue and profit Shown in the table below are unaudited pro-forma figures for the revenues and result before tax of the combined Group as if the acquisition of the SPILA assets had taken place on 1 January 2008. The pro-forma information is not necessarily indicative of the combined results that would have been attained had the acquisition actually taken place on 1 January 2008 or the results that will be attained in the future. The revenues figure shown comprises net earned premiums and fee income from investment and fund management contracts only.

2008 £m Revenues 349 Result before tax (330) b) PLAL and new business operation – non-adjusting post balance sheet event

The acquisition of PLAL and the new business operation of Resolution was completed on 1 August 2008 for a consideration of £858 million (subject to post completion consideration adjustments). The assets acquired were: • 100% of the voting equity instruments of PLAL, formerly Abbey National Life, the products of which are distributed through Abbey’s branch network; • the new business distribution operation of Resolution, (including the Scottish Provident, Pegasus and Self-Assurance brands, Abbey distribution agreement and the new business team); • the investment management rights and policy administration rights of the acquired business.

Due to the timing of the transaction and its complex structure, it is impracticable to give the disclosures required by paragraph 71 of IFRS 3 in respect of this acquisition.

3. Segmental information

No business segment information is presented as the directors consider that all of the business of the Group is within a single segment, Life and business. Also, as substantially all of the Group’s business is carried on in the , no separate geographical analysis has been provided.

10 4. Tax (income) / expense

Six months ended Year ended 30 June 31 Dec 2008 2007 2007 £m £m £m Taxation has been provided as follows: UK corporation tax charge/(credit) - Current period 3 - 4 - Adjustments in respect of prior periods - 1(2) 3 12

Foreign tax partially relieved against UK corporation tax 6 7 8 Deferred tax (105) (5 (12) (96) 3 (2)

5. Pension scheme

The Group operates one main funded defined benefit scheme, Royal London Group Pension Scheme (‘RLGPS’). On 1 September 2005, this scheme was closed to new entrants. The Group has established a contributory, defined contribution arrangement for new employees joining the Group after that date.

(a) Amounts recognised in the balance sheet.

30 June 30 June 31 Dec 2008 2007 2007 £m £m £m Fair value of plan assets 1,695 1,778 1,817 Pension scheme obligations (1,672) (1,607) (1,680) Net pension scheme asset 23 171 137

(b) Amounts charged / (credited) to the income statement

Six months ended Year ended 30 June 31 Dec 2008 2007 2007 £m £m £m Current service cost 7 9 15 Interest cost on pension scheme liabilities 48 43 86 Expected return on plan assets (53) (51) (101) Actuarial losses and (gains) 112 (112) (77) Net expense / (income) recognised in the income statement 114 (111) (77)

The net expense recognised is included within other operating expenses.

The actuarial losses of £112m in the period to 30 June 2008 have mainly arisen from a fall in the fair value of the plan assets over the period.

11 6. Subordinated liabilities

30 June 30 June 31 Dec 2008 2007 2007 £m £m £m Perpetual Cumulative Step-up Subordinated Guaranteed Notes 397 396 396

Perpetual Cumulative Step-up Subordinated Guaranteed Notes On 14 December 2005 RL Finance Bonds plc, a wholly owned subsidiary of the Parent company, issued the Perpetual Cumulative Step-up Subordinated Guaranteed Notes. The issue price of the Notes was 99.676% of the principal amount of £400m. The discount and the directly related costs incurred to issue the Notes of £4m have been capitalised as part of the carrying value and are being amortised on an effective interest basis over the period to the first possible redemption date. The Notes are guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the Notes.

The Notes have no maturity date but the issuer has the option to redeem all of them at their principal amount on 15 December 2015 and at three monthly intervals thereafter. Interest is payable at a fixed rate of 6.125% per annum for the period to 15 December 2015, payable annually in arrears on 15 December each year. If the Bonds are not redeemed on 15 December 2015 the interest rate will be re-set on that date and at three monthly intervals thereafter, at a rate equal to the offered three month sterling deposit rate quoted on the interest re-set date, plus 2.45%. Following the first interest re-set date, interest becomes payable three monthly in arrears on 15 March, 15 June, 15 September and 15 December in each year.

7. Cash and cash equivalents

The cash and cash equivalents for the purposes of the cash flow statement are shown net of bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management.

8. Contingent liabilities

Regulatory reviews During the period, the Group continued to address issues from past inappropriate selling practices and other regulatory matters. The directors consider that they have made prudent provision for any liabilities arising and, as and when the circumstances calling for such provision arise, that the Group has adequate reserves to meet all reasonably foreseeable eventualities.

