New business contribution (NBC) £100m £105m £205m £33m Present value of new business premiums (PVNBP) margin3 1.6% 1.3% 1.4% 0.4% Basic EEV Earnings per share (EPS)4 9.6p 11.8p 21.4p 14.3p Diluted EEV Earnings per share (EPS)4 9.3p 11.4p 20.7p 13.9p Return on embedded value (ROEV)5 8.2% 9.8% 8.9% 7.4%
The above results should be read in conjunction with the basis of preparation information in section 1.4.1.
Assumption changes were £58m negative in 2006 (2005: £37m positive). Within this was a cost in respect of increased lapse assumptions of £260m in 2006, including £100m announced at 30 June 2006 (2005: £103m) – see section 1.4.2.2.
Healthcare and general insurance 119 73 Group corporate centre 553 – Other non-covered business 73 128 Total net assets of non-covered business 1,249 590
Period Period to 10 July 2006 to 31 December 2006 FY 2006 FY 2005 £m £m £m £m
2 The percentage change is based on new business of the underlying joint ventures to avoid distortion due to changes in the Group’s shareholding.
Group pensions remains the largest single product by APE sales volume in our UK life and pensions business. Sales increased by 8% to £437m for 2006 (2005: £403m). The increase in sales is largely due to higher levels of increments from existing schemes, as well as the successful launch of the Group Flexible Retirement Plan and Group SIPP in January 2006.
• PVNBP sales decreased by 21% to £536m • APE sales decreased by 23% to £51m
The first phase of a new policy administration system for SME business was developed on the group IT platform and will be implemented in the second quarter of 2007. The remaining product lines, including the business acquired from FirstAssist in April 2006, are expected to move fully on to the new system during the rest of 2007 and 2008. This new platform, coupled with the launch of a new product proposition, is expected to increase sales, improve efficiencies and reduce operating costs in 2007 with the full benefits being realised in 2008 and beyond.
The addition of these columns provides a pro forma full year 2006 result.
The EEV results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the CFO Forum of European Insurance Companies.
(d) This includes the cost of carry of the subordinated debt charge of £12m transferred from non-covered business (see note (e)).
To give shareholders a guide to the Group’s performance for the period after demutualisation – from 10 July to 31 December – together with illustrative performance for FY2006 compared to FY2005, the pre-demutualisation IFRS mutual figures were adjusted to derive a pro forma profit figure. In order to provide illustrative financial information for FY2006, full year pro forma results have been prepared by adding the pro forma results for the period from 1 January 2006 to 10 July 2006 to the actual results for the period from 10 July 2006 to 31 December 2006.
The increase in pro forma underlying profit before tax was driven by higher fee income from the continued growth in mutual funds and segregated funds under management, continued cost control and also from the strategic focus on higher margin products. The period benefited from strong returns in a buoyant property market, coupled with positive returns in the equity markets.
IFRS pro forma underlying profit increased, mainly because claims experience was better than expected, including a surplus on the run off of the previous year’s outstanding claims reserves of £4m. The improved claims experience is linked to medical claims inflation in 2006 being below expectations, and to pricing and underwriting actions to improve profitability.
Adjustments to derive underlying profit Volatility arising on different asset and liability valuation bases 43 (59) Impairment of intangibles 9 – Restructuring expenses 5 – Underlying profit before tax attributable to equity holders and after minority interest 250 145
(d) In relation to subordinated debt and Subordinated Members’ Accounts (SMAs), the amount by which the return on the assets backing the subordinated debt exceeds the coupon paid, i.e. the cost of carry.
In the HFI, a component of shareholder profit is represented by the transfer of assets to the Shareholder Fund and Proprietary Business Fund. This transfer was calculated in accordance with the formula defined in the Scheme by reference to certain cash flows from the unitised business and non-participating business. These cash flows are based on the amounts reported in the regulatory return and therefore exclude any deferral of acquisition costs.
Profit after tax 515 * Investment management operating profit before tax is stated after excluding profits of £14m which have been generated by the life and pensions businesses.
EEV consolidated balance sheet As at 31 December 2006 28 Standard Life
For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements in the Annual Report and Accounts, unless otherwise stated.
2.2 Segmental analysis – covered business (a) Segmental EEV income statement 10 July 2006 to 31 December 2006 UK Europe Canada Other HWPF TVOG Total
Positive experience variances in relation to HWPF TVOG reflect the net impact of management actions taken to hedge guarantees and change equity backing ratios for with-profits business.
