This document has been published by Standard Life for information only. It is based on our understanding as at March 2010 and does not provide financial or legal advice.
• Group assets under administration up 15% to £170bn (31 December 2008: £148bn)2,3
• Significant step up in investment to develop our leading corporate and retail propositions to accelerate profitable growth
Chief Executive David Nish said: “2009 was a successful year for Standard Life in which we delivered against our strategic objectives and built a strong platform for future profitable growth.
EEV operating cash flow robust with strong coverage of new business strain
Overall, operating capital and cash generation amounted to £414m (2008: £423m)4.
Core return comprises new business contribution, expected return, development costs for covered business5 and IFRS
As a long-term savings and investments business our core return will inevitably be influenced by the overall level of financial markets, with average equity markets in 2009 15%8 lower than 2008. Core return was 15% lower at £584m (2008: £685m)4 delivering a core RoEV of 6.7% (2008: 8.0%)4. New business contribution was 19% lower at £213m (2008: £264m)4, due to reduced sales volumes as a result of challenging markets. Core return was also impacted by a market driven reduction in the value of the in-force book at the end of 2008, which resulted in a lower expected return on existing business.
(2008: 8 years)4 respectively, the decrease in IRR and lengthening of payback period having been driven by lower asset values and lower sales volumes, which have reduced the value of reported sales across our UK and international operations.
We announced in March 2009 a target of achieving a further £75m of annual efficiency savings by the end of 2010.
• Continued improvement and automation of customer service processes, which has allowed us to maintain our awardwinning levels of customer service with lower headcount.
During the year, back book management generated an operating profit before tax of £349m (2008: £184m)4, delivering a back book management RoEV of 4.0% (2008: 2.1%)4.
Positive factors within the back book management result include a £143m benefit from changes to asset allocations and hedging arrangements, which have reduced the time value of options and guarantees (TVOG) associated with the Heritage With Profits Fund (HWPF). In addition, the result includes a £111m benefit arising from actions taken to reduce the market risk to the tax treatment of future shareholder transfers from the HWPF, as well as a £63m (2008: £98m) release of reserves following a review of our deferred annuity data. In February 2008 we reinsured £6.7bn of our UK immediate annuity liabilities to Canada Life International Re. This generated a benefit to EEV operating profit before tax of £119m which was reflected in the 2008 result. 2008 also included a charge of £108m in relation to the Pension Sterling Fund.
IFRS underlying profit before tax was 89% higher at £291m (2008: £154m) and includes a number of items which are not included in the normalised underlying profit figure. In 2009 this figure included a benefit of £63m (2008: £98m) relating to the release of reserves following a review of our deferred annuity data. In 2008 this figure was similarly affected by significant items including a £105m benefit arising from the reinsurance of UK immediate annuity liabilities, and respective charges of £102m and £124m in relation to the Pension Sterling Fund and a sub-fund of Standard Life Investments (Global Liquidity Funds) plc.
The Board have proposed a final dividend of 8.09p per share (2008: 7.70p) making a total of 12.24p for 2009 (2008: 11.77p), an increase of 4.0% (2008: 2.3%). The Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group’s financial performance.
The Financial Groups Directive (FGD) surplus as at 31 December 2009 of £3.6bn has been relatively insensitive to market movements and remains largely unchanged from the previous year end position (31 December 2008: £3.5bn), with a year end solvency cover of 230% (31 December 2008: 219%)9.
Strong platform for profitable growth We will continue to drive shareholder value through being a leading, customer-centric business, focused on long-term savings and investment propositions. This means finding, acquiring and retaining valuable customers for mutual and sustained financial benefit.
We see excellent prospects to drive greater value from all our businesses. In each of our markets, we believe we can leverage our positions to develop new growth opportunities and influence market development. Our ongoing investment to more fully understand the needs of our customers will drive the propositions we will develop for our customers. In doing this, we also help fulfil a growing need for providing long-term retirement and savings solutions.
• Focus on the savings and investment needs of customers in our chosen segments, which include £2.3 trillion of assets in the UK and £1.3 trillion of assets in Canada. We will achieve this by delivering propositions through a digitally enabled distribution strategy, with increased brand preference.
• Maximise the value from our Joint Venture relationships in Asia to further grow shareholder value, through building a strong strategic partnership in China and the opportunity to increase our stake in our Indian Joint Venture.
We will continue to invest in our trusted brand to generate valuable customer loyalty and a predisposition to buy from us. Advanced use of new technology will help us drive rapid innovation in our propositions and enable a market-leading, costefficient operation, fully supporting the regulatory changes that will be introduced under the UK Retail Distribution Review. Our recognised capabilities in accessing and communicating with customers, on both sales and service, and our outstanding relationships with intermediaries, will be core to our ongoing success.
Achieving all of this requires a nimble business that is quick to spot and seize growth opportunities, creates and refines attractive propositions that it gets to market quickly, and does all of this in a highly efficient and effective manner. To create that ‘fit-for-future’ business, we have initiated an internal transformation programme, which will drive performance improvement through putting our customers at the heart of our strategy, investing in our talent, and using technology to support the relationships with customers and distributors and deliver efficiency. We will also continue to manage risk actively to ensure that risk is fully rewarded and appropriate to our strategy.
In 2010 we are doubling the level of growth investment in our business and will spend more than £200m to further develop and market our leading corporate and retail propositions. This development programme, based on rigorously applied returns criteria, will include the launch of our Employee Wealth and Benefit Platform later in the year, and significant enhancements to our adviser propositions. We believe these will lead to a considerable increase in assets under administration and profits over the next 3 years.
In addition, we are announcing today that we will target a further £100m of efficiency savings by 2012. These savings, which will improve new business margins, will be achieved through transforming our operations to become lower cost and scalable, while maintaining the quality of customer service.
Standard Life is strongly positioned for profitable growth in the segments of the markets on which we focus.
There will also be a live listen only teleconference to the investor and analyst presentation at 9:30am. Investors and analysts should dial +44 (0)20 3059 5754. Callers should quote Standard Life Preliminary Results. A replay facility will be available for 14 days. Investors and analysts should dial +44 (0)121 2604861. The pass code is 1943675#.
Notes to Editors: 1 Worldwide life and pensions net flows include net flows in respect of our Asia joint ventures and our Hong Kong subsidiary for the first time. Prior year figures have been restated accordingly.
5 Core elements comprise new business contribution (NBC), expected return on in-force business, non-covered business profits and development costs for covered business other than those directly related to back book. Core EEV capital and cash generation reflects the after tax net worth impact of the core EEV result attributable to shareholders.
8 The daily average level of the FTSE All share index was 15% lower over the twelve months to 31 December 2009 when compared to the same period in 2008. On the same basis the UK IPD All Property Index was 22% lower and the Sterling 5-10 Yr Corporate Securities Index was down 6%.
9 FGD surplus based on draft regulatory returns 10 The Preliminary Results 2009 are available on the Financial Results page of the Standard Life website at www.standardlife.com www.standardlife.com 7
1.4 Business segment performance 19 1.4.5 Global investment management 29 1.5 Capital and cash generation 31 1.9 Basis of preparation 44 2 European Embedded Value (EEV) 45
IFRS notes 90 4.1 Group assets under administration and net flows 116 4.2 Exposure to investment property and financial assets 118 4.3 Fair value hierarchy of financial instruments 121 4.4 Total expenses and operating cost base 123 www.standardlife.com 9
Rising unemployment and reduced salary inflation Rising unemployment and negative economic growth have been reflected in lower average levels of salary increases across all industries and markets, as well as companies placing tighter controls on headcount. This reduced both the number of new corporate pension customers in the market and the level of their pension contributions.
The UK Retail Price Index, a key tool in determining annual salary rises, fell significantly towards the end of 2008 and spent most of 2009 in negative territory. This had an industry-wide adverse impact on increments into existing schemes such as group pensions.
Availability of credit The unprecedented volatility of global capital markets during the latter part of 2008 and throughout 2009, and the financial difficulty experienced by some major financial institutions, has attracted extensive media attention and heightened investors’ concerns about the safety of their investments. Standard Life has robust and actively managed controls in place to ensure that we have access to sufficient liquidity to meet operating requirements during such periods of market uncertainty.
Our ability to develop innovative long-term savings and investments products, such as self invested personal pension (SIPP) and Wrap, puts us in a strong position to support our customers in these challenges and encourage them to take a more active, flexible approach to their long-term financial planning.