12 9. Reconciliation of the IFRS unallocated divisible surplus to the EEV

30 June 30 June 31 Dec 2008 2007 2007 £m £m £m IFRS unallocated divisible surplus 1,897 2,307 2,133 Less items only included on an IFRS basis - Goodwill (113) (113) (113) Add items only included on an embedded value basis - Valuation of subsidiaries 82 133 136 Other valuation differences 23 5 8 EEV 1,889 2,332 2,164

10. Reconciliation of the IFRS transfer (from) / to the unallocated divisible surplus to the EEV (loss) / profit for the six months to 30 June 2008

Six months ended 30 June 2008 2007 £m £m IFRS transfer (from) / to the unallocated divisible surplus (236) 306 Less items only included on an IFRS basis - Movement in deferred tax asset - 7 Add items only included on an embedded value basis - Movement in the value of future profits within non-insurance subsidiaries (54) (11) Movement in other valuation differences 15 39 EEV (loss) / profit after tax (275) 341

13 Consolidated Income Statement – EEV Basis (for the six months to 30 June 2008)

H1 to H1 to Full year 30 Jun 08 30 Jun 07 2007 Restated Restated £m £m £m Contribution from new business 23 25 49 Profit from existing business – expected return 40 44 84 – experience variances 8 1 (12) – operating assumption changes (25) (26) (26) Expected return on opening net worth 31 36 72 Profit on uncovered business 6 712 Other items 17 (10) (32) Operating profit before tax 100 77 147

Economic experience variances (351) 94 (121) Economic assumption changes 93 87 28 Movement in pension scheme surplus (114) 111 77 Financing costs (12) (12) (25) Enhancements to policyholder benefits - - (42) Other items - - 117 EEV (loss) / profit before tax (284) 357 181 Attributed tax credit / (charge) 9 (16) (8) EEV (loss) / profit after tax (275) 341 173

14 Consolidated Balance Sheet – EEV Basis (as at 30 June 2008)

30 Jun 08 30 Jun 07 31 Dec 07 £m £m £m Assets

Assets held in closed funds 6,903 7,590 7,462 Assets backing non-participating liabilities 9,968 9,648 10,253 Reinsured liabilities 421 345 441 Assets backing participating liabilities and net worth: UK equities 1,993 3,269 2,671 Overseas equities 293 629 425 Land & buildings 906 1,307 1,092 Approved fixed interest securities 923 939 968 Other fixed interest securities 1,351 1,391 1,260 Other assets 1,493 386 1,141 Value of in-force business 792 1,012 972 Pension scheme surplus 23 171 137

Total 25,066 26,687 26,822

Liabilities

Liabilities in closed funds 6,903 7,590 7,462 Non-participating liabilities 9,968 9,648 10,253 Reinsured liabilities 421 345 441 Participating liabilities 5,281 5,955 5,827 Current liabilities 604 817 675

Total 23,177 24,355 24,658

Embedded Value

Net worth 1,074 1,149 1,055 Value of in-force business 792 1,012 972 Pension scheme surplus 23 171 137

Total 1,889 2,332 2,164

15 EEV profit commentary for the half year ended 30 June 2008

Life and pensions policies are long-term products where the profit margins emerge over many years. In order to provide readers of accounts with a better understanding of the financial dynamics of transacting such business, proprietary companies have in recent years provided supplementary “Embedded Value” disclosure. The embedded value of a company is defined as its net assets plus the present value of future profits expected to emerge over the lifetime of the business in-force. The change in the embedded value over the year is a company’s EEV result.

We have used a market consistent approach, which is becoming the industry standard, with a discount rate equal to the risk-free return available at 30 June 2008 of 5.20% (31 December 2007 4.55%). We have also taken credit for the expected future profits from our administrative service company arrangements on in-force business and the additional franchise value in our asset management business from managing our in-force life and pensions assets.

The embedded value at 30 June 2008 was £1,889 million (31 December 2007 £2,164 million). The majority of the embedded value comprises the Realistic Balance Sheet surplus, which was £1,789 million at 30 June 2008 (31 December 2007 £1,906 million).

As at 30 June 2008 a small number of refinements have been made to the presentation of the EEV operating profit. The 30 June 2007 and 31 December 2007 figures have been restated to provide a consistent basis for comparison. These restatements move amounts between the various line items in the EEV income statement but do not change the total (loss)/profit figure.

Contribution from new business

The contribution from or value of new business (VNB) is the present value of the projected stream of profits from that business. The VNB of £23m (H1 2007 £25m) shown in the key points section of the press release is the value before tax at Royal London’s tax rate of 6%. It is common for proprietary companies to present the value of new business grossed up for tax at the current rate of corporation tax (H1 2008 28%, H1 2007 30%). For comparability with results published by proprietary companies, the analysis of our VNB in the following table has been similarly grossed up at the appropriate rate of corporation tax. The new business margin represents the ratio of the new business contribution to present value of new business premiums (PVNBP).

