This document has been published by Standard Life for information only. It is based on our understanding as at March 2008 and does not provide financial or legal advice.
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Section Contents Page 1 Business review 9 1.1 Group overview 11 1.2 New business sales and profitability 12 1.3 EEV – Group 14 1.4 IFRS – Group 19 1.5 Capital and cash generation 22 1.6 Business segment performance 27 1.6.1 UK financial services 27 1.6.4 Asia Pacific 37 1.6.5 Investment management 38 1.7 Basis of preparation 40 2 European Embedded Value (EEV) 43 EEV primary statements 44 EEV notes 47 3 International Financial Reporting Standards (IFRS) 79 IFRS primary statements 80 IFRS notes 85
New business PVNBP1,2,3 £16,423m £14,599m 13% New business APE2,3 £1,994m £1,768m 13% Investment – third party net new business £7.9bn £6.4bn 23% New business contribution4 £345m £205m 68% PVNBP margin4,5 2.1% 1.4% 0.7% points 1 The PVNBP new business sales are different from those previously published in the full year new business press release issued on 30 January 2008 as they incorporate year end non-economic assumption changes.
Capital attributable to • equity holders only Key performance metric • for Group life companies Robust embedded value • underpins the financial strength of the Group
Financial Groups Directive The Group is classified as a ‘financial conglomerate’ as defined by the FGD. On this basis, Group capital resources have risen from £7.9bn to £9.2bn at 31 December 2007 with the Group solvency cover reducing from 176% to 166%. While solvency cover has decreased, this does not indicate a weakening of the capital position of the Group. The decrease in the solvency ratio is primarily due to the interaction of the Scheme and the Prudential rules. The increased regulatory surplus within the HWPF, together with the effect of the recourse cash flow transfers to shareholders, results in an increase to the capital resources requirement. The FGD calculation allows the increase in capital resources requirement to be matched by a corresponding increase in the capital resources of the HWPF included in Group capital resources. Overall, whilst this movement is neutral to shareholders, it leads to dilution of the cover ratio.
acceleration of release of reserves by approximately £138m as a result of regulatory changes in respect of Financial Services • Authority (FSA) PS06/14, and a release of reserves in relation to deferred annuities of £143m; impact of changing financial conditions on the capital resources and capital resources requirement of the HWPF;•
Following discussions with the FSA, Standard Life Bank has been granted a waiver to apply the internal ratings based approach in respect of its retail mortgage exposures. As a consequence Standard LIfe Bank expects its regulatory and economic capital to become more closely aligned each year until 2010 when the new regulations come fully into force. In due course, this should allow Standard LIfe Bank to release capital back to the Group, thereby enhancing its return on equity.
Life and pensions UK life and pensions is one of the largest pension, long-term savings and investment providers in the UK with a 9.7% market share, and offers a broad range of products across insurance and investment wrappers with particular strengths in the accumulation for retirement market. In 2007 the existing Wrap platform was complemented with the launch of Fundzone, a mutual fund supermarket, and assets under administration on this platform have now grown to over £1bn.
Operational efficiencies At the time of the initial public offering (IPO) we announced that we would reduce UK life and pension expenses by £30m. We have achieved these cost efficiencies, reducing expenses by £31m excluding the cost of new products launched since 2005, including Wrap. Through our Continuous Improvement Programme (CIP) we have also achieved our additional operational efficiency improvements for 2007 by maintaining costs while delivering significantly higher new business volumes. We are on track to deliver further operational cost efficiencies by 2009.
Mortgages under management £11.3bn £10.4bn 9% Gross lending £3.7bn £3.0bn 22% Savings and deposits £4.6bn £4.2bn 10% IFRS underlying profit before tax* £32m £38m (16%) Return on equity after tax* 7% 9% (2% points) Interest margin 60bps 74bps (14bps) Cost income ratio 60% 59% (1% point)
Customers High quality customer service is the basis of our growth strategy, which focuses on high retention and strong customer relationships. Our client retention level, based on internal methodology, reached 95.7% in 2007. We continually invest in technology, training and processes as part of our efforts to meet the service expectations of our customers. In addition, we have enhanced web-based functionality in our group lines designed to ease the administration of our products from both the sponsor’s and participant’s perspective.
Financial market overview Market conditions have been volatile during 2007, particularly in the second half of the year. Concerns about US sub-prime lending triggered a global crisis of confidence in the credit markets which, in turn, led to serious dislocation of the money markets from August onwards. Equity markets in both the UK and US reached record highs during the first half of the year but lost ground as the impact of the credit crisis began to feed through. Some of the volatility was reflected in changing market conditions in the Retail channel. However investor behaviour in the Institutional channel, which generated just under 70% of third party gross new business in 2007, was minimally impacted.