The Chief Financial Officers (CFO) Forum Market Consistent Embedded Value Principles©* (MCEV Principles) were issued by the CFO Forum on 4 June 2008 to replace the current EEV Principles and Additional Guidance and were designed to improve the transparency and comparability of embedded value reporting. The MCEV Principles were further amended on 20 October 2009 to reflect the inclusion of a liquidity premium.
The introduction of personal accounts will create opportunities for Standard Life, as well as some challenges. It is likely to lead to a much greater general awareness of the need for individuals to take responsibility for their future. We also anticipate that there will be opportunities to target employers who are looking to offer schemes that are significantly differentiated from personal accounts as part of their overall employee proposition. We are well placed to capitalise on these opportunities.
While personal accounts are likely to place downward pressure on management charge income, we will continue to develop value-adding propositions which meet our customers’ needs and create value for shareholders.
The retail market is undergoing substantial change with the RDR proposals being just one factor for consideration. We have been reviewing our strategy and plans incorporating our views on the RDR and assessing the likely impact for our business and the industry as a whole.
We have been following the development of the new regime for many years and continue to be actively involved at industry and regulator level within the UK and Europe. Internally a formal development programme is in place to ensure Standard Life is ready in good time for the implementation of the new framework.
Expected return and development costs £318m 1.2 EEV – Group EEV measures shareholders’ value of net assets and the expected future profits on the existing book of business. The EEV results reflect the Group’s continuing focus on building a leading long-term savings and investments business by managing our existing book of business effectively and writing profitable new business.
EEV highlights 1 2009 Asia results have been prepared on an EEV basis for the first time. Prior to 2009 these were included on an IFRS basis. Comparatives have not been restated. 2 Net of tax. 3 Diluted EEV operating earnings per share (EPS) is based on the diluted weighted average number of shares of 2,203m (2008: 2,180m) and the EEV operating profit after tax of £640m (2008: £649m). 4 EEV per share is based on the diluted closing number of shares of 2,237m (2008: 2,180m).
EEV profit before tax of £474m (2008: loss £158m) includes an operating profit of £919m (2008: £933m) and a non-operating loss of £445m (2008: loss £1,091m). The equivalent after-tax results were £640m operating profit and £335m non-operating loss. Operating profit removes most of the investment variance within a reporting period but does reflect changes in investment conditions from period to period. Non-operating profits and losses are mainly market-driven and occur as a result of short-term investment performance being different from the long-term return anticipated in the opening EEV. Further details of the operating profit and non-operating loss are given below.
We analyse our EEV profits in three components that reflect the focus of our business effort – core, efficiency and back book management.
The core element of our operating profit decreased by 15% to £584m (2008: £685m). Expected return from the Group’s in-force business decreased by 13% to £375m (2008: £431m). This primarily reflected lower opening market returns. The EEV operating profit from non-covered business includes increased profits from Standard Life Bank and our healthcare business, offset by a fall in operating profits from our global investment management business and lower investment returns in the parent company. For further detail see Section 1.4 – Business segment performance.
1 PVNBP margins are calculated as the ratio of new business to PVNBP and are based on the underlying unrounded numbers. 2 2008 PVNBP, NBC, PVNBP margin, IRR and discounted payback for UK and Europe have been restated to reflect the inclusion of offshore bonds within the Europe results. Prior to 2009 this was included within UK. 3 2009 Asia results have been prepared on an EEV basis for the first time. Prior to 2009 these were included on an IFRS basis. Comparatives have not been restated.
Management actions to reduce market risk in UK and HWPF TVOG 111 - - - 143 254 - * 2009 Asia results have been prepared on an EEV basis for the first time. Prior to 2009 these were included on an IFRS basis. Comparatives have not been restated.
Management of our back book focuses on reducing risks and enhancing the value of expected shareholder profits, as well as capturing the impact of changes in insurance experience and assumptions. The two major insurance risks to which shareholders are exposed are lapses and annuitant mortality.
Reflecting our focus on the effective management of the existing business, back book management activities generated EEV
further benefit of £111m arose from actions taken to reduce the market risk to the tax treatment of future shareholder transfers from the HWPF.
The 2008 profit from back book management included a £119m gain from the reinsurance of £6.7bn of pre-demutualisation UK immediate annuity liabilities and a £108m cost in relation to the Pension Sterling Fund.
RoEV was 10.6% in 2009 compared to 10.9% in 2008. Core contributed 6.7% to total RoEV compared to 8.0% in 2008. This movement was primarily due to decreased NBC and expected return from existing business, which contributed 0.6% and 0.8% respectively to the decrease in total RoEV. 2009 back book management RoEV includes 3.0% from management actions to reduce market risk in the UK and the HWPF TVOG.
The closing EEV of £6,435m consists of £3,051m of net worth (free surplus and required capital) and £3,384m from the present value of in-force business (PVIF). The movement in total EEV of £190m consists of a movement in net worth of negative £141m and a movement in the PVIF of positive £331m.
The movements in EEV shareholder net assets are analysed in more detail in Section 1.5 – Capital and cash generation.
Impact of market movements on Canada surplus assets and reserves Normalised FY 2008 underlying profit
IFRS profit after tax attributable to equity holders £213m £100m 113%
1 Diluted IFRS underlying EPS is based on 2,203m shares (2008: 2,180m) and the IFRS underlying profit after tax of £265m (2008: £254m). 2 Dividend cover is calculated as IFRS underlying profit after tax and non-controlling interests for the year, divided by the dividend proposed in respect of this year. 3 IFRS tangible equity per share is based on the diluted closing number of issued shares of 2,237m (2008: 2,180m) and tangible IFRS equity of £3,351m
(2008: £3,295m). IFRS tangible equity excludes non-controlling interests and intangible assets.
Movement in IFRS underlying profit In 2008, underlying profit benefited from the inclusion of a £105m release of reserves following the reinsurance of £6.7bn of UK immediate annuities and a £98m release of reserves in relation to UK deferred annuity business. Offsetting these benefits was a £102m cash injection into the Pension Sterling Fund, a cost of £124m relating to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and a £29m charge relating to the reinsurance of certain contracts held by our business in Canada.
In 2009, underlying profit benefited from a £63m release of reserves in relation to UK deferred annuity business.
Excluding these items, the normalised underlying profit increased by 11% to £228m (2008: £206m) with profitability benefiting by £73m from the reduced impact of market movements in Canada. The impact of market uncertainty continues to be evident within our operations in Canada because of the way that life companies in Canada typically structure non-segregated funds, with assets backing both policyholder liabilities and the shareholder surplus. A fall in investment property values has contributed to a reduction in surplus assets and an increase in policyholder liabilities, more than offsetting the positive impact of rising equity markets. The net effect has reduced normalised underlying profit in Canada by £70m in 2009 (2008: £143m). Excluding the impact of market movements in Canada, normalised underlying profit was £298m (2008: £349m). Operational efficiencies and strict control of expenditure have had a positive impact on profitability of £18m. Across the Group, management charge income decreased due to the impact of lower average asset values compared with 2008. This reduced profits by £66m.
UK Total IFRS underlying profit before tax within our UK business, comprising our UK life and pensions, healthcare, and savings and mortgages businesses, increased to £259m (2008: £238m).
UK life and pensions underlying profit before tax fell by 8% to £184m (2008: £201m). Normalised underlying profit decreased to £111m (2008: £173m) with income impacted by lower average asset values and interest rates.
Our savings and mortgages business delivered a robust performance, focusing on managing profitability whilst ensuring liquidity requirements were met. Underlying profit increased by 131% to £60m (2008: £26m).
Asia Asia’s IFRS underlying loss of £27m (2008: loss £35m) reflects the continuing investment in developing the operations in the region.
1 2008 figures have been restated to exclude offshore bond business which is now reported within the Europe results. The impact of this is to adjust net flows by (£632m), assets under administration by (£1.0bn), new business PVNBP by (£661m), new business contribution by (£13m), discounted payback period by 1 year, EEV covered business operating profit by £1m and IFRS underlying profit before tax by £17m.
Net inflows for the year were 43% higher at £1,214m (2008: £848m). Individual pensions net inflows were £382m (2008: £550m). Within this, lower self invested personal pension (SIPP) net inflows of £1,761m (2008: £2,464m) were mainly due to a reduction in incoming transfer values, driven by lower average market values during 2009. There was also an increase in outflows, with customers making more use of the flexible drawdown and tax-free cash functionality of our SIPP product. The reduction in SIPP net inflows was partially offset by lower individual pensions net outflows of £1,379m (2008: £1,914m) due to a lower level of claims. Group pensions net inflows were £1,496m (2008: £1,479m), boosted by the £220m transfer from the British Telecom plc scheme (BT Scheme). Institutional pensions net inflows were £1,547m (2008: £616m), reflecting several large scheme contributions.