The VNB can be split between our businesses as follows:

H1 2007 H1 H1 H1 2008 New 2007 2007 New Business Value of new business H1 2008 VNB H1 2008 PVNBP Business Margin grossed up at the current VNB Restated PVNBP Restated Margin Restated rate of corporation tax £m £m £m £m % %

Scottish Life 8.6 15.7 779 747 1.1 2.1 Bright Grey 3.2 1.4 80 91 4.0 1.5 International Business 0.4 1.1 90 76 0.5 1.4 Royal London Admin. 11.1 6.6 115 93 9.7 7.1 Services (RLAS) Royal London Asset 5.4 7.1 975 1,516 0.6 0.5 Management (RLAM) Total 28.7 31.9 2,039 2,523 1.4 1.3

16 Scottish Life results in H1 2008 are comparable to 2007. A reduction in margin due to the strengthening of the persistency assumptions has been partially offset by strong sales of our higher margin product, Income Release.

The margins on business sold under the Bright Grey brand have increased over the same period last year. Bright Grey remains a relatively immature business and has yet to realise the economies of scale that should ultimately be achieved. As these economies are realised we expect the profitability of Bright Grey business to improve.

Offshore business has seen reduced profitability due to a change in the mix of business written, with an increased proportion of lower margin products.

The Royal London business is mainly incremental income to the legacy book with low attaching expenses of acquisition. The high VNB for H1 2008 reflects earlier receipt of DWP rebates than in 2007.

The relatively low margins shown in respect of RLAM new business reflect the nature of the external mandates won by that business.

Profit from existing business

Profit from existing business comprises: ¾ The expected return on the value of in-force business (VIF) at the start of the period, plus ¾ Profits and losses caused by differences between actual experience for the period and the assumptions used to calculate the embedded value at the start of the period, plus ¾ The impact of any changes in the assumptions regarding future operating experience. The charge for the period is attributable to a deterioration experienced in persistency for certain pensions business. We have therefore strengthened our future assumptions.

Expected return on opening net worth

The expected return on opening net worth represents the expected investment return on the net worth over the period.

Profit on uncovered business

Profit on uncovered business has been valued on an IFRS basis, as used in the primary financial statements. A breakdown of the profit reported on uncovered business is shown in the table below:

Full Year H1 2008 H1 2007 2007 £m £m £m General Insurance 5 58 Annuity commissions 2 23 Funds Direct (2) -- Cash Management 1 -1 Total 6 712

17 Other items

Other items represent a combination of:

¾ Exceptional development costs, which are typically investments in systems made to improve future EEV profits (for example by reducing on-going expense levels or increasing new business volumes) ¾ Corporate costs ¾ Other exceptional items, for example, modelling changes.

A breakdown of these items is shown in the table below:

Full Year H1 2008 H1 2007 2007 £m £m £m Exceptional development costs (12) (10) (23) Corporate costs (4) (13) (17) Other 33 13 8 Total 17 (10) (32)

Economic experience variances

This shows the impact of actual investment returns relative to those assumed. Economic experience variances have an impact on both the VIF and the net worth.

The economic experience variance on the VIF arises from the decrease in policy values in which Royal London has an interest by way of charges. The economic experience variance on the net worth represents the impact that investment returns being different to those anticipated has on: ¾ The value of the opening net worth ¾ The value of financial options and guarantees (*) ¾ The value of the assets backing the financial options and guarantees (*)

(*) Excluding those movements due solely to changes in the yield curve, which have been offset against the movement in the value of assets caused by the shift in the yield curve.

The value of the second and third items above is far more significant for Royal London, as a mutual insurance company, than would be the case for an equivalent proprietary company, whose interest in the surplus in its with-profit funds is restricted, typically to 10% of the distributable surplus.

Overall, the returns achieved on the underlying assets in H1 2008 were significantly less than those assumed. Equities performed poorly and rises in yields and credit spreads caused the market value of our fixed interest assets to fall. Despite performance broadly in line with benchmarks, absolute levels of investment return were therefore a very significant negative contribution to the overall EEV result reported for the period.

18 Economic assumption changes

Long-term economic assumptions were revised to take into account the financial conditions at the end of the period. The changes included an increase in the discount rate used to reflect the increase in risk-free rates and updated assumptions to value the cost of guarantees and options.

