Annual Report and Accounts Insight Investment Management Limited

Year ended 31 December 2005

Inspired thinking

Registered number 2111149 2 Contents

Contents

Highlights 3 Chairman’s statement 4 Chief Executive’s report 6 Overview 6 Financial highlights 7 Our business 8 Investment management 10 Distribution 16 Operations 17 Risk management 18 Human resources 19 Corporate responsibility 21 Remuneration report 24 Board of directors 26 Annual report and consolidated financial statements 31

Insight Investment Management Limited Annual Report and Accounts 2005 Highlights 3

Highlights

Assets Under Management Gross profit Up £11.0 billion 14% Up £19.1 million 20%

2002 2003 2004 2005

July – Clerical Medical January – Insight acquired January – Proprietary, May – Contract to outsource Investment Management Rothschild Asset in-house analysis tools and Investment Operations to Limited rebranded as Management Limited software developed for Northern Trust signed Insight Investment multi-manager products January – April – September – Name Integration of Insight and May – Integrated formally changed to Rothschild teams, international equity team Insight Investment establishing a Financial developed Management Limited Solutions Group and Multi- Manager team June – Appointment of Chief Risk Officer October – Insight brought Gatehouse property team on board 0 20 40 60 80 100 2002 2003 2004 2005 £88.7 bn 0 20 40 60 80 100 2002 Assets Under Management 2003 at 31 December 2004 2005 £88.7 bn

0 100 200 300 400 500 Colleagues 2002 2003 at 31 December 2004 2005 518 0 100 200 300 400 500 2002 2003 Customers: 2004Retail 60,237 2005 Institutional 307 518

0 1000 2000 3000 4000 500060007000 Retail 60,237

Institutional 307 Insight Investment Management Limited Annual Report and Accounts 2005 0 1000 2000 3000 4000 500060007000 Retail 60,237

Institutional 307 4 Chairman’s statement

Chairman’s statement

2005 continued Insight’s track record of evolution, What Insight has achieved would not have been improvement and innovation. During the past three possible without the continuing commitment of all years since its formation and subsequent development its dedicated colleagues, and the Board’s thanks it has remained true to its primary aim of making go to all those who have delivered this success. its customers better off. It has delivered this We recognise that people are key to its continued through the pursuit of outstanding performance, success. Indeed they are the primary differentiator innovative investment solutions and the provision that makes Insight stand out. of superior service. The future holds considerable challenges for Insight continues to place the customer at the heart Insight, particularly as it considers opportunities of its business, which is a key strength in the changing to take its products and services beyond its traditional financial environment. Its investment activities are UK markets, to continental Europe or further afield. increasingly focused on providing tailored or bespoke However I am convinced that it is in excellent shape, solutions which meet the specific needs and concerns of with the right structure, the right strategy and customers rather than the creation of generic products. above all, the right people to lead the business, This strategy seeks to differentiate Insight from its to meet those challenges, and importantly make competitors. I have been delighted at the speed with more customers better off. which Insight has developed its ability to deliver this proposition and with the innovative offerings it has brought to the market, particularly in terms of liability- Phil Hodkinson driven investment and property fund management. Chairman

Insight Investment Management Limited Annual Report and Accounts 2005 Chairman’s statement 5

Insight continues to place the customer at the heart of its business, which is a key strength in the changing financial environment.

Insight Investment Management Limited Annual Report and Accounts 2005 6 Chief Executive’s report

Chief Executive’s report

Overview In response to this financial storm, Insight has reinvented its investment platform, modernised its organisational We launched Insight as an investment business three years structure and equipped its colleagues with the right ago with a new vision created to meet the needs of a world investment tools and techniques to succeed in this of investors that demanded a different way of looking different and much tougher environment. We have after their money. Our focus was to get into the right also been quick and flexible in scaling back on strategies shape to become a new force in asset management. or plans that no longer appear to meet our That involved significant investment in people and customers’ needs. infrastructure, the development of attitudes to succeed in the new environment and the re-invention and We have put the customer at the heart of our organisation. re-engineering of our investment business. We are managing portfolios against specific customer requirements and, across all asset classes, we have However, even in the short time since our launch the developed the capability to deliver absolute returns investment world has changed dramatically. The decline (positive returns relative to cash). We continue to in market levels in 2002 and 2003, coupled with falling focus on doing a small number of things really well interest rates, has contributed to give both retail and in the areas where we see increasing demand for institutional owners of securities genuine dilemmas our investment skills. We are now a provider of which we can help them to solve. Pension fund surpluses financial solutions that aims to meet the needs are largely a thing of the past. Deficits have appeared; of our customers. final salary schemes are closing at a rapid rate and many with-profits funds – the stalwarts of the savings markets in We want our customers to become advocates for our the 80s and 90s – are similarly closing to new business business. We want The Insight Experience to be a and consolidating. Loss of trust in the savings system pleasurable and stress-free experience. This will make among retail investors is now high in the UK. Customers us stand out from the investment crowd. We are feel let down by our industry. They have suffered real creating a distinct and unified culture in which we stick losses and do not understand why investment to our principles, keep to our values and in the process organisations have not protected their savings. deliver the best deal for our customers.

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We are creating a distinct and unified culture in which we stick to our principles, keep to our values and in the process deliver the best deal for our customers.

I hope that after reading the following examples of our Financials 2005 2004 achievements during 2005 and insights into our business, you will be as confident as I am that we have the Gross profit £116.0 million £96.9 million structures, the strategies and the right colleagues in place Administration costs £113.0 million £95.9 million to succeed and make more people better off. Operating profit £3.0 million £1.0 million

Assets under management £88.7 billion £77.7 billion Financial highlights During 2005 Insight continued to make strong progress Total assets under management ended the year at aided by the continuing recovery in stock markets. £88.7 billion, up from £77.7 billion at the start of 2005. Gross fund inflows of £12.7 billion were achieved We also began to see the benefits of our early compared to £10.7 billion in 2004. recognition of the changes in the corporate pensions industry. As new international accountancy rules made Operating expenditure increased from £95.9 million pension deficits more visible by bringing them onto the in 2004 to £113.0 million in 2005 largely due to balance sheet, we developed the capability to deliver our continued investment in infrastructure, such bespoke solutions to meet specific customer liabilities. as the advanced derivatives platform necessary to At a high level our 2005 financial figures together with deliver the investment solutions needed by our the comparison for 2004 are as shown in the table customers. In basis point terms our operational opposite. Gross profit rose from £96.9 million in 2004 cost base has risen up from 12.3 bps to 12.8 bps to £116.0 million in 2005. This is a reflection of the (using end of year assets under management). growth in assets under management during the period, However, we still enjoy one of the lowest cost bases success in growing the property management division in the industry as measured by independent and additional fees received from group companies. benchmarking surveys.

Insight Investment Management Limited Annual Report and Accounts 2005 8 Chief Executive’s report

Insight distributes its products through a wide range of Our business third parties, as can be seen from the following chart: We are an investment management company that looks Revenue by source after other people’s money. We exist to enrich people’s lives by making more people better off. That’s not only £million Banks 18.9 in monetary terms. We can enrich our customers’ lives UK IFAs 36.6 by keeping our promises. We can enrich our colleagues’ UK Institutional (non-insurance) 29.1 lives by creating an environment in which they can Non-UK Institutional (non-insurance) 2.9 thrive and achieve their potential and we can enrich UK Institutional (insurance) 13.1 our shareholders’ lives by giving them confidence that Non-UK 9.0 we will meet and exceed our business plans. Other 6.4 Our vision identifies what we are and what we are not. £116.0 million • We are an autonomous business with a very The range of assets under management is also wide, supportive parent in HBOS. as shown below: • We are not a retailer, we are a provider of financial

Assets under management by asset type solutions, selling principally through the intermediated market. £billion UK Equities 21.1 • We focus on our core capabilities where we believe we Overseas Equities 8.3 UK Fixed Income 33.6 can add value, doing a few things really well and not Overseas Fixed Income 8.0 trying to ‘do a bit of everything’. Property 6.8 Cash 9.5 • We focus our distribution. Our investment management Multi-Manager 0.7 is in one location – London. This gives us easy lines of Private Equity 0.7 communication, and allows us to develop an aligned £88.7 billion and unified culture.

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We exist to enrich people’s lives by making more people better off.

• We provide added value to our clients with If we can recruit and retain the best people, create our solutions. specific solutions from customer insight, support people to deliver results through innovation and teamwork, Success for us is encompassed in the achievement and have focused products and distribution, then we of our strategic goals, to: will have superior investment results and service. These • Be a UK based provider of superior investment factors, combined with intelligent business management, solutions and customer service; which includes robust risk management, will lead to profit. • Create a respected and trusted investment brand that The virtuous success cycle: will help our distribution businesses to sell; and • Is the basis for what we believe creates value; • Profitably grow revenues and in the process create • It guides how our business should operate; shareholder value. • It shapes our development of strategies and measures; We also know the factors that will lead to success. They are embedded in our virtuous success cycle. • It focuses our priorities;

1 • It is the basis of what we value and celebrate; and Recruit and X retain the right people 2 • It describes the key dynamics of our business. for Insight We create specific Profit solutions from Success customer insight So, as a company, we know strategically what we are, = X what we want to be, how we will succeed and what that 6 Making more people 3 success will look like. The statements in our virtuous Intelligent business better off Support people to deliver success cycle define our culture, and reflect for our management results through innovation and teamwork colleagues, shareholder and customers what we value – X X what are our passions. While all aspects of the virtuous 5 4 success cycle permeate every area of our business, Our product Focused product = Superior investment and distribution I will use specific examples from different divisions to results and service demonstrate Insight’s achievements in 2005.

Insight Investment Management Limited Annual Report and Accounts 2005 10 Chief Executive’s report

Insight has demonstrated a clear commitment to a financial solutions approach, and has re-structured its investment platform to deliver it.

Investment Management Financial solutions From Insight comes solution While it is now increasingly becoming conventional wisdom, few recognised the trend just two years ago. Our industry has generally failed its customers, Insight, however, reorganised its investment platform in particular in pensions, by allowing large funding to meet the challenges of providing financial solutions. surpluses to turn into deficits over the last few years. As a result, the industry is now in the midst of a radical Success depended on three key factors: rethink on how to meet pension fund obligations. • A flexible investment platform that would allow us Traditionally, asset managers have focused on offering to move from an asset to a liability benchmark – to clients generic products that were managed against become a solution rather than a product provider. typical market benchmarks. This narrow focus within a very segmented chain of responsibility that included • The technical expertise to deliver solutions, trustees and consultants, was one of the factors that which required the skilful use of derivatives to contributed to customers’ unintended exposure to many isolate risks and gain a greater degree of accuracy. of the risks embedded within their liabilities. • A robust risk and modelling capability to allow fund We are now seeing the emergence of a new approach managers to trade with precision in a variety of new to solving problems; an approach based on a more instruments and cope effectively with a diversity collaborative partnership between the key players to of benchmarks. deliver holistic solutions to the customers; solutions The early implementation of programmes to reorganise that are based and measured more directly our investment division and provide the infrastructure against liabilities. necessary, has given Insight a head start on the

Insight Investment Management Limited Annual Report and Accounts 2005 Chief Executive’s report 11

competition. However, we will need to continue to The latest component of the solution was the creation innovate and develop if we are to remain ahead and of absolute return funds. Absolute Insight Limited become one of what is likely to be a small number was launched in May 2005. For institutional customers of providers offering solutions based on liability who want an investment with enhanced absolute benchmarks. The increasing number of investment returns combined with downside protection in consultants asking us to pitch to their customers and bear markets, these funds aim to give an annualised the new business we are gaining, attests to the validity return, net of all fees and expenses, that is at least of our approach and the leading position Insight 4% per annum above the return provided by cash. currently enjoys in this area. These funds can provide investors with all the advantages of absolute return products without the The establishment of the Financial Solutions Group disadvantages generally associated with hedge funds was the first step in moving Insight’s investment or funds of hedge funds, these being the lack of platform away from product towards solution provision. transparency, non-UK regulation of the funds themselves, This team is complementary to the other investment and the risk commensurate with highly geared positions. management areas within Insight, helping them Investors will have the option of investing via the fund to develop their products alongside liability-driven of funds, or investing directly in any of the six underlying investment (LDI) and other financial solutions. funds – the UK Equity Market Neutral Fund, the Europe This expertise allows us to provide existing customers Equity Market Neutral Fund, the Tactical Asset Allocation with access to a much broader range of investment Fund, the Currency Fund, the Emerging Market Debt opportunities, and to pitch for mandates in new Fund and the Bond Fund. and growing markets. The second part of the plan was the building of an Insight has demonstrated a clear commitment to a infrastructure that allowed the use and management financial solutions approach, and has re-structured of derivatives on a large scale. its investment platform to deliver it.