Savings and investments net outflows were £438m (2008: net inflow £228m). Within this, mutual funds net inflows were £795m (2008: £339m) driven by growth in customer numbers on our Wrap and Fundzone platforms. This was offset by higher onshore bond net outflows of £1,233m (2008: £111m) following our decision not to renew bulk investment bond deals written in 2008 at lower margins to secure distribution relationships. These deals generated net inflows of £597m in 2008 and led to net outflows of £581m in 2009. Net outflows for legacy life were £1,289m (2008: £1,564m), the majority of which is conventional with profit business and generates minimal shareholder margin.
4 2008 figures have been restated to exclude offshore bond business, which is now reported within the Europe results. 5 Discounted payback period is not applicable due to new business loss. 6 2009 and 2008 discounted payback period is immediate.
The Wrap platform continued to grow as the number of customers and advisers using the platform increased further. At 31 December 2009, the number of Wrap customers increased to 31,600 from 16,900 at 31 December 2008, while the number of independent financial adviser (IFA) firms using the platform had grown to 583 compared to 409 at 31 December 2008. Total funds on the platform more than doubled to £3.6bn compared to £1.7bn as at 31 December 2008 and momentum is expected to continue.
Group pensions benefited from the successfully completed migration of the BT Scheme, which involved the transfer of around three quarters of the existing 18,000 scheme members to the new Standard Life scheme. Development work also continued on our enhanced trustee-based corporate proposition, which is due to launch in April 2010, and our corporate employee wealth plan, which will provide a compelling proposition for both employers and employees through an integrated savings and benefits platform. We believe the sustainability and flexibility of our corporate proposition, combined with the Standard Life Group’s financial strength allows us to win profitable new business.
In February 2010, we launched our Active Money Personal Pension, which has been developed to adapt to each customer’s changing financial needs during their lives. We are also working on opportunities in the long-term savings and investments market as part of the strategic relationship with Barclays UK Retail Banking (Barclays).
UK EEV operating profit before tax £631m (2008: £637m, 2007: £634m)
The overall impact of persistency experience variance and assumption changes was positive £70m (2008: negative £17m). The positive variance was primarily due to revised long-term assumptions on individual pensions, reflecting improved experience on our back book. Development costs of £18m (2008: £30m) mainly related to development of our group pension proposition, as well as implementing legislative changes.
The underlying results exclude the impact of volatility arising from the accounting mismatch of subordinated liabilities being measured at amortised cost, while the associated assets are measured at fair value. They also exclude restructuring costs relating to the Continuous Improvement Programme.
The savings and mortgages business offered retail savings and mortgage products in the UK, via intermediaries and direct to customers, all through telephone and internet-based platforms. The ownership of Standard Life Bank plc was formally transferred to Barclays Bank PLC on 1 January 2010.
The savings book experienced strong growth of 16% to £5.8bn (2008: £5.0bn), with Individual Savings Accounts and business accounts performing well during 2009. SIPP and Wrap balances represent £1.9bn (2008: £1.5bn) of total savings balances.
The growth in retail savings, combined with the reduction in wholesale funding and careful balance sheet management, drove an increase in interest margin to 88bps (2008: 54bps). The rise in interest margin, coupled with continued focus on cost efficiency, improved the cost income ratio to 32% (2008: 58%). As a result, return on equity improved to 14.6% (2008: 6.1%).
The mortgage portfolio continued to perform well despite the adverse economic conditions, with arrears figures remaining low in comparison to the CML average. Only 0.84% of total mortgages were three or more months in arrears or in repossession at the end of 2009, almost a third of the CML industry average of 2.51%, while the average indexed loan to value ratio remained stable at 46% (2008: 46%). Impairment charges increased to £8m in 2009 (2008: £5m), but net write-offs for 2009 were only £3m (2008: £1m).
Standard Life Canada is a long-term savings and investments business offering a range of savings, retirement and insurance products. With a strong focus on the needs of its 1.3 million retail and corporate customers, the business continued to build client and distributor relationships and introduce innovative solutions to protect clients’ assets.
New business contribution increased to £46m (2008: £34m) and PVNBP margins improved to 1.9% (2008: 1.5%), as a result of a more profitable sales mix in all lines. Internal rate of return decreased to 14% (2008: 17%) and the discounted payback period lengthened to 10 years (2008: 8 years), largely due to a market-led change in business mix towards higher strain products.
EEV operating profit before tax EEV operating profit before tax decreased by 19% in constant currency to £192m (2008: £215m). The core element accounted for £177m (2008: £146m), an increase of 10% in constant currency driven by an improvement in total expected return to £136m (2008: £113m). NBC increased to £46m (2008: £34m). The efficiency result amounted to a loss of £8m (2008: profit £31m), mainly due to higher unit costs in our investment funds resulting from lower average asset values than in 2008. Back book management delivered a profit of £23m (2008: £38m), largely because of improved lapse experience in group savings and retirement and improvements in annuitant mortality.
* 2008 and 2007 have been restated to reflect the inclusion of offshore bonds within the Europe results. Prior to 2009 this was included within UK.
The operations in Europe consist of Standard Life Ireland, Standard Life Germany, which operates in both Germany and Austria, and Standard Life International, the offshore business based in Dublin. The European businesses offer high quality and customerfocused investment and pension solutions for individual and corporate clients. Standard Life Ireland celebrated its 175th anniversary in 2009 with a series of awareness-raising events.
In Germany, sales of £407m (2008: £603m) were 40% lower than 2008 in constant currency. This reflects weak consumer confidence and a continuing preference for German domestic life insurers, combined with a less pronounced fourth quarter sales uplift than in previous years.
New business contribution in Europe decreased to £13m (2008: £31m) due to lower sales volumes in Germany and the offshore business. This was partially offset by an increase in Ireland due to higher sales and improved acquisition costs. The overall internal rate of return and discounted payback period deteriorated because of lower sales volumes which were not balanced by a proportionate reduction in the cost base in Germany and the offshore business.
In Europe we remain focused on strengthening our existing operations and improving efficiency whilst responding to the difficult market conditions with innovative solutions for customers and distributors.
The investment range was enhanced by the addition of the GARS products from Standard Life Investments, which generated sales across various product lines in Germany and Ireland. The launch of the Pension Support Fund further strengthened the corporate pensions offering in Germany.
£45m £108m1 £50m2 £48m2 1 2006 results are shown on a pro forma basis.
Asia PVNBP sales £617m £206m £266m £495m 1.4 Business segment performance continued
Standard Life has a growing position in the Asia life and pensions market with joint venture companies in India and China and a wholly owned subsidiary in Hong Kong, each having good potential in their respective markets.
1 2009 Asia results have been prepared on an EEV basis for the first time. Prior to 2009 these were included on an IFRS basis. Comparatives have not been restated.
In China, sales were 12% below 2008 in constant currency at £116m (2008: £109m). However, this reduction reflects a deliberate shift away from business with low profitability to a focus on increasing the proportion of regular premium business, which increased by 58%2 compared to 2008 in constant currency. In addition, regulatory restrictions across the whole market constrained expansion into new cities during 2009.
EEV operating profit before tax EEV operating profit before tax for covered business of £6m is reported for the first time in 2009. Within this, a new business contribution of £15m represents a margin of 2.5% of PVNBP. This is equivalent to a post-tax margin of 11.1% of annual premium equivalent. The new business contribution allows for the full costs of acquiring new business in 2009 whilst development costs of £14m reflect the further costs incurred for growing the business in future years.
IFRS underlying loss before tax Asia IFRS underlying loss of £27m (2008: loss £35m) reflects the continuing investment in developing the operations in the region.
2 Regular premiums in China of £3m for Group protection business have been reclassified to single premiums for the 12 months to 31 December 2008.
The focus at Standard Life Investments is to deliver superior investment performance, supported by exceptional client service. Standard Life Investments operates as a global team, with its investment process underpinned by its ‘focus on change’ philosophy, which has proved itself to be robust and repeatable in both good and bad market conditions. Over the 11 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued during 2009, despite the challenging market conditions.