In October, a 9.9% stake was sold in HDFC Asset Management Limited (HDFC AM) , our joint venture with HDFC in India. This resulted in a gain before tax of £17m. The total cost of our original investment in this business was £17m. Also in October we reorganised our private equity business with the existing management team taking a significant (40%) minority stake in the future business. The business has strong momentum and we believe it is now well positioned for future growth.
The historical financial information (HFI) adjustments have been prepared in order to show the results which would have been attributable to equity holders and policyholders had The Standard Life Assurance Company been a company owned by equity holders under the terms of the Scheme of Demutualisation (the Scheme) throughout 2006. Additional adjustments are required to produce pro forma results which reflect the profit that would have arisen had the Scheme and anticipated post demutualisation capital and debt structure been in place at the start of the period.
EEV consolidated statement of recognised income and expense For the year ended 31 December 2007
in Germany, from 40% in 2007 to 30% commencing 1 January 2008.•
2.3 Analysis of new business contribution The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 2.16.
1 The present value of new business premiums (PVNBP) new business sales are different from those in the full year new business press release issued on 30 January 2008 as they incorporate year end non-economic assumption changes.
Total EEV operating profit before tax 83 39 Profit on part disposal of joint venture 17 Total EEV profit before tax 100 39
Contribution from in-force business: Expected return on existing business - 12 12 125 137 Expected return transfer to net worth 255 (20) 235 (235) -
Aggregate tax effect of items not recognised in income statement - - - - -
Investment return and tax variances 8 1 9 109 118 Effect of economic assumption changes (13) - (13) 126 113
Contribution from in-force business: Expected return on existing business - 25 25 38 63 Expected return transfer to net worth 93 (35) 58 (58) -
Risk discount rates – in-force business Risk-free 4.83 4.83 4.11 3.95 3.95 * Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 2.9% and 2.8% respectively.
Canada – mainly to reflect the change in product mix over the year.•
2.13 Principal economic assumptions – stochastic calculations The level of the TVOG is generally calculated by an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 2.16.
10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense • assumption of £9 p.a.). Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases; 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.); •
Fall in equity/property market values by 10% (148) (67) (10) - 3 (222)
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 each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds to • do so.
Costs related to demutualisation and related to restructuring have been excluded from the EEV results where it has been agreed that these costs are to be met by the HWPF and therefore would not form part of the surplus cash flows.
Earnings per share Basic (pence per share) 3.5 21.7 13.5 Diluted (pence per share) 3.5 21.4 13.0
Notes £m £m Assets Intangible assets 69 60 Deferred acquisition costs 693 445 Investments in associates and joint ventures 4,146 3,627 Investment property 10,646 11,338 Property, plant and equipment 870 1,067
IFRS condensed consolidated balance sheet As at 31 December 2007 82 Standard Life
£m £m Fair value (losses)/gains on cash flow hedges (6) 19 Actuarial losses on defined benefit pension schemes (3) (12) Revaluation of land and buildings (26) 66 Exchange differences on translating foreign operations 175 (214) Equity movements transferred to the unallocated divisible surplus (11) 1 Retained earnings arising on demutualisation - 17 Aggregate policyholder tax effect of items not recognised in income statement - 4 Aggregate equity holder tax effect of items not recognised in income statement - (8)
Notes £m £m Equity at start of period 3,185 Minority interest Recognised prior to 10 July 2006 - 260 Change in the year/period (27) (13)
Net increase in cash and cash equivalents 2,875 423 Cash and cash equivalents at the beginning of the year 6,194 5,808 Effects of exchange rate changes on cash and cash equivalents 51 (37) Cash and cash equivalents at the end of the year 9,120 6,194
Equity Share capital and reserves 2,878 Minority interest 307 Total equity 3,185
The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 3m (2006: 2m). The effect of these dilutive potential ordinary shares did not impact the profit attributable to equity holders of the Company.
Period Period Year ended Year ended 10 July 2006 to 10 July 2006 to 31 December 31 December 31 December 31 December £m Per share p £m Per share p Underlying profit before tax attributable to equity holders 825 38.6 350 16.7 Volatility arising on different asset and liability valuation bases (302) (14.1) 68 3.2
Total change in contract liabilities 7 (624) 165 (452) (28) (480)
Equity attributable to ordinary equity holders of Standard Life plc - 171 976 1,147 841 1,988 890 2,878
The estimated FGD position at 31 December 2007 is shown in section 1.5 of the business review.
3.14 Consolidated income statement presentation Prior to the demutualisation of The Standard Life Assurance Company on 10 July 2006, the parent company of the Group was a mutual insurer and the results of the Group were attributable to participating policyholders. The format of the consolidated income statement for the year ended 31 December 2006 was aligned with that of an equity holder owned company.