Capital injections/(dividends) 7 – 7 – 7 Transfers (to)/from non-covered business (73) – (73) – (73) Foreign exchange rate movements 2 – 2 – 2 Transfer back of surplus to SLI (9) – (9) – (9) Actuarial gains/(losses) on defined benefit pension schemes – – – – –
Transfer back of surplus to SLI – – – – – Actuarial gains/(losses) on defined benefit pension schemes 9 – 9 – 9 2.11 Market value of subordinated liabilities within covered business £m £m
Risk margin – new business Risk margin before cost of capital adjustment
The level of the TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: • the projected economic scenarios and the methodology used to discount shareholder cash flows are based on market consistent assumptions; • the total cost includes an allowance for non-market risk, including credit risk arising from holding non-risk-free bonds; • changes in policyholder behaviour are allowed for according to the particular economic scenario; • changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM); and
• Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business.
On demutualisation UK subordinated liabilities and subordinated members’ accounts were transferred to Standard Life plc on an adjusted cost basis with assets equal in value to this amount. The liability in respect of this plus subordinated debt issued by the Canadian companies forms part of covered business and has been deducted at market value within the EEV (less an adjustment for tax where appropriate).
Embedded value and other balance sheet items denominated in foreign currencies have been translated to sterling using the appropriate closing exchange rates. NBC and other profit and loss account items have been translated using average exchange rates. Differences arising from foreign exchange movements are excluded from the EEV consolidated income statement and are presented separately within the EEV consolidated statement of recognised income and expenses.
Non-cash movements from operating activities (179) (292) Net increase in operational assets (14,250) (14,637) Net increase in operational liabilities 11,895 15,032 Change in unallocated divisible surplus 286 901 Taxation paid (304) (285) Net cash flows from operating activities (1,742) 1,333
(a) Primary reporting format – Business segments (continued) Banking Banking offers a range of retail mortgage and deposit products via on-line and telephone operations.
Note 3.2(a) describes the establishment of the HWPF as part of the demutualisation transaction on 10 July 2006. The Scheme provides that certain recourse cash flows arising in the HWPF on specified blocks of UK and Irish business may be transferred out of that fund and thus accrue to the ultimate benefit of equity holders in the Company. Under the Scheme, such transfers are subject to constraints to protect policyholders. If the recourse cash flows result in a negative amount, then the Shareholder Fund will make a transfer to the HWPF of at least the negative amount. The Scheme also provides for additional expenses to be charged by the Proprietary Business Fund to the HWPF in respect of German branch business.
Recourse cash flows arising on UK and Irish unitised with-profits contracts 116 Recourse cash flows arising on UK and Irish non-participating contracts 42 Additional expenses charged on German unitised with-profits contracts 51 Transfer out of HWPF 209 Profits arising from life and pensions business held outside of the HWPF 362 Profit before tax in the period 10 July to 31 December 2006 571 Result attributable to period 1 January to 10 July 2006 172 Life and Pension segment result for the year 743
Healthcare At 31 December 2006 Life and and general Investment pensions insurance management Banking Other Elimination Total £m £m £m £m £m £m £m
Exchange differences (8) 6 Costs deferred 246 70 Amortisation charge (83) (72) Other – 17 Closing net book amount 445 290
The amount of deferred acquisition costs expected to be recovered after more than twelve months is £365m (2005: £244m).
Non-economic assumptions cover mortality, persistency and expenses. Experience changes in 2005 primarily represent lower than expected claims (including deaths, surrenders, maturities and lapses).
Due after 5 years Standard Life Funding B.V. medium term notes – EUR 3.89% 2.70% 81 83 Standard Life Funding B.V. medium term notes – GBP – 4.63% – 4
Subordinated guaranteed bonds: Subordinated guaranteed notes: 6.14% £265,000,000 Fixed rate perpetual 253 267
Guarantees and letters of credit include guarantees in relation to the Group’s Canadian operations. Revised IAS 39 Financial Instruments: Recognition and Measurement, effective 1 January 2006, results in these guarantees being considered financial guarantee contracts and initially recognised at fair value. The fair value at 31 December 2006 is £nil (2005: £nil).
Standard Life plc, registered in Scotland (SC286832), Standard Life House, 30 Lothian Road,