Insight Investment Management Limited Annual Report and Accounts 2005 12 Chief Executive’s report

Fixed Income Not only does it permit customers to select by currency, but it also allows selection according to Insight has a very strong offering in fixed income. duration and risk appetite with a number of risk-graded Our highly regarded team of 45 now manages in funds. The original Sterling Liquidity Fund remains excess of £51.2 billion of fixed income and cash assets. the best performing S&P-rated fund in its sector This compares with £46.2 billion at the end of 2004. over the past three calendar years. There were some substantial mandate gains, including the Pension Protection Fund, an organisation which plays a very important role in protecting the benefits Equity of UK pension scheme members and the Charities Insight’s equity assets under management now Aid Foundation. stand at £29.4 billion at the end of 2005. The largest These organisations were impressed by the wealth of proportion of this is represented by investments in the knowledge and experience of our fixed income team. UK at £21.1 billion, but we also manage in excess of They also appreciated the excellent and consistent £8.3 billion in overseas markets. We are now well placed performance delivered by the portfolios based on to increase our market share as our performance a well established process that integrates the improves. Our equity team of 30 now comprises four areas, views of specialists in UK and international bonds, UK, European, International and Research. Each of these credit analysis and money market instruments. teams is organised by segment or performance target. Another success within the fixed income area is the For example the UK equity team has core, alpha, Insight Liquidity Funds PLC. This AAA-rated institutional income and smaller companies’ specialists, while global investment vehicle, which aims to provide a flexible equities has teams managing global, ethical, Japanese, and stable alternative to bank deposits, has gone from US and Asian portfolios. The research team provides strength to strength. Launched with just one Sterling the foundation on which our equity proposition is built. denominated sub-fund in 2003 it now has nine sub-funds This team researches companies in which we might in three currencies – Sterling, Euro and US Dollar. invest, and provides advice to the fund managers.

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“We sought to appoint specialist managers so that we could adopt more demanding performance benchmarks. Insight’s appointment was driven by the impressive depth of experience of its fixed income team and its proven investment process.”

Tracey Reddings, Executive Director – Charity Financial Services of Charities Aid Foundation

Whilst we consider external research, it is often driven have been highly acquisitive again in 2005 purchasing at by a different agenda from our own. Our research the rate of a property a day over the last twelve months. team provides independent analysis on companies. A natural extension of our capability is to offer customers Fund managers rely heavily on our analysts’ exposure to the European commercial property market. recommendations and use or challenge them. In 2005 we announced our expansion into Europe with the We steer away from the consensus view in the launch of a pan-European property investment fund with market, and only invest where we believe we can an initial target size of Eur600 million – The Insight add value for our customers. European Real Estate Trust. The fund is initially targeting In terms of 2005 launches, two of the Absolute Insight acquisitions in the major western continental European Limited range referred to above – the UK Equity Market markets including a special focus on France, Belgium, Neutral Fund and the Europe Equity Market Neutral Fund Spain and Germany and has so far accumulated a portfolio – are managed by members of our equity team using of over Eur300 million (including commitments). It has an the bottom-up stock-picking expertise that has been income and growth investment philosophy aiming to developed. The performance generated by the teams out-perform local property markets. We have adopted the has been excellent so far, delivering the required same style of management that has proved successful performance with a very limited amount of risk. with the Insight Foundation Property Trust (IFPT), acquiring properties which we can actively manage with the aim of generating above-average income returns. Property Over 2005 property assets under management have As a result of the funds launched in 2004 we have a solid increased from £5.6 billion to £6.8 billion. The property UK property offering. This includes a range of direct and investment team has also grown to 62, which includes indirect funds that are well diversified across the retail, the recruitment of an experienced and well-respected office and industrial sectors and designed to give team with expertise in continental European property. investors a liquid means of investing in commercial For 2006 we are considering specialist sectors in property. Due to the significant growth of these funds we the UK as well as further European expansion.

Insight Investment Management Limited Annual Report and Accounts 2005 14 Chief Executive’s report

“We looked carefully at a number of fund managers before awarding the business to Insight. We were impressed by their depth of experience and their ability to tailor their services to meet the specific needs of their customers.”

David White, Chief Executive of the Children’s Mutual

Multi-Manager and Private Equity positive returns under all market conditions – absolute return funds. As a result, the multi-manager team During 2005 Insight recruited a new head of alternative developed and modelled the Diversified Target Return investments with responsibility for building the Fund. This low to medium risk fund was launched in multi-manager and private equity capabilities. February 2005 with an objective of delivering positive Established just over two years ago, Insight’s returns on an annual basis with the prospect of long term multi-manager team aims to develop solutions to match capital growth commensurate with investment in equities. investors’ needs. The team of nine experts in a range of In a bear market the fund aims to provide a positive disciplines, divide into two areas – one responsible for fund return while in a bull market it looks to outperform cash. and manager selection and the other for portfolio strategy Insight’s private equity team has more than £700 million and construction. At the heart of their process is risk under management and our customers are amongst assessment and risk management. The team works hard to the longest-standing private equity investors in the UK, understand the risk factors in the various funds selected having invested since the early 1980s. The team of five and in the combination of investments in the portfolios, is highly experienced with one of the longest track as well as considering the risk appetite of the customer. records in the City. Discussions with investors, combined with research We intend to develop both our multi-manager and undertaken during 2003, convinced us that increasingly private equity capabilities and further integrate them investors were looking for funds that aimed to provide into our solution-based investment platform.

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Investor Responsibility experience. The work of our specialist IR team is closely linked to our fund management Corporate governance and corporate responsibility activities through: are of major importance to companies, investors and the public. This topic is therefore very important to • Their provision of valuable input to the fund Insight’s investment activities. management process delivered through credit and equity analysts; and We are committed to encouraging the highest standards of corporate governance and corporate responsibility in • Company-investor meetings where our analysts and the companies in which we invest, and in this connection fund managers raise specific corporate governance in 2005 we joined with Business in the Community and and corporate responsibility issues. FTSE Group to launch a consultation into effective board Our IR experts conduct extensive issue and sector- oversight of corporate responsibility. based research on priority governance and social, Insight’s own approach is through regular, well-argued environmental and ethical topics, selected through engagement with the directors and managers of their own analysis or identified in regular meetings companies. This kind of constructive dialogue with our investment teams. encourages companies to improve their governance A characteristic of Insight’s approach is its commitment standards, while simultaneously building strong to reporting and disclosure. Insight believes in being relationships with investors. transparent regarding engagement activity and voting Insight’s Investor Responsibility (IR) team is widely recommendations, to demonstrate our commitment regarded as one of the most accomplished in the asset and to be accountable not only to our customers, management industry. It comprises eight full-time but also to companies in which we invest and to professionals who have an average of nine years industry the wider society.

Insight Investment Management Limited Annual Report and Accounts 2005 16 Chief Executive’s report

Distribution We now have a substantial and growing pipeline of new Together nothing is impossible business leads, particularly in the areas of fixed income, liability driven investment and property. The opportunities The prime objective of Insight Investment is to be a for Insight are increasing and so it is important that we UK-based provider of superior investment solutions and continue to strengthen not only our investment teams, customer service. That puts the customer at the centre but also our business development and client service of our business. We must find the solutions which fit capabilities. We now have over 300 institutional clients the customers’ needs and provide the service that will and manage funds for them in excess of £32.9 billion. encourage them to return to us. We seek customer advocacy because we believe it is the most effective tool in developing a long-term business. Retail We aim to get the basics right – to give our customers a well-understood, first-class, consistent and reliable service. Insight’s investment funds are sold through intermediaries If we achieve that then we will be ahead of the competition. and third-party distributors who offer savings and investment products to private individuals primarily within the UK. With these we develop business partnerships by Institutional collaborating actively in the development of profitable, innovative, customer-relevant investment solutions. Insight has made great strides in developing its institutional One of our very successful and well-established business offering. Its success is reflected in the significant increase partnerships is with St. James’s Place. Not only have we in the amount of new business for which we have been in developed a property fund for them, but we also help them contention since the start of 2005. This could not have by training their sales force in property and helping been achieved without the excellent work carried out them to promote the fund. Property was a new asset by our investment and distribution teams over the past two class for St. James’s Place when the fund was launched in years. During 2005 the distribution team was strengthened 2004. With the help of their dedicated Insight support, by the recruitment of a head of institutional business. in 2005 they have produced almost £200 million of sales,

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“Insight Investment have a “We have been so impressed by wealth of knowledge and the service we have been given by experience that will help enable Insight Investment that we now use the Pension Protection Fund that as our benchmark, asking other to deliver its strategic fund managers with whom we work investment objectives.” to deliver the same level of support.”

Lawrence Churchill, Chairman of the Pension Protection Fund Andrew Humphries, Divisional Director of St. James’s Place

which represented 17% of their total life and pensions support to ensure that it reflects best market practice business sales for the year. The quality of the service that and delivers the ongoing competitiveness essential to Insight provides is highly regarded by St. James’s Place. our business model.

The development of these partnerships depends upon Our latest review suggested that considerable funding the efforts of our experienced business partnerships in investment operations would be needed to meet our team which, during the year was strengthened by the future requirements. Over the past few years the market rebuilding of our IFA sales team. for outsourcing has gained momentum. From our initial feasibility study it became clear that there was a sound and compelling case for outsourcing our investment Operations operations function, with significant benefits for Insight, Focused products and distribution our colleagues, and our customers. In particular, outsourcing would allow us to focus and dedicate Insight has the ambitious targets of delivering superior resources to our key capabilities – investment investment performance and excellent customer service. performance and customer service. To do this it needs operational and IT platforms that meet the current needs of the business and have the flexibility In February 2005 Insight announced, subject to due and scalability to adapt to future needs. diligence and contract negotiations, its intention to outsource a significant part of its investment operations to Northern Trust. In May the contract was signed. Investment Operations A key factor in Insight’s decision was that we should not lose the expertise built up in our operations team. Over the past few years Insight has built a strong Under the terms of the agreement 90 Insight colleagues operational platform designed to ensure we operate are to transfer to Northern Trust. The project is in the most efficient and cost-effective manner. progressing smoothly and we will benefit from the In line with intelligent business management, considerable resources Northern Trust will devote to we continually review our approach to operational this important and growing area of its business.

Insight Investment Management Limited Annual Report and Accounts 2005 18 Chief Executive’s report

Resilient risk management differentiates us from the competition, and gives assurance to our customers that we can deliver results without taking unnecessary or inappropriate risk.