Standard Life Investments delivered a strong performance in 2009, against the background of volatile and dislocated markets. The strong sales momentum of past years continued, with a high proportion of new business from outside the UK. Strong inflows across our international markets resulted in a 67% increase in third party net inflows, driving the increase in third party AUM to the record level of £56.9bn (2008: £45.5bn). Revenue fell as a result of the weaker market conditions but this was offset by the increase in new business flows, increased profits from our joint venture in India and a tightly controlled cost base which together delivered EBIT of £80m (2008: £82m) and a record EBIT margin of 32%. Our continued focus on serving existing clients and driving sales to new clients through strong investment performance, product innovation, global distribution and high levels of customer service has paid off. Although the economic downturn may not be completely over, this robust performance means that Standard Life Investments is entering potentially more stable market conditions in very good shape.
The pipeline for institutional and retail business remains encouraging with fixed income and global absolute return strategies (GARS) products attracting a lot of interest, increasingly from outside the UK. There is also very positive demand for our mutual funds in the UK and for our SICAVs in continental Europe, and the retail product range was expanded in 2009 to include the Strategic Bond Fund, the UK Equity Recovery Fund and the European Equity Income Fund.
EBIT held up extremely well in the face of difficult trading conditions at £80m (2008: £82m). Revenue fell 8% as a result of the fall in average market values but there was a strong performance from our joint venture in India. Costs were tightly controlled whilst allowing for continued investment in the business to sustain our longer-term growth. These measures resulted in a record EBIT margin of 32% (2008: 30%) for the year.
IFRS equity attributable to equity holders of Standard Life plc £3,457m £3,407m 1%
Capital and cash generation from existing business 567 (21) 546 546 - 546
The Group’s IFRS statement of cash flows is included in the IFRS Group financial statements section of this report. This statement combines cash flows relating to both policyholders and equity holders, but the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital. An analysis of the movement in the EEV shareholders’ net worth is representative of underlying shareholder capital and cash flow. Under existing EEV principles, we are also required to identify required capital for all covered business. Increases/(decreases) in required capital will not reduce the shareholders’ net worth because no external cash flows are made, but will decrease/(increase) the free surplus.
Effective risk management supporting ongoing solvency - EEV operating capital and cash generation: 2009: £414m (2008: £423m)
During the year, the Group paid the final dividend for 2008 of 7.7p per share, amounting to £168m and the 2009 interim dividend of 4.15p per share, amounting to £92m. In 2009 the previous dividend reinvestment plan (DRIP) was discontinued and a new Scrip dividend scheme introduced. The high take-up of this option reduced the capital required to pay the 2008 final dividend from £168m to £110m and the 2009 interim dividend from £92m to £48m. The Board proposes a final dividend of 8.09p per share, making a total of 12.24p (2008: 11.77p). This represents an increase of 4%, reflecting 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.
2009 figures above based on draft regulatory returns and 2008 based on final regulatory returns.
At 31 December 2009, the Group was classified as a ‘financial conglomerate’ as defined by the Financial Groups Directive (FGD), with the strength of our FGD surplus increasing by £0.1bn to £3.6bn. The Group capital resources remained broadly in line with the 2008 closing position, despite ongoing investment in the business. The quality of capital within the Group remains strong with only £0.8bn (31 December 2008: £0.8bn) and £0.7bn (31 December 2008: £0.7bn) of total Group capital resources classified as upper tier 2 and lower tier 2 respectively. Lower tier 2 capital contributes only 19% (31 December 2008: 20%) to the Group capital surplus and further illustrates the strength of our capital position.
Following the sale of Standard Life Bank plc on 1 January 2010 the Group is now classified as an ‘insurance group’ and from this date the Group capital surplus will be calculated in accordance with the Insurance Groups Directive (IGD). The Group’s capital surplus on an IGD basis is not expected to be materially different from the surplus on an FGD basis.
Analysis of movement in Group capital surplus The following table illustrates the key movements in the regulatory capital surplus for the year ended 31 December 2009: £bn £bn
Net movement in capital position of long-term business funds - -
Movement in capital resources of shareholder funds: Annuity reinsurance change - 0.1
Long-term business funds: • Impact of changing financial conditions on the capital resources and capital resource requirement of the HWPF and other longterm business funds
Group capital resources include the capital resources within the long-term business funds, but the FGD limits the amount that can be recognised to the level of the capital resources requirement for that fund. This resulted in a restriction of £0.1bn (31 December 2008: £1.3bn) and a net zero contribution to the Group capital surplus. In addition, capital resources amounting to £0.6bn within the shareholder fund are excluded from the Group capital surplus in order to remove capital which arises from intragroup arrangements.
Recourse cash flows arising on UK and Irish unitised contracts 191 243
Reconciliation of key capital measures The following diagram illustrates the key differences between the regulatory, IFRS and EEV capital measures at 31 December 2009: www.standardlife.com 35
The Group’s capital, as measured by the FGD, can be split into three elements: • Shareholder capital, used to invest in the strategy of the Group, covers the capital requirements borne directly by shareholders and manages risk borne by shareholders
While the latter two elements provide capital support for the Group, they do not form part of the shareholders’ regulatory capital. Shareholder capital can be measured under each of the Group’s reporting bases – regulatory, IFRS equity and EEV net worth. Each of these is a comparable measure of the net assets attributable to equity holders of the Group. In some cases, the regulatory rules for valuing assets and liabilities differ from IFRS accounting rules, resulting in a valuation adjustment of £0.8bn.
Capital management policy Matters related to management of the Group’s capital are reserved for the Board of Standard Life plc. The scope of the liquidity and capital management policy is wide-ranging and forms one pillar of the Group’s overall management framework. It operates alongside and complements the Group’s other policies and processes, in particular its risk policies and strategic planning process, and provides a framework for effective and consistent management of capital. The Group continues to develop its Enterprise Risk Management (ERM) framework to robustly link the processes of capital allocation, value creation and risk management.
Debt, facilities and liquidity The Group’s capital structure has been developed to provide an efficient capital base by using a combination of equity holders’ funds, subordinated debt and capital within the HWPF.
• Note 3.16 – Capital statement shows the external subordinated debt and the internal loans made across life and other operations.
Bond default allowances Shareholders are exposed to debt securities which back annuity liabilities in the UK and Europe and the liability in respect of longevity risk reinsured from SLAL’s HWPF. These debt securities amount to £2.0bn and comprise £0.7bn of government and government backed bonds and £1.3bn of other corporate bonds. There were no defaults in respect of assets backing UK and European annuity liabilities in 2009. The average yield deduction to allow for future defaults within the valuation of liabilities has been broadly maintained at 31 December 2008 levels. Debt securities in Canadian non-segregated funds amount to £6.0bn, including £2.3bn of corporate bonds. There were no defaults within this portfolio of debt securities during 2009 and the allowance for future defaults within the valuation of liabilities has been maintained at 31 December 2008 levels.
Financial assets valuation and exposures Asset-backed securities The Group’s total investment (including third party funds) in the asset-backed securities markets across both short-term treasury instruments and long-term fixed interest instruments is approximately £5.1bn or 2.9% (31 December 2008: £5.3bn or 3.3%) of Group assets under administration (AUA). These are predominantly UK securities. Of the total of £5.1bn, £1.2bn relates to shareholder funds, of which £0.9bn is AAA rated. The Group has continued to actively manage its exposure to asset-backed securities.
Market risk: Fixed interest Shareholder exposure to fixed interest risk arises from a number of sources, but is primarily attributable to asset liability mismatches in certain portfolios of liabilities. The extent of such mismatches has been reduced over the course of the year, most notably through improvements in cash flow matching of annuities written in the UK business post-demutualisation.
Fixed interest risk also arises within Canada, primarily as a consequence of the difficulty in obtaining long-dated fixed income assets to match the long-term liability cash flow which gives rise to consequential reinvestment risk.
Appetite The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group risk adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and will therefore establish robust risk limits which must be adhered to by Group companies.
Shareholder exposure to credit risk arises from a number of sources, but is primarily attributable to asset liability mismatches in certain portfolios of liabilities. The extent of such mismatches has been reduced over the course of the year, most notably through improvements in cash flow matching of annuities written in the UK business post-demutualisation. Credit risk also arises from exposure to the value of asset backed securities, and to variances on swap spreads used to manage certain investment risks of the Group.
The UK business also bears credit risks associated with the previously disclosed ‘Contract for Differences’ between Standard Life Assurance Limited and Standard Life Investments. This has resulted in a recovery in the IFRS underlying profit before tax in 2009 due to improvements in the value of underlying assets.
Definition The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected, which for the purpose of risk management includes liabilities of insurance and investment contracts.
