13 July 2004

With Profits Update – Scottish Provident Ireland

I’m writing to let you know that we’ve now concluded the review of the SPI Fund (the "Fund") and discussions with the UK Financial Services Authority on realistic reporting and capital requirements.

Please note that policies invested after 1 August 2001, which are invested in the Scottish Mutual International Dublin With Profits Fund, are NOT affected by the contents of this letter.

The outcome of this review is as follows:

• The Fund now fully meets the new UK regulatory requirements, which are expected to come into force soon.
• The Fund is stable and in a well risk-managed capital position with a statutory solvency margin, as at 31 May 2004, of 250% for Scottish Provident Limited.
• We are now in a position to increase the target level of equities in the Fund to 35% (excluding the hedge asset) – which is broadly in line with industry averages. This will help us take advantage of potential stock market growth - although our aim is still to produce steady returns with moderate risk over the long term.
• There is now greater clarity on the future management of the Fund as published in our updated Principles and Practices of Financial Management.

In arriving at these outcomes, Abbey has confirmed significant financial support to With Profit Fund following from provisioning previously disclosed in Abbey’s 2002 and 2003 year end accounts as a reserve against future risks. Our hedging measures used over the last eighteen months have been extended and improved, and will now be held within the Fund. This is to help protect against negative movements in both the stock market and interest rates impacting fund realistic solvency in the future.

We have reviewed terminal bonus and Market Value Reduction (MVR) / early surrender reduction (ESR) levels established earlier this year and have made adjustments to payouts, which now reflect the new realistic position of the Fund. I’d now like to update you on what the review means for Scottish Provident Ireland policyholders.

Scottish Provident Ireland Conventional With Profits Policies

For Scottish Provident Ireland Conventional With Profits policies we have been able to make a small increase to terminal bonus levels for some longer term policies, as well as improving some surrender values. Subject to positive net investment returns, in the next few years, we hope to see improved payouts in terminal bonus levels in priority to declaring an annual bonus.

Scottish Provident Ireland Unitised With Profits Policies

Our review concluded that we’ve been able to improve the general level of MVRs for most Scottish Provident Ireland policies. MVRs will continue to be reviewed regularly to reflect stock market conditions and other relevant factors.

Going forward, our plan is to use future growth from net investment returns to reduce MVRs/ESRs and increase terminal bonus levels, in priority to declaring annual bonus. This allows us to pass on to the policyholder the benefits of future net investment returns through improved bonuses on policy maturities or higher values on surrender. This allows the Fund to provide all policyholders with a fairer share of available assets.

We believe it is fairer to all policyholders to re-introduce annual bonuses only after MVRs/ESRs have been substantially reduced, although this does not necessarily mean that they would need to be completely removed. Before we would apply annual bonus our investment managers would also have to be confident that the investment outlook was stable and sustainable and that the Fund was likely to remain in a position to meet its increased liabilities following an annual bonus declaration.

At that stage we would also ensure that any payment of annual bonus was fair to all policyholders and did not favour any one set of policyholders over others.

We appreciate that this has been an uncertain time, however, we believe that Abbey’s contribution along with the above measures will have a positive effect on the Fund in the future. We can also assure you that any guarantees that apply to your clients’ policies are not affected and currently there is no explicit future annual charge against policy values for guarantees.

We have updated our Principles and Practices of Financial Management (PPFM) to reflect the changes I have discussed. This remains the definitive document which sets out how the Fund will be managed in the future. If you would like a copy please visit our website at www.scotprov.ie, e-mail us at info@scotprov.ie or call us on 01 6399859.

Please read the ‘Your Questions Answered’ document attached and if you have any further queries please contact us as above.

Yours faithfully

Anthony Haynes

Head of Intermediary Contact
Scottish Provident Ireland