IT Risk management We are determined that colleagues have the very best tools Intelligent business management to do their jobs, and constantly monitor what is available The focus for 2005 has been on further embedding and seek ways of enhancing the technology we provide. a risk culture throughout Insight. Risk is part of After substantial efforts in 2003 to integrate the IT our business, not separate from it, and we take a platforms of Rothschild Asset Management and Insight, business approach to risk rather than the other in 2004 the principal priority for the IT area was to deliver way around. a platform that was scalable to meet the needs of We aim for: investment management to model financial solutions and allow substantial use of derivative instruments. • Clear identification and understanding of While this programme was virtually complete by early potential risks; 2005, we are continuing to enhance our ability to • Clear thinking about the appropriate level of risk; process new and different instruments. • Clear management information to constantly track We undertook a substantial programme to refresh our the status of risks; and technical infrastructure. Developments during the year supported asset management processes such as • Clear controls in place to ensure the level of risk performance attribution, stock lending, electronic taken is a level we and our customers are dealing, investment research and risk management. comfortable with in achieving the desired performance or returns. Work has already commenced on a number of projects to further enhance our capability including the In summary, the key elements to achieving success in replacement of our modelling applications as well as a risk-aware manner are: identification – appetite – further enhancements to risk management tools. information – control.

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Specific initiatives undertaken in 2005 have included: Human Resources • Continuous development of our independent investment People are key risk monitoring capacity in line with the expansion of our A key differentiator for Insight is our people. Successful investment capability, in particular to accommodate our companies are those where everyone in the business is liability-driven and absolute return activities. clear about the corporate goals and how their individual • The business-wide implementation of a control role contributes to the achievement of those goals. risk self assessment programme to establish clear The virtuous success cycle and The Insight Experience identification, ownership and understanding of all (TIE), developed by the Executive Management team, risks and controls in each division. underpin that achievement, defining the business model we use and the behaviours we adopt both internally • A new incident reporting system to record and analyse all and, importantly, to our customers. incidents, losses, breaches and “near misses” to ensure that we can learn from any issues that have arisen, rectify TIE behaviours are integral in the way we manage our as appropriate and put in place additional or enhanced colleagues – from recruitment and orientation, through controls as quickly and efficiently as possible. individual objectives to the performance management • A business continuity review, including testing of various process, development and recognition. A major focus for systems and scenarios, to ensure Insight is in the best us is the assessment of how effectively TIE is embedded shape to recover quickly from unexpected events with in our processes throughout a colleague’s career minimal impact on our customers’ business. with Insight. At Insight, we believe that resilient risk management is We not only assess how our colleagues perform in something that differentiates us from the competition, relation to TIE behaviours, but we also evaluate how and gives assurance to our customers, colleagues and Insight as a company lives up to those same criteria. the regulators that our business will be conducted in a During 2005 we carried out a TIE-based colleague prudent manner and that we can deliver results without opinion survey (as shown on page 20) which provided taking unneccesary or inappropriate risk. the following results.

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Of those who participated: a colleague from another business area. Their experience is then shared with other colleagues. • 78% of colleagues found Insight was either very good This approach is designed to promote greater or good at “Sharing the rewards of our success with understanding and cohesion across Insight. them”. Only 4% felt it was poor. • The embedding of TIE behaviours within the • 80% felt Insight were very good or good at “Making performance management scheme. This provides it clear what is expected of them”. Only 3% colleagues with even greater clarity about their believed it was poor. objectives. Not only do we define what we want • 85% believed Insight “Treated them fairly” with only individuals to deliver, but we also clarify how we want 4% finding it poor. them to deliver. Under this initiative, assessment is not only made by line managers, but also through • 81% felt that Insight “Supported a team approach”, the use of 360o feedback. with only 4% believing that poor. While we are pleased with the results of this survey, Following the survey a number of initiatives were the goal is to continually learn and evolve the various launched including: processes that make up our colleague offering. We are • A “Total Team” job rotation scheme which allows determined to ensure The Insight Experience remains individuals to spend one day per year shadowing relevant for all our colleagues and customers.

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“It's always encouraging to hear of members of the corporate arena contributing to their communities and I'm delighted that some of the most underprivileged communities have been targeted by Insight Investment and the HBOS Foundation.”

Diane Abbott, MP for Hackney

Corporate Responsibility A Space is school-based and designed to provide Making More People Better Off services that meet the health, emotional, psychological, educational and social needs of young people between Each year Insight helps to make a difference through the ages of 11 and 13. Insight’s grant was used to the HBOS Foundation. This registered independent produce two DVD’s made in collaboration with charitable trust established by HBOS plc in 2001, children for use in classroom settings as a learning focuses on two guiding themes – money advice resource. The first, entitled Transitions, recorded and financial literacy, and developing and improving children and adults’ views on moving from primary communities. Insight receives £30,000 to distribute to secondary school. The second, entitled Money in our community to charities that meet the HBOS Matters, is the result of workshops on Foundation criteria. financial literacy. Two organisations we helped with grants this year were One school that benefits from A Space services is Create and A Space. Create, an organisation which aims Shacklewell Primary School at which a number of Insight to enhance the lives of children in hospitals and hospices colleagues volunteer regularly as reading, numbers and through the creative arts, used the grant for their Arts mentoring partners. Shacklewell also received a grant to Adventures programmes. This innovative three-year enable them to send a number of Year 6 pupils to a farm project will take 36 informal, interactive creative arts in Wales as part of the farms for city children initiative. workshops each year to young patients at six childrens’ Diane Abbott, the MP for Hackney visited Shacklewell to hospices and hospital wards in or just outside London. talk to the pupils about their visit.

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We have the right structures, the right strategies and the right colleagues to reach new heights, and build our business to benefit all our stakeholders.

Environment Since 1999 HBOS has invested more than £3.6 million in energy initiatives, resulting in over £13 million cost Insight, as a member of the HBOS Group, takes its savings and a reduction of around 110,000 tonnes of environmental responsibilities very seriously. It works CO2. During 2005 a new contract was signed with hard to encourage the achievement of high standards of electricity supplier, E.ON, so that 100% of the energy corporate responsibility by companies in which it invests the group uses comes from renewable sources. and applies the group’s environmental policy rigorously. This is the first time the group has reached such The group has set itself some stretching targets to an agreement. The contract will remain in force reduce energy and water consumption and improve until October 2006. waste management. Other environmental impacts:

Impact area Target Period of Target Procurement and Paper: All Insight’s business communication paper adheres to strict environmental 17.5% per full time 1 January 2002 - Energy reduction standards in terms of recycled fibres and avoidance employee 31 December 2007 of harmful chemicals during the production 10% per full time 1 January 2002 - Water reduction process. All external suppliers conform to employee 31 December 2007 ISO14001 standards. 1 January 2002 - Waste recycling 60% Travel: A series of practical measures to reduce the 31 December 2007 need for business travel have been adopted.

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Waste: General office waste amounts for less than 1% of the HBOS Group’s direct environmental impact. Approximately one quarter of paper waste is being recycled and all electrical equipment, including PCs and monitors, are either sold or recycled.

I am very proud of what we have achieved this year. I hope, having read the above, you have a flavour of what we have achieved at Insight. We have been going for three years now, but with the enthusiasm and excitement of colleagues Insight still has the atmosphere of a new business. I have every confidence that we have the right structures, the right strategies and above all the right colleagues to reach new heights, and build our business to benefit all our stakeholders – customers, shareholders and colleagues.

Douglas Ferrans Chief Executive

Insight Investment Management Limited Annual Report and Accounts 2005 24 Remuneration report

Remuneration report

Responsibility for remuneration policy rests with the • Variable pay, bonuses and the long-term incentive plan Insight remuneration committee. (LTIP) that rewards individuals for their contribution to Insight’s success in accordance with their performance against agreed individual and corporate objectives. Constitution of the committee A comprehensive performance management system is operated throughout Insight, ensuring remuneration The committee determines remuneration policy for Insight. packages and performance against individual objectives Its members are Phil Hodkinson (chairman), William Govett, are closely aligned.To ensure remuneration is Brian Ivory and Louis Sherwood (non-executive directors). competitive within the industry, regular benchmarking Douglas Ferrans, the chief executive, attends the comparisons with other asset management companies committee which is also supported by Insight’s director are undertaken. In more detail, the main components of human resources, Patrick Margrave. In addition, of the remuneration package are shown below: the committee obtains advice from external consultants on technical aspects of compensation policy. Basic pay – The table below shows the dispersion of colleagues across salary ranges.

Basic annual pay ‘£’ % of colleagues within range Policy on remuneration 0 - 25,000 10.6 Insight has adopted total reward principles. It promises 25,001 - 50,000 47.2 to invest in its people and share the rewards of its 50,001 - 75,000 17.5 success by committing to total rewards that are 75,001 - 100,000 13.3 competitive within the industry. 100,001 - 125,000 6.3 Total rewards include: 125,001 - 150,000 3.0 • Basic pay, that recognises skill, knowledge, 150,000 + 2.1 responsibility and accountability; and

Insight Investment Management Limited Annual Report and Accounts 2005 Remuneration report 25

Insight promises to invest in its people and share the rewards of its success by committing to total rewards that are competitive within the industry.

Variable pay – This divides into a discretionary bonus individuals participated in the scheme; with 7.0 million and the LTIP. (2004: 4.7 million) ‘A’ units, and 8.0 million (2004: 5.5 Discretionary bonus – individual bonuses are assessed million) ‘B’ units in issue. as noted above. LTIP – Insight operates a phantom equity scheme linked Other directly to the growth in the value of the business. New schemes are launched annually, with the award period Pensions – All colleagues are encouraged to plan for running for a maximum of seven years. 50% of the their retirement. New colleagues become eligible to join participant’s award may be exercised after three years. the defined contribution scheme, operated by HBOS plc. Individual membership and awards are at the discretion Levels of contribution vary according to age. of the remuneration committee. Benefits – Largely driven by job grade, some colleagues Grants under the LTIP scheme: are entitled to other benefits such as car allowances. In addition, a flexible benefits plan allows individuals to choose • ‘A’ units behave like ordinary shares in so far as the the benefits that best suit their needs. These include a potential value of the award on exercise will represent wide variety of lifestyle, leisure and health benefits. In the value of the initial grant plus any increase or addition, all colleagues are able to participate in a decrease determined by the growth (or decline) in number of discretionary HBOS share incentive schemes. the value of the business. • ‘B’ units behave like share options and the value of each unit is equivalent to the growth in the value Directors’ contracts of the business only. The company may terminate an executive’s employment The value of the business is reviewed annually and by giving not less than 12 months’ notice. The executive approved by the remuneration committee in February may terminate employment by giving the company not each year. As at 31 December 2005, 99 (2004:65) less than six months’ notice.

Insight Investment Management Limited Annual Report and Accounts 2005 26 Board of Directors

Board of Directors

From left to right: Phil Hodkinson, Douglas Ferrans, Charles Farquharson, Keith Lovett, Atul Manek, Abdallah Nauphal

Phil Hodkinson – chairman of the full range of business areas before becoming chief executive of Scottish Amicable Investment Phil, 47, joined HBOS plc in September 2001 as chief Managers in 1995. In 1997 he joined Britannic Asset executive of the Insurance & Investment Division. Management as marketing director where he was In 2005 he became group finance director and took responsible for managing the sales and marketing over responsibility for HBOS Treasury Services. He joined functions. He is a fellow of the Faculty of Actuaries. HBOS from Zurich Financial Services, having worked in the UK insurance industry for all of his career. In addition, Phil is the board sponsor for HBOS’s Charles Farquharson – head of distribution corporate responsibility activities and is chairman of the HBOS Foundation. He is also a non-executive Charles, 45, joined Insight Investment as head of director of BT Group plc and Business in the Community. distribution in January 2005, and became a board He is a Fellow of the Institute of Actuaries. director in February. He was previously with Merrill Lynch Investment Managers (formerly Mercury Asset Management). During this time he worked in a number Douglas Ferrans – chief executive of senior management roles including company secretary, head of compliance and head of the legal Douglas, 51, joined HBOS plc as chief executive, asset department. Most recently he was regional head management in June 2001, and subsequently directed of institutional business. the launch in September 2002 of Insight Investment as the independent asset management business of His first employment on qualifying as a solicitor was HBOS. He began his investment career at Scottish in the company department of Simmons & Simmons. Amicable in 1977 after graduating in mathematics and He holds a degree in law from St. Catharine’s physics from Glasgow University. He gained experience College, Cambridge.