Persistency Persistency within the UK business primarily arises as a consequence of variances in the value of future fund charges on unit linked funds and future recourse cash flow payments from the HWPF. Generally the value of such charges will fall if withdrawals are higher than expected.
We have an active approach to the management of longevity risk and demographic and expense risks in general.
• Maintenance of a portfolio (currently undrawn) of committed bank facilities
– Events after the reporting period of the IFRS Group financial statements.
Definition Operational risk is the risk of loss, or adverse consequences for the Group’s business, resulting from inadequate or failed internal processes, people or systems, or from external events.
• Projects and programmes: managing change and execution of projects through effective control, and embedding business as usual controls as part of the design of future processes
We recognise that to drive value for our shareholders, we need to build valuable, long-term and mutually beneficial relationships with our customers.
This is why last year we took significant action on behalf of around 100,000 customers who had invested in our Pension Sterling Fund. When the fund did not perform in the way that some of our literature said it would, we fully compensated all those affected.
In 2009, we launched the Active Money SIPP aimed at the ’Baby Boomer‘ generation. Our research showed that these people are approaching retirement in a very different way to previous generations. They are far more interested in an active retirement, perhaps taking the opportunity to travel, or forging a second career by setting up a business of their own. This insight helps us to understand the types of product that customers want from us – in this case a flexible pension product, and helps us build those long-term relationships that are valuable to consumers, our company and to shareholders.
We continually monitor our relationship with our customers across our businesses: UK
Our efforts to continuously improve the quality of services that we provide to our customers enable us to deliver market-leading customer service at low cost. Regular feedback from customers helps us to focus improvement activities on the elements of service our customers value most, and confirms that the relationship we share is improved as a consequence.
Our focus on customers was recognised during the year with a range of awards including: Life and pensions
• Money Marketing Awards: - Company of the Year (tenth consecutive year) - Best Pension Provider (sixth consecutive year)
We are strongly committed to delivering exceptional customer service and always put our customers at the heart of our thinking. In 2009, we established a European customer insight team to help us respond to customer needs and continue growing our already high level of customer satisfaction. All customer insight activities are designed to build our understanding of our existing and future customers. This will help to establish better relationships with customers and develop customer-centric market-leading propositions, as well as keeping retention rates high.
All Asia operations are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2009 by various awards received by our operations throughout Asia including: • Diamond EDGE 2009 – Enterprises Driving Growth and Excellence – Initiative – empowering financial consultants to access information for sales and customer servicing over the web
• Chief Information Officer (CIO) 100 – 'The Ingenious 100' – A customised workflow-based solution for recruitment and licensing of life insurance agents catering to the regulator guidelines
• Top One Hundred Fund Manager of the Year (Harry Nimmo) – Citywire Awards
• Best UK Small Cap – Money Observer Investment Trust Awards 42 www.standardlife.com
1.8 Our people To become a more customer-focused business it is vital that we develop and harness the talents of our people and ensure that our people practices are both aligned and powerful in delivering change. In 2009, we began transforming our performance, talent and leadership practices to help strengthen the relationship that each individual employee has with our business. This is important because we believe that highly engaged people increase productivity and have a positive effect on profit and shareholder value.
A key priority for Standard Life is to ensure that we have the depth and flexibility of talent we need for the future, as well as powerful and consistent leadership at all levels of the organisation.
• For our senior leaders, we have an established process targeted at accelerating the development of those with executive potential. We currently have two groups (with a total of over 50 leaders) participating in this process.
The most important non-GAAP measures in the Business review include European Embedded Value (EEV) information and IFRS underlying profit.
The financial results are prepared on both an EEV basis and an IFRS basis. All EU listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to ‘covered’ business, which mainly comprises the Group’s life and pensions business. Non-covered business is reported on an IFRS basis. The EEV financial results in Section 1.2 of the Business review, and in the EEV financial statements section of this report, have been prepared in accordance with the EEV methodology applied by the Group in Note 2.16 of the EEV financial statements section of this report for 2009, and in the relevant EEV methodology note included in the Annual Report and Accounts 2008 in respect of the comparative period. The IFRS financial results in Section 1.3 of the Business review and in the IFRS Group financial statements section of this report have been prepared on the basis of the IFRS accounting policies applied by the Group in Note 3.1 of the IFRS Group financial statements section of this report.
The 2009 IFRS reconciliation of Group underlying profit to profit for the year, presented on page 86 of this report, presents profit before tax attributable to equity holders adjusted for non-operating items. The 2009 EEV consolidated income statement, on page 46 of this report, presents EEV profit showing both operating and non-operating items. In doing so, the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group.
Profit on in-force business is the statutory surplus for the year adjusted for the amortisation of deferred acquisition costs.
Effect of economic assumption changes (539) - (539) 48 - 48
Restructuring and corporate transaction expenses3 (58) (1) (59) (70) (2) (72)
Volatility arising on different asset and liability valuation bases - 40 40 (15) (94) (109)
Tax attributable to: 1 The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 and has therefore been classified as a discontinued operation. Refer to Note 2.1 – Basis of preparation. 2 Global investment management operating profit before tax is stated after excluding profits of £33m (2008: £45m) which have been generated by life and pensions business. 3 Refer to IFRS financial information Note 3.3 – Administrative expenses. 4 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 2.16 – EEV methodology.
Weighted average number of ordinary shares on a diluted basis (millions)
EEV operating profit before tax from continuing operations of £859m (2008: £907m) less attributed tax on operating profit from continuing operations of £251m (2008: £278m). 2 EEV operating profit before tax from discontinued operations of £60m (2008: £26m) less attributed tax on operating profit from discontinued operations of £28m (2008: £6m).
Aggregate tax effect of items not recognised in income statement 27 (53)
Total comprehensive income/(expense) for the period attributable to equity holders from discontinued operations 50 (76)
Notes to the EEV financial information 2.1 Basis of preparation The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS), but the timing of recognition of profits is different.
A detailed description of EEV methodology is provided in Note 2.16. There have been no significant changes to EEV methodology from that adopted in the previous reporting period except as noted below.
A detailed description of EEV covered business is provided in Note 2.16 – EEV methodology.
The inclusion of Asia business for the first time on an EEV basis is reflected in the EEV results for the 12 months to 31 December 2009 with an opening adjustment of £33m, which captures the PVIF and cost of capital as at 1 January 2009 and removes any intangibles.
Under the EEV Principles and Guidance we are required to provide business classifications which are consistent with those used for the primary statements. In the IFRS financial statements the Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8 for the first time. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business. The Heritage With Profits Fund time value of options and guarantees (HWPF TVOG) is disclosed separately in EEV, as explained in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement.
Within the IFRS segmental analysis, UK operations primarily comprise life and pensions business and healthcare business. We distinguish between covered and non-covered business within our EEV results. UK non-covered business is shown within Note 2.6 – Non-covered business.
The Europe segment within the IFRS financial statements includes the Germany and Ireland life and pensions businesses which are treated as covered business under EEV. The Ireland operations include the offshore bond business, which is sold by Standard Life International Limited (SLIL). Prior to the implementation of IFRS 8, the results for SLIL were included within the UK covered business under EEV. Comparative results for the 12 months to December 2008 have been restated for UK and Europe to reflect this change.
In March 2007, we announced our aim to reduce underlying costs by a further £100m by 2009. This cost efficiency target was achieved one year early. In March 2009, we announced the next phase of efficiency savings with a target of achieving a further £75m of annualised efficiency savings by the end of 2010. In the 12 months to 31 December 2009, £50m of costs have been incurred in progressing this initiative (12 months to 31 December 2008: £45m).
To reflect the sale of Standard Life Bank plc, the banking business, which was previously included within UK non-covered, has now been classified as a discontinued operation. The presentation of the 2008 comparatives has been reclassified accordingly.
Expected return on free surplus (27) 5 3 3 - (16)
HWPF TVOG Total 12 months to 31 December 2008 Notes £m £m £m £m £m £m
Contribution from in-force business: Expected return on existing business 289 109 33 - - 431
An analysis of profit after tax by territory is provided in Note 2.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
The EEV operating profit before tax has been increased by £111m arising from the impact of the removal of the market risk to the tax treatment of future shareholder transfers from the HWPF (refer to Note 2.16 – EEV methodology), calculated on opening economic assumptions.
The reduction in the expected return on existing business in the UK is primarily due to lower opening PVIF and lower opening risk discount rates.