Movement in pension scheme surplus

This represents the movement in the surplus of the defined benefit Royal London Group Pension Scheme. On an IFRS basis the scheme had a surplus of £23m at 30 June 2008 (31 December 2007: £137m).

Financing costs

In December 2005 Royal London raised £395m (after expenses) of subordinated debt, which carries a coupon of 6.125% per annum. The financing cost is calculated as the cost of servicing the debt over the year.

Enhancements to policyholder benefits

In 2007 additional investment returns were credited to asset shares. This is the 'mutual dividend' of £39m, net of tax, referred to in the Chairman's statement in the 2007 year end results. A decision as to whether there will be an equivalent credit in respect of 2008 will not be made until later in the year.

Full Year H1 2008 H1 2007 2007 £m £m £m Additional returns credited to asset shares (gross of tax) - - (42)

Other items

Other items represent the impact of exceptional changes to the basis for managing the estate as incorporated into Royal London's PPFM in December 2007. There were no such changes in H1 2008.

Full Year H1 2008 H1 2007 2007 £m £m £m Change to target maturity benefits - -80 Changes to smoothing formula - -32 Other - -5 Total - - 117

19 Notes to the EEV financial information for the six months ended 30 June 2008

1. Basis of preparation

The EEV results in this document have been prepared in accordance with the EEV Principles and the Additional Guidance issued in 2005. They provide supplementary information for the 6 months to 30 June 2008 and should be read in conjunction with the Group’s IFRS results. These contain information regarding the Group’s financial statements prepared in accordance with IFRS, issued by the International Accounting Standards Board, and adopted for use in the EU.

The EEV Principles and Guidance were designed for use by proprietary companies to assess the value of the firm to its shareholders. As a mutual, Royal London has no shareholders. Instead, we regard our members as the nearest equivalent to shareholders and have interpreted the EEV Principles and Guidance accordingly. With-profits policies held by members do not generally contribute to the value of in-force business. However, the liabilities associated with these contracts are deducted from total assets to arrive at net worth. Hence, any movement in liabilities not matched by a corresponding movement in assets will change the net worth and flow through the income statement. The reported embedded value provides an estimate of Royal London’s value to its “owners”.

2. EEV methodology

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 lifetime of the policy is the same as that recognised under the IFRS basis of reporting, but the timing of recognition is different.

For the purposes of EEV reporting, the Group has adopted a market-consistent methodology. Within a market-consistent embedded value (MCEV) framework, assets and liabilities are valued in line with market prices and consistently with each other. In principle, each cash flow is valued using a discount rate consistent with that applied to such a cash flow in the capital markets.

3. EEV assumptions i) Principal economic assumptions – deterministic.

Economic assumptions are actively reviewed and are based on the prevailing market yields on risk-free assets at the valuation date.

H1 2008 H1 2007 % % Risk-free rate 5.20 5.35 Retail Price inflation 4.00 3.25 Expense inflation 5.00 4.25

20 ii) Principal economic assumptions – stochastic.

The value of financial options (including premium rate guarantees and guaranteed annuity options, smoothing costs and future deductions from asset shares) are calculated using market-consistent techniques. Market-consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. The economic scenarios achieve market-consistency by:

• Deriving the underlying risk-free rate from the forward gilt curve, with a margin of 10 basis points to reflect empirical evidence that gilt yields may understate the true risk-free rate; • Calibrating equity and interest rate volatility to observed market data by duration and price, subject to interpolation / extrapolation where traded security prices do not exist. We attempt to achieve the best possible fit, though modelling restrictions prevent this from being perfect.

The tables below show the implied volatilities used in the modelling by asset class:

H1 2008 Term (years) 510152030 15-year risk-free zero coupon bonds 7.2% 5.4% 3.8% 3.1% 3.6% 15-year AA-rated corporate bonds 9.1% 7.4% 6.1% 5.4% 5.4% Equities 25.5% 26.7% 27.0% 27.4% 27.6%

H1 2007 Term (years) 510152030 15-year risk-free zero coupon bonds 6.1% 4.6% 3.7% 3.1% 4.0% 15-year AA-rated corporate bonds 7.5% 6.1% 5.4% 4.9% 5.4% Equities 19.3% 22.2% 24.0% 25.1% 26.0%

iii) Expected returns in reporting period

For the purposes of calculating the expected returns over the period, allowance is made for the risk premium as set out in the following table:

H1 2008 H1 2007 % % Risk premium - equities 2.50 2.50 Risk premium – property 2.00 2.00

All other assets are assumed to earn the risk-free rate. iv) Other assumptions

Demographic assumptions are regularly reviewed having regard to past, current and expected future experience, and any other relevant data. These are generally set as best estimate with an appropriate margin for adverse deviations.

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