Insight Investment Management Limited Annual Report and Accounts 2005 Board of Directors 27

Keith Lovett – chief risk officer Atul joined RAM in April 2000 as head of operations and technology. Prior to this he had been in the internal Keith, 48, joined Insight as chief operating officer in consultancy team at JP Morgan Investment Management, January 2002, and in 2004 was appointed chief risk and was director of business projects at Baring Asset officer. Trained as an accountant, Keith held a number Management. He graduated in 1983 with a degree of finance and IT roles, before moving to Prudential in economics from Hull University. He is a Portfolio Managers (PPM) in 1990. Between 1990 and Chartered Accountant. 1999 he gained experience of a number of different operational areas including project, client and supplier management, before becoming head of operations for PPM in 1999 and for M&G after their acquisition by Abdallah Nauphal – chief investment officer Prudential later that year. Abdallah, 45, was appointed managing director, fixed Keith is a member of the Securities Institute and a fellow income, in February 2003, following Insight’s acquisition of the Association of Chartered Certified Accountants. of RAM. In September 2003 he became chief investment officer with overall responsibility for the investment management team. He has more than 20 years’ Atul Manek – chief operating officer experience in investment markets. His previous roles include chief investment officer (fixed income) at RAM Atul, 43, was appointed head of investment operations in and head of fixed income for Schroder Investment February 2003 when Insight acquired Rothschild Asset Management. He holds a degree in business Management (RAM). He was appointed chief operating administration from New England College, together with officer and became a board director of Insight an MSc in Information Systems and an MBS in Finance Investment in 2004. and Investments from George Washington University.

Insight Investment Management Limited Annual Report and Accounts 2005 28 Board of Directors

From left to right: Duncan Owen, Brian Ivory, William Govett, Louis Sherwood

Duncan Owen – managing director, Brian Ivory, CBE property Brian, 56, was formerly chairman of Highland Distillers Duncan, 38, joined Insight Investment in October 2003 as plc, having been a director since 1978. He was also managing director of the property division and became a chairman of Macallan-Glenlivet plc from 1996 to 1999 board director in February 2005. Prior to joining Insight, and Treasurer of the Scotch Whisky Industry Association. Duncan was founding partner of Gatehouse Investment Brian is chairman of the Scottish American Investment Management, where he helped establish and acted as Company PLC, a director of Remy Cointreau S.A. property investment manager for a number of UK and and chairman of the National Galleries of Scotland. European funds. Duncan began his career at Jones Lang In February 1998, Brian was appointed a non-executive Wootton Fund Management, initially as a property director of Bank of Scotland and following its merger manager and an investment surveyor before becoming with Halifax in September 2001 he was appointed a an equity partner. Duncan holds a BSc from Sheffield non-executive director of HBOS plc and is chairman University and also studied at INSEAD Business School. of its remuneration committee. He is a qualified Chartered Surveyor.

Insight Investment Management Limited Annual Report and Accounts 2005 Board of Directors 29

William Govett Louis Sherwood William, 68, was formerly chairman of John Govett & Co, Louis, 64, was formerly chairman and chief executive of and a director of Legal and General Group and of 3i Group Gateway Foodmarkets, until the takeover of Gateway Ltd. He recently retired as chairman of Merrill Lynch Corporation in 1989, chairman of HTV Group plc British Smaller Companies Trust. between 1991 and 1997 and chairman of Govett European Technology and Income Trust plc. He is He is a trustee of the National Art Collections Fund and currently a non-executive director of Wessex Water served as a trustee of the Tate Gallery from 1988 to 1993. Services Limited. In 1997 he joined the board of Halifax In January 2002, he was appointed to the board plc as a non-executive, and was chairman of Clerical of Insight Investment. Medical Investment Group from 2000 to 2001. From 2001 to 2004 Louis was a non-executive director of HBOS plc.

Insight Investment Management Limited Annual Report and Accounts 2005 30 Annual report and consolidated financial statements

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 31

Annual report and consolidated financial statements

32 Directors’ report 36 Statement of directors’ responsibilities 37 Independent auditors’ report 38 Consolidated income statement 39 Statement of recognised income and expense 40 Consolidated balance sheet 41 Company balance sheet 42 Statement of cash flows 43 Notes to the financial statements 72 Key contacts and corporate information

Insight Investment Management Limited Annual Report and Accounts 2005 32 Annual report and consolidated financial statements

Directors’ report

The directors present their annual report and the Proposed dividend audited consolidated financial statements for the year ended 31 December 2005. The directors do not recommend the payment of a dividend (2004: nil).

Principal activities Supplier payment policy The principal activity of Insight Investment Management Limited (‘the Company’) and its subsidiary and The Group’s suppliers are paid through HBOS plc's associated companies (‘the Group’) is the provision of centralised Accounts Payable department. investment management services, investment advisory For the forthcoming period HBOS plc's policy for the services and the retailing of Open Ended Investment payment of suppliers will be as follows: Companies (‘OEICs’) and other investment vehicles. • Payment terms will be agreed at the start of the As at 31 December 2005, the Group was managing relationship with the supplier and will only be changed £88,743 million (2004: £77,740 million) of assets. by agreement; • Standard payment terms to suppliers of goods and services will be 30 days from receipt of a correct Business review invoice for satisfactory goods or services which have been ordered and received unless other terms are The Group recorded a profit before tax for the financial agreed in a contract; year of £6,009,000 (2004: £3,490,000). The detailed income statement is set out in page 38. • Payment will be made in accordance with the agreed terms or in accordance with the law if no agreement has been made; and Business development • Suppliers will be advised without delay when an invoice is contested and disputes will be settled The Group’s existing business and future prospects as quickly as possible. are reviewed by the Chairman on page 4 and the Chief Executive on pages 6 to 23. HBOS plc complies with the Better Payment Practice Code. Information regarding this Code and its purpose can be obtained from the Better Payment Practice Group's website at www.payontime.co.uk. The Group had trade creditors outstanding at 31 December 2005 representing 13 days (2004: 15 days) of purchases.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 33

Directors’ report (continued)

Directors and directors’ interests

The directors who held office during the year were as follows:

Appointed

Phil Hodkinson – chairman Charles Farquharson 18 February 2005 Douglas Ferrans Keith Lovett Atul Manek Abdallah Nauphal Duncan Owen 18 February 2005 William Govett (non-executive) Brian Ivory (non-executive) Louis Sherwood (non-executive)

During the year, no director had any beneficial interest in the share capital of the Company or of any Group undertaking other than in HBOS plc, the ultimate holding company, details of which are set out below.

Directors’ beneficial interests in the ordinary share capital of HBOS plc are as follows:-

At 31 December 2005 At 31 December 2004 Ordinary Shares Ordinary Shares of 25p each of 25p each Charles Farquharson 333 0* Douglas Ferrans 36,303 15,170 Phil Hodkinson 207,648 112,919 Brian Ivory 7,000 7,000 Keith Lovett 19,694 11,053 Atul Manek 4,924 1,097 Duncan Owen 726 393* Louis Sherwood 2,000 2,000

*as at date of appointment

Insight Investment Management Limited Annual Report and Accounts 2005 34 Annual report and consolidated financial statements

Directors’ report (continued)

According to the register of directors’ interests, no rights to subscribe for shares in or debentures of HBOS plc, the ultimate holding company were granted to any of the directors or their immediate families, or exercised by them, during the financial year except as indicated below:

At start of year During the year At end of year Granted Exercised Number of options HBOS plc Short Term Bonus Scheme (25p Ordinary Shares) Douglas Ferrans 6,334 8,225 1,220 13,339 Phil Hodkinson 20,717 10,255 5,163 25,809 Keith Lovett 5,399 4,133 0 9,532 Atul Manek 548 1,747 0 2,295 HBOS plc All Employee Share Option Plan (25p Ordinary Shares) Keith Lovett 13,071 0 0 13,071 Atul Manek 7,292 0 0 7,292 Abdallah Nauphal 12,609 0 0 12,609 Duncan Owen 4,266* 0 0 4,266 HBOS plc Sharesave (25p Ordinary Shares) Douglas Ferrans 3,463 0 0 3,463 Phil Hodkinson 2,970 0 0 2,970 Keith Lovett 3,036 0 0 3,036 Atul Manek 1,607 0 0 1,607 Charles Farquharson 0* 2,473 0 2,473 HBOS plc Long Term Incentive Plan (25p Ordinary Shares) Phil Hodkinson 201,881 166,252 201,372 166,761

None of the other directors who held office at the end of the financial year had any interest in the shares in, or debentures of, any Group company either at the beginning of the year or at a later date of appointment or at the end of the year.

* as at date of appointment.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 35

Directors’ report (continued)

Corporate governance Political and charitable contributions The activities of the Group are overseen by the Risk Control The Company made no political contributions during Committee of the Treasury and Asset Management Division the year. Donations to UK charities amounted to of HBOS plc, the ultimate holding company. The committee, £45,974 (2004: £10,880). which is chaired by David Shearer (a non-executive director of HBOS plc), reviews all risk and compliance issues affecting the Group, as well as the other companies within International Financial the Treasury and Asset Management Division. Reporting Standards In addition to the Risk Control Committee, there are a number of other committees responsible for These accounts are prepared in accordance with applicable different aspects of corporate governance of HBOS plc United Kingdom law and with International Financial and its major subsidiaries. Further details of these Reporting Standards, consistent with its ultimate parent committees and compliance with the Combined Code company, HBOS plc. on corporate governance are included in the HBOS plc Annual Report and Accounts. Auditor KPMG Audit Plc, having expressed its willingness to do so, Employees will continue in office as auditor. Full and fair consideration is given to applications for By order of the board. employment made by disabled persons having regard to their particular aptitudes and abilities. Appropriate training John Veale is arranged for disabled persons, including retraining for Secretary alternative work of employees who become disabled, to 33 Old Broad Street promote their career development within the organisation. London Our employee policy is consistent with the HBOS EC2N 1HZ Group-wide policy. Please refer to HBOS plc directors’ report for further information. 22 February 2006

Insight Investment Management Limited Annual Report and Accounts 2005 36 Annual report and consolidated financial statements

Statement of directors’ responsibilities in respect of the Annual Report and the financial statements

The directors are responsible for preparing the Annual • State whether they have been prepared in accordance Report and the financial statements in accordance with with IFRSs as adopted by the EU; and applicable law and regulations. • Prepare the financial statements on the going Company law requires the directors to prepare financial concern basis unless it is inappropriate to presume statements for each financial year. Under that law they that the Company will continue in business. have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU. The directors are responsible for keeping proper accounting records that disclose with reasonable The financial statements are required by law to present accuracy at any time the financial position of the fairly the financial position and performance of the Company and enable them to ensure that its financial Company; the Companies Act 1985 provides in relation statements comply with the Companies Act 1985. to such financial statements that references in the relevant part of that Act to financial statements giving They have general responsibility for taking such steps a true and fair view are references to their achieving a as are reasonably open to them to safeguard the assets fair presentation. of the company and to prevent and detect fraud and other irregularities. In preparing those financial statements, the directors are required to: The directors’ are responsible for the maintenance and integrity of the corporate and financial information • Select suitable accounting policies and then apply included on the company’s website. Legislation in the them consistently; UK governing the preparation and dissemination of • Make judgements and estimates that are reasonable financial statements may differ from legislation in and prudent; other jurisdictions.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 37

Independent auditors’ report to the members of Insight Investment Management Limited