Profits within investment return and tax variances reflect the impact of favourable investment outcomes in the HWPF, which reduces the burnthrough risk, and in Europe. Investment gains in the UK were offset by increases in subordinated debt liabilities, whilst performance in Canada was adversely impacted by losses on property values. In the UK, improved modelling of our index-linked deferred annuities generated a profit of £59m, whilst revised tax modelling of UK tax due on profits from branches resulted in a loss of £47m.
Transfer back of surplus to Standard Life Investments (19) (3) (2) - - (24)
Opening adjustments in Asia for the 12 months to 31 December 2009 reflect the inclusion of Asia on an EEV basis for the first time. This adjustment is explained in more detail in Note 2.1 – Basis of preparation. The results for the 12 months to 31 December 2008 have not been restated and include Asia on an IFRS basis.
Opening adjustments in the UK for the 12 months to 31 December 2008 reflect the inclusion of Sigma mutual funds in covered business for the first time.
2.2 Segmental analysis – covered business continued (c) Segmental analysis of opening and closing EEV
margin3 12 months to 31 December 2009 £m £m £m £m PVNBP
1 The PVNBP new business sales are different from those in the full year new business press release issued on 3 February 2010 as they incorporate year end noneconomic assumption changes. 2 The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums. 3 PVNBP margins are calculated as the ratio of the value of new business to the present value of new business premiums and are based on the underlying unrounded numbers. 4 The offshore bonds business, previously included within UK savings and investments, is now included within Europe. Results for the 12 months to 31 December 2008 have been reclassified to reflect this change. 5 Regular premiums in China of £3m for Group protection business have been reclassified to single premiums for the 12 months to 31 December 2008.
Tax variances in the UK reflect favourable experience and increases to deferred tax assets, whilst the £8m profit in Europe mainly reflects the successful agreement of prior year tax affairs in Ireland.
‘Other’ UK variances include the £111m benefit from reduction in market risk referred to in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement, plus the EEV operating profit benefit from a £63m release of deferred annuity reserves (12 months to 31 December 2008: £98m), offset by £38m of modelling changes for life business. Within Europe, ‘other’ variances include £15m of modelling changes to expenses.
The £143m of HWPF TVOG ‘other’ variances primarily reflect the benefits of changes in asset allocations and hedging arrangements which reduced the HWPF burnthrough risk.
The ‘other’ assumption change in Canada mainly relates to reductions in policy charges on existing business.
For the 12 months to 31 December 2008, £119m of 'other' operating assumption changes, consisting of £96m in the UK, £12m in Europe and £11m in HWPF TVOG, arose from the reinsurance of UK immediate annuity liabilities.
2.6 Non-covered business Non-covered business EEV operating profit is represented by IFRS normalised underlying profit* as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business.
Transfer back of net worth from covered business 24 (20) - 1 5 * The only difference between IFRS normalised underlying profit and IFRS underlying profit arises within global investment management, as described in Note 2.6(b) – Non-covered business – Global investment management EEV profits before tax.
‘Other’ movements in the UK EEV net assets predominantly relate to the UK non-covered pension scheme liability of £56m (12 months to 31 December 2008: £nil) and deferred tax liability of £6m (12 months to 31 December 2008: £23m).
‘Other’ movements in Other including Group corporate centre predominantly relate to the £102m issue of share capital other than in cash in relation to the Scrip dividend paid by Standard Life plc.
Global investment management profits are included in EEV on a look through basis. This means that the profits from global investment management generated from the life and pensions business are allocated to covered business. However, the excluded life and pensions profits include £19m (12 months to 31 December 2008: £20m) of profits relating to products which are actively marketed and sold to third parties through global investment management distribution channels. If these profits are added to the third party profits disclosed for non-covered business, there are £61m (12 months to 31 December 2008: £68m) of third party related profits for global investment management.
Less: Third party related life and pensions profits before tax 19 20
Life and pensions look through profits before tax excluding third party profits 14 25
Included within ‘other’ are the head office costs relating to the Europe and Asia businesses. These costs are included within the Europe and Asia segments of the IFRS financial statements.
2.7 EEV reconciliation of movements in consolidated statement of financial position 12 months to £m £m
The opening adjustment for the 12 months to 31 December 2009 relates to the inclusion of Asia on an EEV basis for the first time. The EEV results for the 12 months to 31 December 2008 have not been restated.
For the 12 months to 31 December 2009, Asia is included within the covered business results for the first time on an EEV basis. This is reflected in the opening adjustment of £33m.
Contribution from in-force business: Expected return on existing business (1) 4 3 144 147
Expected return transfer to net worth 342 (3) 339 (339) -
Aggregate tax effect of items not recognised in income statement - - - - 62 www.standardlife.com
Expected return transfer to net worth 381 (1) 380 (380) -
Actuarial losses on defined benefit pension schemes (16) - (16) - (16)
Contribution from in-force business: Expected return on existing business - - - 24 24
Expected return transfer to net worth 73 1 74 (74) -
Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 2.2(c) – Segmental analysis – covered business – Segmental analysis of opening and closing EEV is net of these liabilities.
The increase in the value of the UK and Canada subordinated debt liabilities reflects the reduction in credit spreads during 2009. The impact of this movement has been to reduce non-operating profit in UK and Canada as shown in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement. For Canada, however, this has been offset by the Group EEV consolidation adjustment in respect of the Canada subordinated liability, as shown in the EEV consolidated income statement.
* Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 5.36% for annuities that are level or subject to fixed escalations and 4.11% for annuities where escalations are linked to a price index. ** Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds. ***1.367% in 2009. The rate in subsequent years is based on a moving 30-year bond yield less a variable deduction.
Risk discount rates – in-force business 1 Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 7.38% and 6.56% respectively. The weighted average for
Risk discount rates – in-force business 1 Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 6.78% and 6.20% respectively. The weighted average for
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 2.20 2.80 3.20 2.20 2.80
Risk discount rates – new business 1 As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2008. 2 Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 6.11% and 5.83% respectively. The weighted average for
Risk discount rates – new business 1 As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2007. 2 Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 7.41% and 7.29% respectively. The weighted average for
The Asia PVIF and cost of required capital is calculated using a ‘risk neutral’ approach whereby projected investment returns and discount rates are based on risk free rates. The risk free rates used were: As a result of this risk neutral approach there is no requirement to hold a market risk margin within the risk discount rate.
2.13 Principal economic assumptions – stochastic calculations The level of the TVOG is generally calculated using a stochastic projection. This requires 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 – EEV methodology.
The ESG simulates future economic environments in a market consistent manner. The outputs of the ESG include: • Cash account index
Cash and bond returns These variables are calibrated using the following instruments: • Conventional government bond yields adjusted to allow for any ‘convenience premium’ associated with government bond prices
Dividend and rental yields Dividend yields are derived from current market observable yields (FTSE All Stocks for UK and Euro Stoxx 50 for Europe) and a long-term best estimate.
Rental yields are derived from rental income on our actual portfolio of Property (with three month lag) and a long-term best estimate.
2.14 Foreign exchange A description of the approach to the currency translation for foreign entities is provided in Note 2.16 – EEV methodology.
• Interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties
• 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
The sensitivity of the Canada embedded value as shown above includes the effect of changes in the market value of the subordinated liability. Whilst Group EEV is adjusted for the different subordinated debt valuation bases used for covered and non-covered business as explained in Note 2.16 – EEV methodology, the impact of these sensitivities on the Group EEV consolidation adjustment is not included in this sensitivity analysis.
• Those elements of Wrap business that are contained within a long-term product wrapper i.e. bonds, SIPPs and mutual funds
Europe covered business consists of: • The Group’s Germany branch of Standard Life Assurance Limited (SLAL)
• The Group’s offshore business, which is sold by Standard Life International Limited (SLIL)
• The Group’s share of results in the joint venture in China, Heng An Standard Life Insurance Company Limited, at 50% for the 12 months to 31 December 2009 (during the 12 months to 31 December 2008: 50%)
The Group’s non-covered business mainly includes the business of Standard Life Bank, Standard Life Healthcare, Standard Life plc, the third party global investment management business of Standard Life Investments, the non-covered business of Standard Life Savings and other non-life and pensions entities.
The value of future equity holders’ cash flows is calculated for each material business unit on an after-tax basis, projected using best estimate future assumptions as described below.
Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing global investment management and other services where these relate to covered business. This is referred to as the ‘look through’ into service company expenses.
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the equity holders’ fund, plus the value of the equity holders’ interests in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business.
The main elements of non-market risk which are stress tested are lapse, mortality, expense and credit risk assumptions. Benefits of diversification between risk types are allowed for in deriving the risk margins in line with our internal capital model.
