The Heritage With Profits Fund (HWPF) residual estate amounted to £0.5bn as at 31 December 2008 (31 December 2007: £1.5bn). The reduction in the estate over the year largely reflects both the direct and indirect effects of movements in corporate debt, property and equity markets, the impact of which has been exaggerated by technical changes in the way that realistic liabilities are calculated. The impact on the residual estate of further falls in equity markets continues to be mitigated by the hedges we have in place. The impact of most other adverse asset movements would, in the first instance, be met by policyholders with indirect impacts on shareholders via higher guarantee costs, and hence higher burnthrough cost. Shareholder exposure is also limited by the structure of the capital support mechanism set up at demutualisation, with shareholder support being obtained by withholding the furthest out cash transfers from the HWPF to shareholders. At the end of February 2009 the HWPF residual estate was estimated to be £0.3bn.
Section Contents Page 1 Business review 11 1.1 Group overview 12 1.2 New business sales and profitability 14 1.3 EEV – Group 16 1.4 IFRS – Group 20 1.5 Business segment performance 22 1.5.1 UK financial services 22 1.5.4 Asia Pacific 33 1.5.5 Investment management 34 1.6 Group assets under administration 36 1.7 Capital and cash generation 37 1.8 Risk management 44 1.9 Basis of preparation 45 2 European Embedded Value (EEV) 47 EEV primary statements 48 EEV notes 51 3 International Financial Reporting Standards (IFRS) 83 IFRS primary statements 84 IFRS notes 89 4 Supplementary information 111 4.1 Group assets under administration and net flows 112 4.2 Fair value hierarchy of financial instruments 113 4.3 Total expenses and operating cost base 115
Net flows Group assets under administration as at 31 December 2008 were £156.8bn compared to £169.0bn at 31 December 2007. The reduction is mainly due to a fall in asset values following adverse market movements during the year. As a result of the challenging economic conditions in which we have been operating, total life and pensions net inflows (excluding Asia Pacific) decreased by 12% to £2,440m and third party investment management net new business amounted to £3,395m.
Core Core elements comprise new business contribution (NBC), expected return, non-covered business profits and development costs for covered business other than those directly related to back book management.
During the year, we made £96m of EEV profit from the release of provisions held in the UK deferred annuity business. This release was made possible following a further review of our annuity data in 2008. This compares with £191m of EEV profit from improved deferred UK annuity data modelling in 2007.
Non-life non-operating losses include £90m of total losses borne by our investment management business in relation to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. Total investment management losses in relation to this sub-fund include a £51m loss relating to the fair value movements of assets brought directly onto the balance sheet prior to 23 September 2008. On 23 September 2008, a contract was signed between Standard Life Investments and
During the year we have developed our e-commerce capabilities with SIPP online, which enables Independent Financial Advisers (IFAs) to submit SIPP applications online. We have also continued to invest in the development of our Wrap and Fundzone operations to ensure that we are able to continue capitalising on opportunities for growth and efficiency. At the same time, our current platforms have allowed our customers to make the most of market developments by making it easier for them to transfer monies from protected rights. We continue to work on developing a variable annuity proposition but are waiting for market conditions to improve before launching.
The significant increase in underwriting profit compared to 2007 was due to improvements in the claims ratio and an increase in earned premium. Return on equity for 2008 was 8.6% (2007: 7.7%).
IFRS normalised underlying profit before tax increased by 12% to £93m (2007: £83m). This excludes all restructuring costs, principally those associated with the one-off restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. The total impact of the restructuring on Standard Life Investments’ IFRS profit before tax in 2008 was a charge of £90m. This consists of restructuring costs of £39m, representing a cash injection into the funds, and a marked-to-market adjustment of £51m, representing the fair value movements of assets brought on to the Group’s balance sheet following the restructuring. Our IFRS profit before tax was £nil (2007: £100m).