We have audited the financial statements of Insight implications for our report if we become aware of any Investment Management Limited for the year ended 31 apparent misstatements or material inconsistencies with December 2005 which comprise of the Income the financial statements. Our responsibilities do not Statement, the Balance Sheet, the Cash Flow Statement, extend to any other information. the Statement of Recognised Income and Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. Basis of audit opinion This report is made solely to the Company’s members, We conducted our audit in accordance with International as a body, in accordance with section 235 of the Standards on Auditing (UK and Ireland) issued by the Companies Act 1985. Our audit work has been Auditing Practices Board. An audit includes examination, undertaken so that we might state to the Company’s on a test basis, of evidence relevant to the amounts and members those matters we are required to state to them disclosures in the financial statements. It also includes an in an auditor’s report and for no other purpose. To the assessment of the significant estimates and judgements fullest extent permitted by law, we do not accept or made by the directors in the preparation of the financial assume responsibility to anyone other than the Company statements, and of whether the accounting policies and the Company’s members as a body, for our audit are appropriate to the Company’s circumstances, work, for this report, or for the opinions we have formed. consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information Respective responsibilities of directors and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable and auditors assurance that the financial statements are free from The directors’ responsibilities for preparing the Annual material misstatement, whether caused by fraud or other Report and the financial statements in accordance with irregularity or error. In forming our opinion we also applicable law and International Financial Reporting evaluated the overall adequacy of the presentation of Standards (IFRSs) as adopted by the EU are set out in information in the financial statements. the Statement of Directors’ Responsibilities on page 36. Our responsibility is to audit the financial statements in Opinion accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). In our opinion the financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, We report to you our opinion as to whether the financial of the state of the Group and Company’s affairs as at statements give a true and fair view and are properly 31 December 2005 and of its profit for the year then prepared in accordance with the Companies Act 1985 ended; and the financial statements have been properly and Article 4 of the IAS Regulation. We also report to you prepared in accordance with the Companies Act 1985 if, in our opinion, the Directors’ Report is not consistent and Article 4 of the IAS Regulation. with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding KPMG Audit Plc directors’ remuneration and other transactions is not disclosed. London Chartered Accountant We read other information contained in the Annual Registered Auditor Report and consider whether it is consistent with the audited financial statements. We consider the 22 February 2006 Insight Investment Management Limited Annual Report and Accounts 2005 38 Annual report and consolidated financial statements

Consolidated income statement

For the year ended 31 December 2005

Note 2005 2004 £000 £000

Revenue 1 135,652 121,420 Cost of sales 2 (19,682) (24,535) Gross profit 115,970 96,885 Other operating income 3 127 35 Administrative expenses (113,040) (95,940) Other operating expenses 4 (23) (7) Operating profit before financing income 3,034 973 Financial income 8 2,917 2,694 Financial expenses 8 (498) (571) Net financing income 2,419 2,123 Share of post tax profits from joint ventures 13 556 394 Profit before tax 5 6,009 3,490 Income tax 9 (2,642) 3,661 Profit after tax - attributable to equity holders 18 3,367 7,151

The notes on pages 43 to 71 form part of these financial statements.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 39

Statement of recognised income and expense

For the year ended 31 December 2005

Group Company 2005 2004 2005 2004 Note £000 £000 £000 £000 Foreign exchange translation differences 86 32 0 0 Profit/(loss) for the year 3,367 7,151 63 (612) Total recognised income and (expense) for the year 10 3,453 7,183 63 (612)

The notes on pages 43 to 71 form part of these financial statements.

Insight Investment Management Limited Annual Report and Accounts 2005 40 Annual report and consolidated financial statements

Consolidated balance sheet

as at 31 December 2005

Note 2005 2004 £000 £000 Assets Property, plant and equipment 11 1,311 1,629 Intangible assets 12 37,771 38,004 Other investments 13 2,462 1,049 Deferred tax assets 14 3,018 3,221 Total non-current assets 44,562 43,903 Other investments 15 40,277 863 Trade and other receivables 16 48,315 53,247 Cash and cash equivalents 17 25,715 58,926 Total current assets 114,307 113,036 Total assets 158,869 156,939 Equity Issued capital 9,300 9,300 Share premium 1,000 1,000 Reserves 57,454 57,368 Retained earnings 4,748 1,381 Total equity 18 72,502 69,049 Liabilities Interest-bearing loans and borrowings 19 7,839 7,839 Other non-current liabilities 20 4,909 2,734 Total non-current liabilities 12,748 10,573 Trade and other payables 21 73,619 77,317 Total current liabilities 73,619 77,317 Total liabilities 86,367 87,890 Total equity and liabilities 158,869 156,939 The financial statements were approved by the board of directors on 22 February 2006 and were signed on its behalf by:

Phil Hodkinson Douglas Ferrans Chairman Director

The notes on pages 43 to 71 form part of these financial statements.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 41

Company balance sheet

as at 31 December 2005

Note 2005 2004 £000 £000 Assets Property, plant and equipment 11 0 0 Other investments 13 53,573 3,100 Deferred tax assets 14 45 35 Total non-current assets 53,618 3,135 Other investments 15 508 0 Trade and other receivables 16 4,201 12,735 Cash and cash equivalents 17 12,540 21,359 Total current assets 17,249 34,094 Total assets 70,867 37,229 Equity Issued capital 9,300 9,300 Share premium 1,000 1,000 Retained earnings 10,560 10,497 Total equity 18 20,860 20,797 Liabilities Interest-bearing loans and borrowings 19 4,275 4,275 Total non-current liabilities 4,275 4,275 Trade and other payables 21 45,732 12,157 Total current liabilities 45,732 12,157 Total liabilities 50,007 16,432 Total equity and liabilities 70,867 37,229 The financial statements were approved by the board of directors on 22 February 2006 and were signed on its behalf by:

Phil Hodkinson Douglas Ferrans Chairman Director

The notes on pages 43 to 71 form part of these financial statements.

Insight Investment Management Limited Annual Report and Accounts 2005 42 Annual report and consolidated financial statements

Statement of cash flows

For the year ended 31 December 2005

Group Company 2005 2004 2005 2004 Note £000 £000 £000 £000 Cash flows from operating activities Cash generated from operations 24 6,029 (10,939) 41,280 (23,211) Income taxes (paid)/refunded (153) 1,225 (330) 947 Net cash from operating activities 5,876 (9,714) 40,950 (22,264) Cash flows from investing activities Proceeds from sale of property, plant and equipment 17 72 0 0 Proceeds from sale of investments 346 56 0 0 Interest received 2,897 2,615 1,433 1,258 Dividends received 961 392 0 0 Acquisition of property, plant and equipment 11 (865) (702) 0 0 Acquisition of other investments (41,602) 0 (50,981) 0 Development expenditure 12 (357) (1,262) 0 0 Net cash from investing activities (38,603) 1,171 (49,548) 1,258 Cash flows from financing activities Interest paid (587) (420) (221) (207) Net cash from financing activities (587) (420) (221) (207) Net decrease in cash and cash equivalents (33,314) (8,963) (8,819) (21,213) Cash and cash equivalents at 1 January 58,926 67,851 21,359 42,572 Effect of exchange rate fluctuations on cash held 103 38 0 0 Cash and cash equivalents at 31 December 17 25,715 58,926 12,540 21,359

The notes on pages 43 to 71 form part of these financial statements.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 43

Notes to the financial statements

Significant accounting policies the historical cost basis except for current asset investments and other non-current investments, Insight Investment Management Limited (the “Company”) which are stated at their fair value. is a company domiciled in the United Kingdom. The consolidated financial statements were authorised Non-current assets are stated at the lower of carrying for issue by the directors on 22 February 2006. amount and fair value less costs to sell. The preparation of financial statements in conformity (a) Statement of compliance with IFRSs requires management to make judgements, estimates and assumptions that affect the application of The financial statements have been prepared in policies and reported amounts of assets and liabilities, accordance with International Financial Reporting income and expenses. The estimates and associated Standards (“IFRSs”) and its interpretations as endorsed assumptions are based on historical experience and by the EU and effective (or available for early adoption) various other factors that are believed to be reasonable at 31 December 2005. under the circumstances, the results of which form the basis of making the judgements about carrying values The accounting policies set out below have been of assets and liabilities that are not readily apparent from applied in respect of the financial year ended other sources. Actual results may differ from these 31 December 2005. IAS 32 and IAS 39 only became estimates. The estimates and underlying assumptions effective from 1 January 2005. Accordingly, the 2004 are reviewed on an ongoing basis. Revisions to comparatives do not reflect the provisions of these accounting estimates are recognised in the period in standards, which have been prepared in accordance which the estimate is revised if the revision affects only with the applicable UK accounting standards in force that period, or in the period of the revision and future for that period. These are the Company’s first financial periods if the revision affects both current and statements on an IFRS basis and therefore the following future periods. exemption under IFRS1 has been applied: Translation differences Cumulative translation differences for all foreign operations (c) Foreign currency are deemed to be zero at 1 January 2004. Any gain or loss on the subsequent disposal of a foreign operation Transactions in foreign currencies are translated at the shall exclude translation differences that arose before 1 foreign exchange rate ruling at the date of the transaction. January 2004, but include later translation differences. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to An explanation of how the transition to IFRSs has affected Sterling at the foreign exchange rate ruling at that date. the reported financial position, financial performance Foreign exchange differences arising on translation are and cash flows of the Company and Group is provided recognised in the income statement. Non-monetary in note 26. assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (b) Basis of preparation Translation differences arising from the consolidation of The financial statements are presented in Sterling, subsidiary companies are recognised in the foreign rounded to the nearest thousand. They are prepared on currency translation reserve.

Insight Investment Management Limited Annual Report and Accounts 2005 44 Annual report and consolidated financial statements Annual report and consolidated financial statements 44

Notes to the financial statements (continued)

(d) Property, plant and equipment (e) Intangible assets (i) Owned assets (i) Software development costs Items of property, plant and equipment are stated at Costs associated with the development of software cost as deemed cost less accumulated depreciation for internal use, subject to de minimis limits, (see below) and impairment losses. Property, plant and are capitalised only if the software is technically equipment is assessed for impairment where there is feasible and the Company has both the intent and an indication of impairment. Where impairment exists, sufficient resources to complete the development. the carrying amount of the asset is reduced to its In addition costs are capitalised only if the asset recoverable amount and the impairment loss recognised can be reliably measured, will generate future in the income statement. The depreciation charge for economic benefits and there is an ability to use the asset is then adjusted to reflect the asset’s revised or sell the asset. carrying amount. Where parts of an item of property, Only costs that are directly attributable to bringing that plant and equipment have different useful lives, asset into working condition for its intended use are they are accounted for as separate items of property, included in its measurement. These costs include all plant and equipment. directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in a manner intended by management. Other development (ii) Subsequent costs expenditure, including software research development costs, are recognised in the income statement as an The Company recognises in the carrying amount of expense as incurred. an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred Capitalised development expenditure is stated at if it is probable that the future economic benefits cost less accumulated amortisation and impairment embodied with the item will flow to the Company losses. The useful life of software development and the cost of the item can be measured reliably. costs is deemed to be finite and amortisation is All other costs are recognised in the income charged to the income statement on a straight-line statement as an expense as incurred. basis over four years.

(iii) Depreciation (ii) Goodwill The cost of equipment, including fixtures and fittings, Goodwill arising on acquisition is stated at cost vehicles and computer hardware, less estimated residual less impairment losses. value, is written off in equal installments over expected The carrying value is systematically tested for lives of the following assets: impairment at each balance sheet date. Motor vehicles 4 years Computer equipment 3 years Fixtures, fittings and equipment 5 years

Insight Investment Management Limited Annual Report and Accounts 2005 45 Annual report and consolidated financial statements Annual report and consolidated financial statements 45

Notes to the financial statements (continued)

(iii) Other intangible assets (iii) Current asset investments Other intangible assets that are acquired by the Current asset investments are carried at fair value Company are stated at cost less accumulated with gains and losses taken to the income statement amortisation and impairment losses. Amortisation is as they arise. charged to the income statement on a straight-line basis over the estimated useful life of other intangible assets unless such lives are indefinite. Other intangible assets (g) Trade and other receivables with an indefinite useful life are systematically tested for impairment at each balance sheet date. Trade and other receivables are stated at their cost less impairment losses.

(iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets (h) Cash and cash equivalents is capitalised only when it increases the future economic Cash and cash equivalents comprise solely of cash benefits embodied in the specific asset to which it balances. Bank overdrafts that are repayable on relates. All other expenditure is expensed as incurred. demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the statement (f) Investments of cash flows. (i) Investment in subsidiaries Investment in subsidiary undertakings in the Company’s financial statements are stated at cost. (i) Impairment The carrying amounts of the Company’s assets, and deferred tax assets, are reviewed at each balance sheet (ii) Investment in joint ventures date to determine whether there is any indication of impairment. If any such indication exists, the asset’s The Group’s share in joint ventures is stated in the recoverable amount is estimated. consolidated balance sheet as the Group’s share of their net assets. The attributable share of results An impairment loss is recognised whenever the carrying of joint ventures, generally based on audited accounts, amount of an asset or its cash-generating unit exceeds is included in the consolidated income statement its recoverable amount. Impairment losses are using the equity method of accounting. recognised in the income statement.

Insight Investment Management Limited Annual Report and Accounts 2005 46 Annual report and consolidated financial statements

Notes to the financial statements (continued)

(j) Reversals of impairment (n) Trade and other payables An impairment loss in respect of a receivable carried Trade and other payables are stated at cost. at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. (o) Income tax In respect of other assets, an impairment loss is reversed Income tax on the profit or loss for the year comprises if there has been a change in the estimates used to current and deferred tax. Income tax is recognised in the determine the recoverable amount. An impairment loss income statement except to the extent that it relates to is reversed only to the extent that the asset’s carrying items recognised directly in equity, in which case it is amount does not exceed the carrying amount that recognised in equity. would have been determined, net of depreciation or Deferred tax is provided using the balance sheet liability amortisation, if no impairment loss had been recognised. method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation (k) Dividends purposes. The following temporary differences are not Dividends are recognised as a liability in the period in provided: goodwill not deductible for tax purposes, the which they are declared. initial recognition of assets and liabilities that affects neither accounting nor taxable profit and differences relating to The Company recognises dividend income when the investments in subsidiaries to the extent that they will Company’s right to receive payment is established. probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets (l) Interest-bearing borrowings and liabilities, using tax rates at the balance sheet date. Interest-bearing borrowings are recognised at fair value. Any costs associated with obtaining interest-bearing borrowings are expensed in the (p) Revenue period in which they are incurred. Revenue comprises:

• Sales and repurchases of units in unit trusts and shares (m) Provisions in OEICs; and A provision is recognised in the balance sheet when the • Fees arising from investment management and other Company has a present legal or constructive obligation related services. as a result of a past event, and it is probable that an Management and performance fees are recognised in outflow of economic benefits will be required to settle the income statement as they are earned. the obligation. If the effect is material, provisions are determined by discounting the expected future cash In accordance with IAS 18, up front fees charged on the flows at a pre-tax rate that reflects current market sale of shares in OEICs less any associated discounts and assessments of the time value of money and, initial commissions have been deferred and recognised where appropriate, the risks specific to the liability. over the average life of investment in the funds.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 47

Notes to the financial statements (continued)

(q) Pension scheme (r) Financial instruments All employees performing services on behalf of the group A financial asset is derecognised when: are contractually employed by HBOS plc. Employees are members of a range of HBOS plc Group schemes including • The rights to the cash flows from the asset expire; both money purchase and defined benefit schemes. HBOS • The rights to the cash flows from the asset and plc pay contributions into these schemes of which the substantially all the risks and rewards of ownership proportion relevant to the Group is recharged. The of the asset, are transferred; schemes’ assets, liabilities and any associated costs are fully disclosed in the financial statements of HBOS plc in • An obligation to transfer the cash flows from the asset accordance with IAS 19 ‘Employee Benefits’. is assumed and substantially all the risks and rewards are transferred; or • Substantially all the risks and rewards are neither transferred nor retained, but control of the asset is transferred. A financial liability is derecognised when the obligation is discharged, cancelled or expired.

Insight Investment Management Limited Annual Report and Accounts 2005 48 Annual report and consolidated financial statements Annual report and consolidated financial statements 48

Notes to the financial statements (continued)

1. Revenue

2005 2004 £000 £000 Brokerage income 883 1,023 Investment management fees 131,195 115,276 Other 3,574 5,121 135,652 121,420

2. Cost of sales 2005 2004 £000 £000 Brokerage expense 660 763 Commission payable and other trading expenses 19,022 23,772 19,682 24,535

3. Other operating income 2005 2004 £000 £000 Gain on current asset investments 127 35

4. Other operating expenses 2005 2004 £000 £000 Net loss on disposal of property, plant and equipment 23 7

5. Profit before tax 2005 2004 £000 £000 Profit before tax is stated after charging: Auditors remuneration Audit 212 227 Assurance services 223 216 Tax 17 59 Other services 8 20 Depreciation of property, plant and equipment 1,140 1,730 Amortisation of intangibles 590 412

Insight Investment Management Limited Annual Report and Accounts 2005 49 Annual report and consolidated financial statements Annual report and consolidated financial statements 49

Notes to the financial statements (continued)

6. Personnel expenses

2005 2004 £000 £000 Wages and salaries 53,472 48,000 Compulsory social security contributions 6,416 5,572 Contribution to HBOS plc pension schemes 2,046 2,089 61,934 55,661

7. Remuneration of directors 2005 2004 £000 £000 Directors’ emoluments 3,859 3,149 Amounts receivable under long term incentive schemes (note 21) 1,098 1,995 Pension contributions 93 85 5,050 5,229

The highest paid director is also a director of HBOS Insurance and Investment Group Limited. The highest paid director’s emoluments are included within the wages and salaries of the Group. The highest paid director’s aggregate emoluments and pension scheme entitlements are included in the financial statements of HBOS Insurance and Investment Group Limited.

Number of directors 2005 2004 Retirement benefits under defined benefit schemes are accruing to the following number of directors: 3 3 The number of directors who exercised share options 2 1 The number of directors in respect of whose services shares were received or receivable under long term incentive schemes 6 4

2005 2004 £000 £000 Compensation for loss of office 0 286

Insight Investment Management Limited Annual Report and Accounts 2005 50 Annual report and consolidated financial statements Annual report and consolidated financial statements 50

Notes to the financial statements (continued)

8. Net financing income 2005 2004 £000 £000 Interest income 2,917 2,692 Dividend income 0 2 Financial income 2,917 2,694 Interest expense (600) (417) Net foreign exchange gain/(loss) 102 (154) Financial expense (498) (571) Net financing income 2,419 2,123

9. Income tax Tax on profit on ordinary activities 2005 2004 £000 £000 Current tax: Corporation tax charge for the period at a rate of 30% (2004: 30%) 2,559 428 Corporation tax charge/(credit) in respect of earlier periods 289 (945) 2,848 (517)

Deferred tax: Deferred tax credit for the period at a rate of 30% (2004: 30%) (862) (376) Deferred tax charge/(credit) in respect of earlier periods 656 (2,768) (206) (3,144) Total income tax expense/(income) in income statement 2,642 (3,661)

Insight Investment Management Limited Annual Report and Accounts 2005 51 Annual report and consolidated financial statements Annual report and consolidated financial statements 51

Notes to the financial statements (continued)

9. Income tax expense (continued) Reconciliation of effective tax rate

The tax assessed for the period is higher/(lower) than the standard rate of corporation tax in the UK of 30%. The differences are explained below: 2005 2004 £000 £000 Profit on ordinary activities before taxation 6,009 3,490 Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK 1,803 1,047 Effects of: Non-deductible expenses 1,120 59 Net effect of differing tax rates overseas (370) (456) Adjustments to tax in respect of prior periods 289 (3,713) Other timing differences (200) (598) 2,642 (3,661)

10. Income statement of the Company

By virtue of the exemption contained within Section 230 of the Companies Act 1985, the Income Statement of the Company is not presented. The Company recorded a retained profit for the year of £63,000 (2004: £612,000 loss).

Insight Investment Management Limited Annual Report and Accounts 2005 52 Annual report and consolidated financial statements Annual report and consolidated financial statements 52

Notes to the financial statements (continued)

11. Property, plant and equipment Group Company Fixtures, Fixtures, fittings fittings Motor Computer and Computer and vehicles equipment equipment Total equipment equipment Total £000 £000 £000 £000 £000 £000 £000 Cost Balance at 1 January 2004 136 5,604 225 5,965 458 3 461 Acquisitions 0 698 4 702 0 0 0 Disposals (50) (2,493) (33) (2,576) 0 0 0 Balance at 31 December 2004 86 3,809 196 4,091 458 3 461 Balance at 1 January 2005 86 3,809 196 4,091 458 3 461 Acquisitions 0 840 25 865 0 0 0 Disposals 0 (48) (62) (110) 0 0 0 Balance at 31 December 2005 86 4,601 159 4,846 458 3 461

Depreciation Balance at 1 January 2004 29 3,164 36 3,229 458 3 461 Depreciation charge for the year 42 1,625 63 1,730 0 0 0 Disposals (16) (2,458) (23) (2,497) 0 0 0 Balance at 31 December 2004 55 2,331 76 2,462 458 3 461 Balance at 1 January 2005 55 2,331 76 2,462 458 3 461 Depreciation charge for the year 22 1,060 58 1,140 0 0 0 Disposals 0 (33) (34) (67) 0 0 0 Balance at 31 December 2005 77 3,358 100 3,535 458 3 461

Carrying amounts At 1 January 2004 107 2,440 189 2,736 0 0 0 At 31 December 2004 31 1,478 120 1,629 0 0 0 At 31 December 2005 9 1,243 59 1,311 0 0 0

Insight Investment Management Limited Annual Report and Accounts 2005 53 Annual report and consolidated financial statements Annual report and consolidated financial statements 53

Notes to the financial statements (continued)

12. Intangible assets Group Software development Goodwill costs Total Cost £000 £000 £000 Balance at 1 January 2004 36,501 1,120 37,621 Acquisitions 0 1,262 1,262 Balance at 31 December 2004 36,501 2,382 38,883 Balance at 1 January 2005 36,501 2,382 38,883 Acquisitions 0 357 357 Balance at 31 December 2005 36,501 2,739 39,240

Amortisation Balance at 1 January 2004 0 467 467 Amortisation for the year 0 412 412 Balance at 31 December 2004 0 879 879 Balance at 1 January 2005 0 879 879 Amortisation for the year 0 590 590 Balance at 31 December 2005 0 1,469 1,469

Carrying amounts At 1 January 2004 36,501 653 37,154 At 31 December 2004 36,501 1,503 38,004 At 31 December 2005 36,501 1,270 37,771

The goodwill is assessed as having an indefinite useful life. As such, the carrying value of the goodwill is not amortised but is assessed for impairment at the balance sheet date. The recoverable amount of goodwill has been measured on a value in use calculation for the cash generating units associated with this goodwill and no impairment provision was required at 31 December 2005. The projected cash flows were based on approved budgets and strategic plans for the next five years, which where then extrapolated for another ten years with no revenue growth assumed in the last ten years. Management believe that the use of a fifteen year period is reasonable given the nature of the business. The discount rate applied to the cash flows was 12.1%. Estimated future cash flows used in the impairment calculations represent management’s best view of likely market conditions. Actual future cash flows may differ significantly from these estimates, due to the effect of changes in market conditions. These differences may have a material impact on the asset value and impairment expense reported in future periods.