The values of the risk discount rates used for this reporting period are provided in Note 2.12 – Principal economic assumptions – deterministic calculations – covered business.
In Asia, the PVIF and cost of required capital is calculated using a ‘risk neutral’ approach whereby projected investment returns and discount rates are based on risk free rates. As a result, there is no need for an additional market risk margin in the discount rate. Non-market risk is deducted directly from the PVIF using a ‘cost of capital’ approach on the risk capital arising from the key sources of non-market risk. For the Asia business, this methodology would give a similar result to the methodology used in the UK, Europe and Canada since the calibration of a risk discount rate would have allowed for the market and non-market risks.
• The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the time the TVOG is calculated www.standardlife.com 77
Equity holder assets are at risk if the resources of these with profits funds are insufficient to pay the guaranteed benefits. The level of the TVOG has been calculated using stochastic techniques. The TVOG has reduced both the NBC as well as the closing PVIF for Europe.
Asia The TVOG in Asia arises from guarantees and options given to with profits business written in India and China.
The Group’s offshore business, which is sold by SLIL, is included within Europe results but has the same economic assumptions as UK covered business.
In determining future expenses in relation to covered business, no allowance has been made in the EEV or the NBC for any allocation of Group corporate centre costs.
Development expenses represent specific expenses incurred which are considered temporary in nature and are not expected to occur again. Costs 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.
Restructuring expenses for covered and non-covered business include the current year cost of the Continuous Improvement Programme (CIP) and any additional restructuring expenses consistent with those identified in the IFRS underlying profit adjustments. The total restructuring expenses are included together with the cost of any corporate activity in restructuring and corporate transaction expenses.
Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits. IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19 Employee Benefits on the amount of any surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The interpretation has been taken into consideration in determining the treatment of the surplus arising in respect of the UK defined benefit plan as at 31 December 2008.
Definition of new business New business includes new policies written during the period and some increments to existing policies.
• Pensions vesting under other group contracts and individual pensions are included as new business
For Asia, the new business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts.
During the year, a loan was made to the HWPF by Standard Life plc, repayment of which is contingent on the emergence of recourse cash flows and surplus in the HWPF (‘contingent loan agreement’). A transfer to equity holders was then made to transfer the remaining unallocated surplus to equity holders without equity holder tax arising. As a result of this the market risk associated with unallocated surplus was reduced. Future transfers to equity holders from the HWPF will, in the first instance, take the form of repayments under the contingent loan agreement. Such transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers to equity holders will move toward the standard rate of corporation tax. The impact of this on current year results is provided in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement.
Details of the exchange rates applied are provided in Note 2.14 – Foreign exchange.
Equity movements attributable to third party interest in consolidated funds - 22
Share of other recognised income from associates and joint ventures - 2
Aggregate equity holder tax effect of items not recognised in income statement 28 (53)
Other comprehensive (expense)/income for the year from continuing operations (37) 300
Total comprehensive income for the year from continuing operations 101 366
Loss attributable to non-controlling interests (33) - (33) (83) - (83)
Underlying profit before tax attributable to equity holders and adjusted items 198 60 258 45 26 71
Adjusted for the following items: Volatility arising on different asset and liability valuation bases 3.6 (18) 40 22 (47) (94) (141)
Restructuring and corporate transaction expenses 3.3 (58) (1) (59) (70) (2) (72)
Impairment loss on discontinued banking operations 3.5 - (10) (10) - - -
Tax (expense)/credit attributable to: Total tax (expense)/credit attributable to equity holders’ profits 18 (42) (24) 138 21 159
Assets of operations classified as held for sale 3.17 9,395 -
Customer accounts related to banking activities and deposits by banks - 6,991
interests Total equity 2009 £m £m £m £m £m £m £m
Issue of share capital other than in cash 6 96 - - 102 - 102
Profit/(loss) for the year - - 100 - 100 (83) 17
Total comprehensive income/(expense) for the year - - 210 163 373 (83) 290
Issue of share capital other than in cash 1 - - - 1 - 1
Vested employee share-based payment schemes - - - (2) (2) - (2)
Other movements in non-controlling interests in the year - - - - - 26 26 88 www.standardlife.com
Capital flows from/(to) non-controlling interests and third party interest in consolidated funds
The preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The accounting policies as set out in the Group’s Annual Report and Accounts for the year ended 31 December 2009 have been applied in the preparation of this preliminary announcement. The Group’s accounting policies have not changed since the issue of the Annual Report and Accounts 2008, except as described below.
From 1 January 2009, the Group has adopted the requirements of the following new standards: (i) IFRS 8 Operating Segments, which supersedes the disclosure requirements of IAS 14 Segment Reporting. In accordance with the provisions of the standard, comparatives have been restated. The standard has no financial impact but adoption has resulted in changes to the Group’s segmental disclosures, including the reportable segments themselves. In compliance with the requirements of IFRS 8, the Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed.
(ii) IAS 1 (revised) Presentation of Financial Statements. The revised standard includes an option to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present both statements. The preliminary announcement has been prepared under the revised disclosure requirements and adoption has not had any financial impact thereon.
Europe The operations in Ireland, Germany and Austria provide life and pension products.
3.2 Segmental analysis continued (b) Reportable segments – income statement, underlying profit and asset information continued
Tax attributable to policyholders’ returns 294 - 5 - - - - 299
Profit for the year from discontinued operations 42 - - - - - - 42
Profit/(loss) for the year 198 (41) 41 (27) 51 (42) - 180
Loss attributable to non-controlling interests from continuing operations 33 - - - - - - 33
Reconciliation to Group underlying profit: Tax (credit)/expense attributable to equity holders’ profits: Adjustments to reconcile the Group underlying profit to profit for the year: Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items: Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items 259 (7) 45 (27) 66 (45) - 291
Other segment income 443 109 24 - 162 6 (34) 710 Inter-segment revenue 21 1 - 3 105 560 (690) -
Share of profits/(losses) from associates and joint ventures 112 4 7 (25) (4) 7 - 101
Loss for the year from discontinued operations (49) - - - - - - (49)
Reconciliation to Group underlying profit: Tax (credit)/expense attributable to equity holders’ profits: Adjustments to reconcile the Group underlying profit to profit for the year: From continuing operations 69 1 3 - 42 2 - 117 From discontinued operations 96 - - - - - - 96
Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items: From continuing operations 212 (102) 48 (35) 42 (37) - 128 From discontinued operations 26 - - - - - - 26
Other expenses included in the income statement include: Amortisation of deferred acquisition costs1 110 11 42 - 2 - - 165
Depreciation of property, plant and equipment1 - 2 1 - - 7 - 10 Interest expense: From continuing operations 121 18 3 - 2 112 (126) 130 From discontinued operations 638 - - - - - - 638
Segment assets 107,611 17,458 8,383 41 509 804 (924) 133,882 Investments in associates and joint ventures 2,569 127 202 107 15 78 - 3,098
Inter-segment transactions are entered into under normal commercial terms and conditions that would be available to unrelated third parties. The allocation of total net revenue presented above is based on customer location and this basis is not materially different to geographical origin. The Group has a widely diversified policyholder base and is therefore not reliant on any individual customers. The Group utilises additional measures to assess the performance of each of the reportable segments, which are presented in the European Embedded Value information.
Interest expense includes interest payable on customer accounts and other funding instruments within the banking operation of the Group. Interest expense of £123m (2008: £129m) in respect of subordinated liabilities is included within finance costs of which £8m (2008: £20m) relates to discontinued operations. For the year ended 31 December 2009, total interest expense is therefore £373m (2008: £768m).
Restructuring costs from continuing operations incurred during the year of £59m (2008: £71m) include £50m of expenses in relation to the Group’s Continuous Improvement Programme (CIP) (2008: £44m) and other restructuring costs of £9m (2008: £3m) of which £5m (2008: £nil) relates to transaction costs in relation to the sale of Standard Life Bank plc. Restructuring costs for the year ended 31 December 2008 include £24m of costs associated with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc. On 30 April 2008, Standard Life Investments (Global Liquidity Funds) plc restructured one of its sub-funds, changing the pricing structure from an amortised cost to marked to market basis. The total costs to the Group associated with the restructuring of the sub-fund at the date of the transaction were £39m, of which £24m are restructuring costs and £15m is recognised in net investment return since it reflects the difference between the amortised cost and marked to market value of assets recognised directly on the consolidated statement of financial position.
