Q: Underlying profit before tax is only £13m. Now is this a reflection of what’s going on out there in the markets or has Friends Provident taken its eye off the ball during the strategic review?

A: Profit in the six months is £13m against £111m last year. There are two main reasons for the decline.

Firstly, corporate bond spreads have moved out quite considerably and our prudent approach is to put more reserving into the annuity book when that happens. Now, to the extent that corporate bond spreads tighten again, that money will emerge in future years as profits. The second element is the shareholder funds, where we’re now prudently invested in bonds rather than equities.

Q: But if we look at the profitability of your core Life and Pensions new business, the contribution there has gone down from something like £78m to £49m and also the IRR has gone backwards as well. What’s going on there?

A: There are three main things going on. Firstly, we have adopted more conservative accounting policies this year than we did this time last year for costs and persistency.

That reduces the reported numbers. Secondly, we are purposely taking our business out of certain segments, so our volumes are less.

Q: Turning to the balance sheet, you’ve made a big play about ‘de-risking’ it. So can you talk us through the changes that you’ve made and also the impact they have had?

A: There are two main changes to our balance sheet risk. Firstly,equity backing. Our shareholders funds are now in cash and bonds; they used to be 50% in equities. And our pension fund is now 20% in equities, when it used to be 60%. The second main change we’ve made is in reinsuring some of our liabilities, firstly in our annuity book and secondly pensions and payments in the pensions fund. The combined effect of these changes is that we’ve avoided losses amounting to around £250m.

Q: So what’s on the balance sheet and what’s your exposure to asset-backed securities?

A: The asset-backed securities that we have on our balance sheet are largely in the annuities portfolio and are held to maturity to match liabilities. The shareholder exposure amounts to about £680m and it’s almost entirely in investment grade securities. So we’re very comfortable with the exposure that we have.

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