Insight Investment Management Limited Annual Report and Accounts 2005 54 Annual report and consolidated financial statements Annual report and consolidated financial statements 54

Notes to the financial statements (continued)

13. Other investments – non current investments Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Shares in group undertakings At beginning of the year 0 0 3,100 3,100 Additions 0 0 48,488 0 At the end of the year 0 0 51,588 3,100 Interest in joint ventures Share of net assets at the beginning of the year 1,049 1,051 0 0 Additions 0 0 203 0 Foreign exchange adjustments (14) (6) 0 0 Dividends received (961) (390) 0 0 Share of retained profits for the year 556 394 0 0 At the end of the year 630 1,049 203 0 Unquoted equity securities At the beginning of the year 0 0 0 0 Additions 1,832 0 1,782 0 At the end of the year 1,832 0 1,782 0 Total non-current assets as at 31 December 2,462 1,049 53,573 3,100

Joint ventures The amounts included in respect of joint ventures in the consolidated accounts of the Group comprise the following: 2005 2004 £000 £000 Income Statement Turnover 1,206 980 Profit before tax 780 509 Taxation (224) (115) Profit after tax 556 394

Balance Sheet Share of assets Share of fixed assets 831 145 Share of current assets 131 1,562 962 1,707 Share of liabilities Due within one year (332) (658) Share of net assets 630 1,049

Insight Investment Management Limited Annual Report and Accounts 2005 55 Annual report and consolidated financial statements Annual report and consolidated financial statements 55

Notes to the financial statements (continued)

13. Other investments – non current investments (continued)

The Company’s investment in its wholly owned subsidiary undertakings and its joint venture as at 31 December 2005, included the following: Country of Principal Class of incorporation activity shares held Subsidiary undertakings Insight Investment Funds Management Limited UK Investment Management Ordinary Insight Investment Services Limited UK Service Company Ordinary HBOS Investment Advisor Inc. USA Investment Advisor Ordinary Insight Investment BV Holland Investment Holding Company Ordinary Insight Investment Management (Global) Limited UK Investment Management Ordinary Insight Investment Management (C.I.) Limited Guernsey Investment Management Ordinary Insight Fund Management Limited UK Investment Management Ordinary Insight Investment Management (Mediterranean) Limited UK Investment Holding Company Ordinary Insight Investment Management (UK) Holdings Limited UK Investment Holding Company Ordinary Insight Investment Management Holdings (Malta) Limited Malta Investment Holding Company Ordinary Joint venture (40% of share capital held) Valletta Fund Management Limited Malta Investment Management Ordinary

During the year, the Group undertook a re-organisation resulting in the transfer to the Company of a £48,488,000 investment in subsidiary undertakings and a £203,000 investment in a joint venture. These investments were transferred from fellow subsidiary undertakings.

Insight Investment Management Limited Annual Report and Accounts 2005 56 Annual report and consolidated financial statements Annual report and consolidated financial statements 56

Notes to the financial statements (continued)

14. Deferred tax assets and liabilities Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Deferred tax assets 3,018 3,221 45 35 Deferred tax liabilities 0 000 Net position 3,018 3,221 45 35

The movement for the year in the deferred tax position was as follows :

Group Company 2005 2004 2005 2004 £000 £000 £000 £000 At 1 January 3,221 1,126 35 261 Credit/(charge) to income for the year 862 376 10 (226) Prior year adjustments (656) 2,768 0 0 Other movements (409) (1,049) 0 0 Balance carried forward as at 31 December 3,018 3,221 45 35

Deferred tax comprises of:

Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Capital allowances in excess of depreciation 625 494 45 35 General provisions 1,555 823 0 0 Other timing differences 838 1,904 0 0 3,018 3,221 45 35

15. Other investments - current Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Stocks of shares in OEICs (managers box) 507 863 0 0 Other investments 39,770 0 508 0 40,277 863 508 0

Other investments relate to holdings in a AAA rated Sterling denominated liquidity fund with same day settlement terms.

Insight Investment Management Limited Annual Report and Accounts 2005 57 Annual report and consolidated financial statements Annual report and consolidated financial statements 57

Notes to the financial statements (continued)

16. Trade and other receivables Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Trade debtors 19,420 23,986 250 2,438 Amounts owed by HBOS group undertakings (note 25) 19,013 18,480 3,538 7,054 Corporation tax receivable 108 1,271 0 0 Other debtors 1,593 1,687 413 8 Prepayments and accrued income 8,181 7,823 0 3,235 48,315 53,247 4,201 12,735

17. Cash and cash equivalents Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Cash at bank and on hand At beginning of year 58,926 67,851 21,359 42,572 Cash flow (33,211) (8,925) (8,819) (21,213) At end of year 25,715 58,926 12,540 21,359

Insight Investment Management Limited Annual Report and Accounts 2005 58 Annual report and consolidated financial statements Annual report and consolidated financial statements 58

Notes to the financial statements (continued)

18. Capital and reserves Reconciliation of movement in capital and reserves

Foreign currency Issued Share Capital translation Retained capital premium reserve reserve earnings Total Group Note £000 £000 £000 £000 £000 £000 Balance at 1 January 2004 (UK GAAP) 9,300 1,000 57,336 (164) (5,182) 62,290 Change in accounting basis to IFRS 26 0 0 0 164 (588) (424) Total recognised income and expense 0 0 0 32 7,151 7,183 Balance at 31 December 2004 9,300 1,000 57,336 32 1,381 69,049 Balance at 1 January 2005 9,300 1,000 57,336 32 1,381 69,049 Total recognised income and expense 0 0 0 86 3,367 3,453 Balance at 31 December 2005 9,300 1,000 57,336 118 4,748 72,502

Issued Share Retained capital premium earnings Total Company £000 £000 £000 £000 Balance at 1 January 2004 (UK GAAP) 9,300 1,000 11,109 21,409 Change in accounting basis to IFRS 0 0 0 0 Total recognised income and expense 0 0 (612) (612) Balance at 31 December 2004 9,300 1,000 10,497 20,797 Balance at 1 January 2005 9,300 1,000 10,497 20,797 Total recognised income and expense 0 0 63 63 Balance at 31 December 2005 9,300 1,000 10,560 20,860

Insight Investment Management Limited Annual Report and Accounts 2005 59 Annual report and consolidated financial statements Annual report and consolidated financial statements 59

Notes to the financial statements (continued)

18. Capital and reserves (continued)

2005 2004 Issued capital £000 £000 Authorised Equity: Ordinary shares of £1each 9,500 9,500 Allotted, called up and fully paid Equity: Ordinary shares of £1each 9,300 9,300

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.

Capital Reserve The capital reserve relates to capital contributions received by the Company from its immediate parent, HBOS Insurance and Investment Group Limited.

Foreign currency translation reserve In accordance with IFRS 1, the foreign currency translation reserve is deemed to be zero on the date of adoption of IFRS (1 January 2004). On this date, an accumulated loss on foreign currency translation of £164,000 was transferred to retained earnings.

19. Interest-bearing loans and borrowings Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Non-current liabilities Amounts owed to HBOS group undertakings - subordinated loans 7,839 7,839 4,275 4,275

The subordinated loans fall due between one and three years and incur interest at a rate of 0.5 per cent above HBOS plc base rate. This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and borrowings. For more information about the Group and Company’s exposure to interest rate risk, see note 22.

Insight Investment Management Limited Annual Report and Accounts 2005 60 Annual report and consolidated financial statements

Notes to the financial statements (continued)

20. Other non-current liabilities Group 2005 2004 £000 £000 Long term incentive plan (note 21) 4,909 2,734

21. Trade and other payables Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Trade payables 14,541 16,907 2 0 Amounts owed to HBOS group undertakings (note 25) 7,923 24,337 45,704 11,845 Corporation tax payable 1,284 163 20 0 Other creditors 11,442 4,149 6 207 Long term incentive plan 3,523 1,735 0 0 Accruals 34,555 29,596 0 105 Deferred income 351 430 0 0 73,619 77,317 45,732 12,157

The long term incentive plan is a phantom equity scheme linked directly to the growth in the value of the business. New schemes are launched annually, with the award period running for a maximum of seven years. 50% of a participant’s award may be exercised after three years. Individual membership and awards are at the discretion of the remuneration committee. Deferred income relates to the net position of up front fees and commissions. In accordance with IAS 18, they have been deferred upon payment/receipt and recognised over the average life of investment in the funds.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 61

Notes to the financial statements (continued)

22. Financial instruments Exposure to credit, interest rate and currency risks arises in the normal course of the Company’s business.

Credit risk The credit risk to the Company is limited to the non-payment of investment management fees. At the balance sheet date there were no significant concentrations of credit risk. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Company does not require collateral in respect of financial assets.

Foreign currency risk The Company is exposed to foreign currency risk on management fee debtors and cash balances that are denominated in a currency other than the Sterling. The currencies giving rise to this risk are primarily U.S. Dollars and Euros. In respect of other monetary assets and liabilities held in currencies other than Sterling, the Company ensures that the net exposure is kept to an acceptable level, by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances.

Interest rate risk Effective interest rates and maturity analysis All income-earning financial assets and interest-bearing financial liabilities earn/bear interest on a floating rate basis. The table on page 62 indicates the periods in which they mature and the effective interest rate earned/borne.

Insight Investment Management Limited Annual Report and Accounts 2005 62 Annual report and consolidated financial statements

Notes to the financial statements (continued)

22. Financial instruments (continued) 2005 2004 Cash and Current Cash cash asset Subordinated and cash Subordinated Group equivalents investments loans equivalents loans Effective rate 4.3% 4.5% 5.4% 4.3% 4.6% £000 £000 £000 £000 £000 One year or less 25,715 39,770 0 58,926 0 between one and two years 0 0 (4,275) 00 between two and three years 0 0 (3,564) 0 (4,275) between three and four years 00 00 (3,564) between four and five years 00 000 more than five years 00 000 25,715 39,770 (7,839) 58,926 (7,839)

2005 2004 Cash and Current Cash cash asset Subordinated and cash Subordinated Company equivalents investments loans equivalents loans Effective rate 4.3% 4.5% 5.4% 4.3% 4.6% £000 £000 £000 £000 £000 One year or less 12,540 508 0 21,359 0 between one and two years 0 0 (4,275) 00 between two and three years 00 00 (4,275) between three and four years 00 000 between four and five years 00 000 more than five years 00 000 12,540 508 (4,275) 21,359 (4,275)

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 63

Notes to the financial statements (continued)

22. Financial instruments (continued) Fair values The fair values together with the carrying amounts shown in the balance sheet are as follows:

Carrying Fair Carrying Fair amount value amount value 2005 2005 2004 2004 £000 £000 £000 £000 Other investments 42,739 42,739 1,912 1,912 Trade and other receivables 48,315 48,315 53,247 53,247 Cash and cash equivalents 25,715 25,715 58,926 58,926 Loans and borrowings (7,839) (7,839) (7,839) (7,839) Trade and other payables (78,528) (78,152) (80,051) (79,834)

Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table.

Other investments Fair value is based on quoted market prices at the balance sheet date without any deduction for transaction costs.

Trade and other receivables/payables For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables greater than one year are discounted at the HBOS plc base rate to determine the fair value.