36 www.standardlife.com 1.6 Group assets under administration Group assets under administration (AUA) represent the IFRS gross assets of the Group adjusted to include third party AUA, which are not included in the balance sheet. In addition, certain assets are excluded from the definition, for example deferred acquisition costs, intangibles and reinsurance assets.
New business strain margin is calculated excluding Asia Pacific. * New business strain margin for 2005 and 2006 and PVNBP
Dividends During the year, the Group paid the final dividend for 2007 of 7.70p per share, amounting to £168m, and the 2008 interim dividend of 4.07p per share, amounting to £89m. The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group’s financial performance.
Regular reviews of experience• Reinsurance and risk transfer• Business planning process• Specified underwriting limits• Testing of claim values, reinsurance recoveries, • and the survival of annuitants
Regular risk assessment to identify the potential • cause of the risk The transfer, acceptance, reduction or transfer of • risk within risk appetite
The inclusion of this Sigma mutual funds business within covered business is reflected in the EEV results with an opening adjustment of £32m (£32m for covered business and £nil for non-covered business), capturing the PVIF as at 1 January 2008 within covered business and removing any related intangibles, e.g. deferred acquisition costs, from the opening net assets of non-covered business. The movement in the EEV of those mutual funds is reflected in the covered business EEV movement with changes in net worth transferred back to non-covered business for inclusion in their closing net asset position. No covered business movement for Sigma mutual funds has been included within the comparative results for the 12 months to 31 December 2007.
On 14 February 2008, Standard Life Assurance Limited entered into a reinsurance treaty with Canada Life International Re in respect of part of its UK immediate annuity liabilities. As a result of this transaction, EEV operating profit before tax increased by £119m. An analysis of this profit is shown in Note 2.2(a). 1 As adjusted for Standard Life Investments look through profits and the return on certain mutual funds which are recognised in covered business. 2 The only difference between IFRS normalised underlying profit and IFRS underlying profit arises within investment management, as described in Note 2.6(b).
Total closing Group EEV has also been adjusted to exclude the £42m difference between the market value and the amortised cost value of the Canadian subordinated liability, as shown in the EEV consolidated balance sheet.
2.2 Segmental analysis – covered business (a) Segmental EEV income statement 12 months to 31 December 2008 Notes UK £m
Internal capital transfers mainly reflect dividend transfers to Standard Life plc.
The UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. This has increased significantly during 2008, primarily due to adverse market movements. This has arisen from both the significantly lower than expected investment returns earned during 2008, and the impact of changes to long-term investment assumptions, in particular from the use of lower risk free rates and higher implied volatilities.
The ESG simulates future economic environments in a market consistent manner. The outputs of the ESG include: Cash returns•
5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies•
Cash flows emerging in the period on covered business that do not reside within a life and pensions company on a statutory basis are transferred back to the relevant non-covered entity for disclosure within their closing net assets. This treatment is applied to both the return from investment management and the return on certain mutual funds included in covered business.
The results of the Group’s business in Hong Kong (Standard Life Asia), along with an allocation of costs attributable to • the Asia Pacific Development head office
Changes in policyholder behaviour are allowed for according to the particular economic scenario•
Effects of exchange rate changes on cash and cash equivalents 145 51
Recourse cash flows arising on UK and Irish unitised contracts 243 378
The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2008 was as follows: Participating insurance contract liabilities £m
100 www.standardlife.com 3.8 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued
The change in non-participating investment contract liabilities was as follows: £m £m
Standard Life Funding B.V. medium term notes – GBP - 6.56% - 9
Lothian Mortgages No. 1 plc – USD – Maturity 2017 - 5.49% - 79
The Group operates in a number of geographical regions, and local regulators, primarily the FSA, specify rules and guidance for the minimum level of capital required to meet local requirements. The Group has not breached any regulatory capital requirements at any time during the year.
This document has been published by Standard Life for information only. It is based on our understanding as at March 2009 and does not provide financial or legal advice.