Review of the Year

Executive Chairman's Statement

A year of two halves...

2007 started with a good deal of promise. The economic environment was on an improving trend, enabling us to remove the last remaining market value reductions for our customers with unitised with-profits investments. Over the first half of the year, we extended the Group's international reach by launching our first product into the Singaporean market, and built on our recently-established foothold in the German pensions market. In the UK we were attracting record levels of new pensions business, consolidating our position as a leading provider.

We were also delighted to have secured the acquisition of two successful and profitable intermediary businesses – the Sesame Group and Pantheon Financial – representing sound financial investments as well as bringing us closer to the needs and aspirations of customers and professional financial advisers in their respective markets.

In contrast, the second half of the year could not have been more different, becoming extremely challenging for global economies in general, for financial services as a whole and for the ongoing advance of the Friends Provident Group.

In the UK, the sight of thousands of customers queuing to withdraw their savings from Northern Rock remains an enduring image of the year, epitomising the fallout from the sub-prime mortgage lending worries that surfaced in the US and reverberated around the globe. Although its impact helped to drag down stock values generally, financial services were hit the hardest. It is disappointing to report a 25% decline in the value of our shares over the year – the first annual decline since the stock market crash of 2001.

Further disappointments were the termination of our merger agreement with Resolution plc and the subsequent standing down of our Group Chief Executive, Philip Moore. This merger was absolutely the right strategy for our Board to pursue and would have created significant long-term value for customers and shareholders alike. The prospective merits of the merger were validated by the subsequent bidding battle for control of Resolution.

Strategic review

The failed merger heightened media and market speculation regarding the Friends Provident Group's future and, to restore certainty, we announced in November our undertaking of a strategic review with the aim of maximising value for shareholders. This 'root and branch' review embraced every aspect of our business and, as a result, the Board concluded that a significant change in strategic direction was the right way to create value in the Group.

We announced the new strategy at the end of January this year, together with an indication of the significant fall in profits expected for 2007, and both of these are explained in detail over the following pages.

The strategic review was necessary, albeit painful. The outcome, however, repositions Friends Provident very positively, such that we can have confidence in its future. It has enabled us to put in place a long term, sustainable, capital structure and dividend policy, supporting the Group's further growth. Not only will we be restructuring the company to reflect better its new shape and focus, but also we will rebuild our structure of financial controls to ensure future management decisions can be taken with confidence. The company is refocused, with the prospect of becoming self-financing, and capable of funding further investment, particularly in profitable international territories.

We now have a strategy that, we believe, will achieve our aim of maximising value for our shareholders, and we are determined to deliver against this new strategy as swiftly as we can, recognising its urgency.

The current structure of the Friends Provident Group includes ownership of three businesses that now fit less comfortably within our new strategy. They are F&C Asset Management, in which we hold a 52% controlling stake, Lombard, based in Luxembourg, and the more-recently acquired adviser firm, Pantheon Financial. All three are very good businesses. We are actively engaged with their respective management teams to establish strategies that maximise value for our shareholders while minimising disruption to these businesses.

Dividend

Your Board is recommending a final dividend for 2007 of 5.30 pence per share, which would bring the total 2007 dividend to 8.00 pence per share, a 2% increase over 2006.

Since our stock market listing in 2001, we have increased the dividend to shareholders by around 2% each year, which is less than inflation and therefore does not represent real growth. After payment of the final dividend for 2007, we will reduce the overall cost of the dividend to a level that reflects the dividend paying capacity of the Life & Pensions business and adopt a policy of growing the dividend in line with operating cashflow in future. The Board believes that this offers the prospect of dividend growth in real terms in the years to come.

Board changes

A number of changes to the Board were addressed in our 2006 Report & Accounts. The two subsequent changes were the appointment of Gerhard Roggemann as an independent director in June 2007, and the change of my own role to Executive Chairman until our new Group Chief Executive, Trevor Matthews, joins us, which is likely to be July this year.

Alison Carnwath will be leaving the Board at the conclusion of the 2008 Annual General Meeting. Alison has served on the Board since December 2002 and, notwithstanding her relocation to New York following her appointment as the Chairman of MF Global in July 2007, has continued to play a most effective part in the Board's proceedings. She will be much missed.

Jim Smart, our Chief Financial Officer, has notified the Board of his intention to leave the company after our interim results in August 2008. Jim had been expected to leave under the terms of our proposed merger with Resolution plc last year but, following the termination of that merger agreement, he agreed to remain with Friends Provident to help me lead our strategic review. The Board is enormously grateful to Jim for his huge contribution to this review and for his ongoing commitment to help move this programme of change even further forward over the coming months.

I want to pay tribute to those directors who have left us and joined us over the past year, for their significant contribution and commitment, and to thank all my Board colleagues for their ongoing support as we navigate the Group through this challenging period.

We are also delighted to have recruited Trevor Matthews to lead us forward from here. Trevor is a natural leader with a profound understanding of the insurance business, both internationally and in the UK. His track record is outstanding, and his decision to join us is, in itself, an important expression of confidence in the business and its new strategic direction.

All those who work for the Group have been tremendous, more than meeting the many challenges throughout 2007 and maintaining the excellent service levels that have become the hallmark of Friends Provident. I thank them all. It is a sincere regret that a consequence of our strategic review is that there will be in the region of 600 fewer people employed by Friends Provident over the next two years, and we will do all we practically can to help and support those who are affected.

Finally, our Annual General Meeting is on 22 May 2008 and I look forward to welcoming all of you who are able to attend. In any event, may I encourage you all to vote, online or by post, on the resolutions being put forward at that important meeting.

Sir Adrian Montague, Executive Chairman