Insight Investment Management Limited Annual Report and Accounts 2005 64 Annual report and consolidated financial statements

Notes to the financial statements (continued)

23. Pension schemes All employees performing services on behalf of the group are contractually employed by HBOS plc. Employees are members of the following HBOS plc Group schemes:

Defined benefit schemes CMIG Superannuation Scheme Equitable Pension Fund and Life Assurance Scheme Halifax Retirement Fund

Defined contribution schemes Halifax Group Money Purchase Scheme Equitable Money Purchase Scheme

For the defined benefit schemes, it has not been possible to apportion the assets and liabilities of these schemes between the Group’s members and other members of these schemes. In accordance with IAS 19 “Employee Benefits” the Group has accounted for these schemes as if they were defined contribution schemes. HBOS plc pay contributions into these schemes of which the proportion relevant to the Group is recharged. During the year, the recharge for these costs was £2,046,000 (2004: £2,089,000) The schemes’ assets, liabilities and any associated costs are fully disclosed in the financial statements of HBOS plc in accordance with IAS 19.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 65

Notes to the financial statements (continued)

24. Cash flow operating activities Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Profit/(loss) for the year 3,367 7,151 63 (612) Adjustments for: Tax 2,642 (3,661) 340 (721) Depreciation 1,140 1,730 0 0 Loss on disposal of property, plant and equipment 23 7 0 0 Amortisation of intangibles 590 412 0 0 Dividend income 0 (2) 0 0 Interest income (2,917) (2,692) (1,445) (1,302) Interest expense 600 417 220 209 Share of results in joint ventures (556) (394) 0 0 Changes in working capital: Decrease/(increase) in trade and other receivables 3,816 (8,962) 8,546 (1,489) (Decrease)/increase in trade and other payables (2,676) (4,945) 33,556 (19,296) Cash generated from continuing operations 6,029 (10,939) 41,280 (23,211)

25. Related parties As at 31 December 2005, the Company was a wholly owned subsidiary undertaking of HBOS Insurance and Investment Group Limited, which is registered in England and Wales and operates in the United Kingdom. HBOS plc is the ultimate parent undertaking and heads the largest higher group of undertakings for which Group accounts are drawn up and of which the Company is a member. Copies of the financial statements of HBOS plc may be obtained from HBOS plc, The Mound, Edinburgh, EH1 1YZ, which is its principal place of business.

Insight Investment Management Limited Annual Report and Accounts 2005 66 Annual report and consolidated financial statements

Notes to the financial statements (continued)

25. Related parties (continued) At the end of the year, the Group and Company had the following balances with related parties: Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Debtors Group undertakings Clerical Medical Investment Group Limited 9,135 10,914 2,900 3,503 Halifax Investment Fund Managers Limited 5,299 841 0 840 Halifax Life Limited 2,633 331 0 0 Clerical Medical International Asset Management Luxembourg SA 768 778 0 778 Halifax General Insurance Limited 0 4,232 0 0 Clerical Medical Managed Funds Limited 0 1,218 0 0 Insight Investment Funds Management Limited 0 0 130 1,168

Other related companies 1,178 166 508 765 19,013 18,480 3,538 7,054

Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Creditors Group undertakings The Governor and Company of the Bank of Scotland (3,530) (6,739) (3) (109) Clerical Medical Investment Group Limited 0 (2,762) 0 0 HBOS Financial Services (Holdings) Limited (178) (2,055) 0 (2,055) Insight Investment Management (UK) Holdings Limited 0 0 (45,400) 0 Insight Investment Management Holdings (Malta) Limited 0 0 (203) 0 Insight Investment Services Limited 0 0 0 (9,620)

Intermediary parent Halifax plc (3,076) (9,151) 0 0 HBOS Insurance and Investment Group Limited (1,096) (2,841) 0 0

Other related companies (43) (779) (98) (61) (7,923) (24,337) (45,704) (11,845)

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 67

Notes to the financial statements (continued)

25. Related parties (continued) During the year, income was received from the following related parties for the provision of investment management services. Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Group undertakings Clerical Medical Investment Group Limited 21,939 22,822 760 22,728 Clerical Medical Managed Funds Limited 11,675 8,954 571 8,954 Halifax Investment Fund Managers Limited 12,412 8,663 547 8,663 Clerical Medical Investment Asset Management Luxembourg SA 4,304 4,304 174 4,304 Halifax Life Limited 6,712 3,452 378 3,452 St. James’s Place Capital plc 2,411 1,535 0 0 Insight Investment Fund Management Limited 0 0 1,027 4,131

Other related companies 1,837 546 68 1,115 61,290 50,276 3,525 53,347

During the year the following related parties received investment management fee rebates: Group Company 2005 2004 2005 2004 £000 £000 £000 £000 Group undertakings Clerical Medical Investment Group Limited (10,446) (15,868) (278) (6,146)

Other related companies (1,253) (806) 0 0 (11,699) (16,674) (278) (6,146)

At the end of the year the Group had subordinated loans due to HBOS Financial Services Limited of £4,275,000 (2004: £4,275,000) and HBOS Insurance and Investment Group Limited of £3,564,000 (2004: £3,564,000). During the year the Group incurred interest on these loans of £420,000 (2004: £363,000). During the year the Group incurred costs recharged from Bank of Scotland plc of £38,589,000 (2004: £23,636,000), Halifax plc £57,646,000 (2004: £49,387,000) and HBOS Insurance and Investment Group Limited of £9,933,000 (2004: £3,763,000). The recharged costs principally include payroll costs, Accounts Payable services and premises charges.

Insight Investment Management Limited Annual Report and Accounts 2005 68 Annual report and consolidated financial statements

Notes to the financial statements (continued)

Key management personnel During the year, key management personnel’s remuneration was as follows: 2005 2004 £000 £000 Short term employee benefits 4,033 3,318 Amounts receivable under long term incentive schemes (note 21) 1,172 2,049 Pension contributions 103 96 Compensation for loss of office 0 286 5,308 5,749

26. Explanation of transition to IFRS As stated in significant accounting policies, note (a), these are the Company’s first consolidated financial statements prepared in accordance with IFRSs. The accounting policies applied in preparing the financial statements are set out in the significant accounting policies on pages 43 to 47. In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Company’s and Group’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the table.

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 69

Notes to the financial statements (continued)

26. Explanation of transition to IFRS (continued) Effect of transition to IFRS 1 January 2004 Software Foreign UK development currency Up front GAAP costs reserve fees IFRS Note A Note C Note D £000 £000 £000 £000 £000 Assets Property, plant and equipment 3,389 (653) 0 0 2,736 Intangible assets 36,501 653 0 0 37,154 Other investments 1,051 0 0 0 1,051 Deferred tax assets 1,126 0 0 0 1,126 Total non-current assets 42,067 0 0 0 42,067 Other investments 919 0 0 0 919 Trade and other receivables 44,207 0 0 0 44,207 Cash and cash equivalents 67,851 0 0 0 67,851 Total current assets 112,977 0 0 0 112,977 Total assets 155,044 0 0 0 155,044

Equity Issued capital 9,300 0 0 0 9,300 Share premium 1,000 0 0 0 1,000 Reserves 57,172 0 164 0 57,336 Retained earnings (5,182) 0 (164) (424) (5,770) Total equity 62,290 0 0 (424) 61,866

Liabilities Interest-bearing loans and borrowings 7,839 0 0 0 7,839 Other non-current liabilities 3,786 0 0 0 3,786 Total non-current liabilities 11,625 0 0 0 11,625 Trade and other payables 81,129 0 0 424 81,553 Total current liabilities 81,129 0 0 424 81,553 Total liabilities 92,754 0 0 424 93,178 Total equity and liabilities 155,044 0 0 0 155,044

Insight Investment Management Limited Annual Report and Accounts 2005 70 Annual report and consolidated financial statements 70

Notes to the financial statements (continued)

26. Explanation of transition to IFRS (continued) Effect of transition to IFRS 31 December 2004 Software Foreign UK development currency Up front GAAP costs Goodwill reserve fees IFRS Note A Note B Note C Note D £000 £000 £000 £000 £000 £000 Assets Property, plant and equipment 3,132 (1,503) 0 0 0 1,629 Intangible assets 32,495 1,503 4,006 0 0 38,004 Other investments 1,049 0 0 0 0 1,049 Deferred tax assets 3,221 0 0 0 0 3,221 Total non-current assets 39,897 0 4,006 0 0 43,903 Other investments 863 0 0 0 0 863 Trade and other receivables 53,247 0 0 0 0 53,247 Cash and cash equivalents 58,926 0 0 0 0 58,926 Total current assets 113,036 0 0 0 0 113,036 Total assets 152,933 0 4,006 0 0 156,939

Equity Issued capital 9,300 0 0 0 0 9,300 Share premium 1,000 0 0 0 0 1,000 Reserves 57,204 0 0 164 0 57,368 Retained earnings (2,031) 0 4,006 (164) (430) 1,381 Total equity 65,473 0 4,006 0 (430) 69,049

Liabilities Interest-bearing loans and borrowings 7,839 0 0 0 0 7,839 Other non-current liabilities 2,734 0 0 0 0 2,734 Total non-current liabilities 10,573 0 0 0 0 10,573 Trade and other payables 76,887 0 0 0 430 77,317 Total current liabilities 76,887 0 0 0 430 77,317 Total liabilities 87,460 0 0 0 430 87,890 Total equity and liabilities 152,933 0 4,006 0 0 156,939

Insight Investment Management Limited Annual Report and Accounts 2005 71 Key contacts and corporate information Annual report and consolidated financial statements 71

Notes to the financial statements (continued)

26. Explanation of transition to IFRS (continued) The effect of IFRS adjustments on the income statement for the year ended 31 December 2004 is as follows: Effect of UK transition to GAAP IFRS IFRS Note £000 £000 £000 Gross profit D 96,891 (6) 96,885 Other operating income 35 0 35 Administrative expenses B (99,946) 4,006 (95,940) Other operating expenses (7) 0 (7) Operating(loss)/profit before financing costs (3,027) 4,000 973 Financial income 2,694 0 2,694 Financial expenses (571) 0 (571) Net financing income 2,123 0 2,123 Share of post tax profits from joint ventures 394 0 394 Income tax credit 3,661 0 3,661 Profit for the period 3,151 4,000 7,151

A In accordance with IAS 38 ‘intangible assets’, software development costs of £1,503,000 have been reclassified from property, plant and equipment as at 31 December 2004. B Due to the goodwill being assessed as having an indefinite life, the intangible amortisation charged in 2004 under UK GAAP has been reversed in accordance with IAS 38, where the goodwill is now subject to an impairment review at balance sheet date. This has resulted in a decrease in administrative expenses under IFRS in 2004 of £4,006,000 when compared to UK GAAP. C In accordance with IFRS 1, the foreign currency translation reserve is deemed to be zero on the date of adoption of IFRS (1 January 2004). On this date, an accumulated loss on foreign currency translation of £164,000 was transferred to retained earnings. D In accordance with IAS 18, up front fees charged on the sale of shares in OEICs have been apportioned into a brokerage fee recognised at the inception of the contract and a front end investment management fee deferred and recognised over the average life of investment in the funds. This has resulted in a reduction in opening retained earnings as at 1 January 2004 of £424,000 and a £6,000 reduction in revenue for the year ended 31 December 2004.

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Key contacts and corporate information

Registered Office Retail business 33 Old Broad Street London Gordon Phillips EC2N 1HZ head of group and retail business 020 7321 1291 Auditor KPMG Audit Plc David Aldred 8 Salisbury Square director, Europe London 020 7321 1996 EC4Y 8BB Martyn Gilbey Regulator director, HBOS Group, partnerships and affinities Financial Services Authority 020 7321 1128 25 The North Colonnade Lawrence Hawthorn Canary Wharf director, UK partners London E14 5HZ 020 7321 1576 Solicitor and Company Secretary Frank McGarry John Veale director, intermediary sales 33 Old Broad Street 020 7321 1655 London EC2N 1HZ Sean O’Sullivan Business Switchboard director, partner development 020 7930 5474 020 7321 1388 Investor Services 0845 777 2233 Intermediary Services 0845 850 6050 Dealing services 0845 850 0861 (09:30 to 17:30)

Insight Investment Management Limited Annual Report and Accounts 2005 Annual report and consolidated financial statements 73

Institutional business Property business Sarah Aitken Duncan Owen head of institutional business managing director, property 020 7321 1096 020 7321 1677 Roger Price-Haworth Philip Gadsden head of UK institutional business development head of external funds (property) 020 7321 1297 020 7321 1679 Denise Saber Chris Ludlam head of european business development director, property fund development 020 7321 1582 020 7321 1959 Alan Tripp head of group property funds Communications 020 7321 1019 Press Office 020 7321 1358 Telephone calls may be recorded Annie Dixon head of corporate communications 020 7321 1113

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Insight Investment Management Limited Annual Report and Accounts 2005 Annual Report and Accounts 75

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