Other administrative expenses in the year ended 31 December 2008 include £102m related to an expense incurred in respect of a unit linked fund, the Pension Sterling Fund. In January 2009, the value of units in that fund was reduced to reflect reductions in the market value of certain instruments held by the fund. In February 2009, in order to put customers invested in that fund back into the position they would have been before the valuation adjustment, the Group injected cash into the fund. The cost was accrued within other administrative expenses for the year ended 31 December 2008.
The share of tax of associates and joint ventures is £9m (2008: £3m) and is included above the line ‘Profit/(loss) before tax’ in the summary consolidated income statement in ‘Share of (losses)/profits from associates and joint ventures’.
3.4 Tax expense/(credit) continued Tax relating to components of other comprehensive income is as follows: £m £m
The profit/(loss) included in the consolidated income statement in respect of the discontinued banking operations is as follows: Revenue
Loss recognised on the measurement of the assets of disposal group (10) -
The comprehensive income included in the consolidated statement of comprehensive income in respect of the discontinued operations is as follows: Profit/(loss) for the year from discontinued operations 42 (49)
The analysis of assets and liabilities of the discontinued banking operations classified as held for sale as at 31 December 2009 is presented in Note 3.17 – Assets and liabilities of operations classified as held for sale.
Profit attributable to equity holders of Standard Life plc (£m) 213 100
Basic earnings per share from discontinued operations (pence per share) 1.9 (2.3)
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares – share awards and share options awarded to employees.
Diluted earnings per share from discontinued operations (pence per share) 1.9 (2.3)
The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 2 million (2008: 4 million). The effect of these dilutive potential ordinary shares did not impact the profit attributable to equity holders of the Company.
Earnings per share is also calculated based on the underlying profit before tax and certain non-operating items after tax as well as on the profit attributable to equity holders. The Directors believe that earnings per share based on underlying profit provides a better indication of operating performance.
Underlying profit before tax attributable to equity holders 258 11.7 71 3.3
Volatility arising on different asset and liability valuation bases 22 1.0 (141) (6.5)
Tax (expense)/credit attributable to: Loss attributable to non-controlling interests 33 1.6 83 3.8
3.8 Dividends The Company paid a final dividend of 7.7 pence per share (final 2007: 7.7 pence) totalling £168m in respect of the year ended 31 December 2008 on 29 May 2009 (final 2007: £168m) and an interim dividend of 4.15 pence per share (interim 2008: 4.07 pence) totalling £92m (interim 2008: £89m) in respect of the year ended 31 December 2009 on 16 November 2009.
On 15 May 2009, the Group’s equity holders approved the introduction of the Scrip dividend scheme, effective for the final 2008 dividend payment onwards. Investors taking part in the Scrip scheme receive their dividend entitlement in the form of shares rather than cash. The distribution under Scrip is recorded as an appropriation of retained earnings. Dividends paid during the year ended 31 December 2009 comprise £102m settled by the issue of shares under the Scrip scheme and £158m paid in cash.
Shares issued in lieu of cash dividends 55,018,211 6 - -
Shares issued in respect of employee share plans 630,003 - 559,061 -
Shares issued in respect of share options 2,842,293 - 3,142,947 1
The Group also operates a Long-Term Incentive Plan (LTIP) for executives and senior management. During the year ended 31 December 2009, 2,842,293 (2008: 3,142,947) ordinary shares were issued on exercise of share options in respect of the LTIP.
The Heritage With Profits Fund (HWPF) was established as part of the demutualisation transaction on 10 July 2006. Under the Scheme of Demutualisation (the Scheme) certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders, and the component related to contracts whose future cash flows will remain in the HWPF, to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining policies invested in the fund.
On 31 December 2009, Standard Life plc lent £588m to Standard Life Assurance Limited (SLAL) HWPF under a contingent loan agreement (a contingent recourse cash flows loan, as defined under the Scheme). Under the Scheme this resulted in an obligation arising in the HWPF to transfer the loan proceeds (the ‘securitisation receipt’) to the SLAL Shareholder Fund. The securitisation receipt will be transferred in March 2010. As a result of this transfer, the SLAL Shareholder Fund will hold a limited recourse loan issued by Standard Life plc. As the repayment of this limited recourse loan is contingent on the emergence of recourse cash flows and surplus in the HWPF, the obligation to transfer, and the subsequent transfer of, the securitisation receipt is not treated as an allocation to shareholders from the HWPF. Therefore the arrangement had no impact on equity holders’ profits for the year. The purpose of the arrangement was to remove the market risk to the tax treatment of future shareholder transfers from the HWPF.
The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2009 was as follows: Participating insurance contract liabilities
Change in unearned premium reserve - (6) - (6) - (6)
Effect of changes in: Effect of: Total change in contract liabilities (2,831) (2,094) (2,096) (7,021) (5,559) (12,580)
The amounts included in Certificates of deposit, commercial paper and medium term notes and Securitisations - mortgage backed floating rate notes are wholly attributable to Standard Life Bank and have been reclassified as held for sale. Refer to Note 3.18 – Events after the reporting period.
The Group has issued certificates of deposit through its subsidiary Standard Life Bank plc (Standard Life Bank). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V. a wholly owned subsidiary of Standard Life Bank. Standard Life Bank has guaranteed the liabilities of its subsidiary in relation to the issuance of this debt. The guarantee is in respect of notes issued and is for a maximum of US$2bn and €4bn in relation to the US commercial paper and Euro commercial paper programmes respectively, and €4bn in respect of the medium term note programme. This guarantee is internal to the Group and is considered a financial guarantee contract under IAS 39 Financial Instruments: Recognition and Measurement.
Standard Life Bank certificates of deposit – GBP 0.91% 4.13% 120 228
Standard Life Funding B.V. commercial paper – GBP 1.25% 6.20% 75 144
Standard Life Bank medium term notes – GBP 2.38% - 513 -
Total certificates of deposit, commercial paper and medium term notes 816 573
Loans are issued by the Group, which are subject to securitisations. Under this arrangement, the beneficial interest in these mortgages is transferred to special purpose entities (SPEs). The issue of mortgage backed floating rate notes by the SPEs funded the purchase of the mortgages.
3.11 Borrowings continued (b) Securitisations – mortgage backed floating rate notes continued
Lothian Mortgages No. 3 plc – GBP – Maturity 2039 0.88% 6.47% 626 730
Lothian Mortgages No. 4 plc – EUR – Maturity 2040 0.83% 5.12% 27 175
Lothian Mortgages No. 4 plc – GBP – Maturity 2040 0.73% 6.25% 563 571
Lothian Mortgages Master Issuer plc – USD – Maturity 2028 - 0.61% - 59
Lothian Mortgages Master Issuer plc – USD – Maturity 2050 0.40% 3.71% 26 35
Lothian Mortgages Master Issuer plc – GBP – Maturity 2050 0.75% 6.25% 377 381
The present value of the defined benefit obligation less the fair value of gross scheme assets is as follows: UK Canada Ireland Total UK Canada Ireland Total £m £m £m £m £m £m £m £m
Fair value of plan assets 1,644 144 48 1,836 1,462 123 44 1,629
Adjustment for unrecognised past service costs - (6) - (6) - (5) - (5)
The net liability is included in ‘Other liabilities’ in the summary consolidated statement of financial position. The Group also recognises a net liability of £5m (2008: £5m) arising from a scheme with a total defined benefit obligation of £5m (2008: £5m) administered for the benefit of employees in Germany, resulting in a net liability in the summary consolidated statement of financial position of £94m (2008: £42m).
The surplus which arose in respect of the UK scheme as at 31 December 2008 was not recognised as the Group did not consider that it had an unconditional right to a refund of contributions from the UK scheme, nor did the Group consider that it had the ability, under the guidance contained in IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction to anticipate a reduction in the level of future contributions that would enable the Group to recover this surplus.
The principal economic assumptions used in determining pension benefit obligation for the Group’s plans are as follows: UK Canada Ireland UK Canada Ireland
Rate of increase in pensions 3.80 1.33 1.00 3.35 1.33 2.00
The Group, like other financial organisations, is subject to legal proceedings and complaints in the normal course of its business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, the Directors do not believe that such proceedings (including litigations) will have a material effect on the results and financial position of the Group.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and it has complied in material respects with local solvency and other regulations. Therefore, there are no contingencies in respect of these regulations.
The Scheme of Demutualisation sets a 10-year time limit, ending in 2016, for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlements. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.
A contingent liability also exists in relation to future FSCS levies, including the actual compensation costs due in relation to the banks which defaulted during 2008. As this liability cannot be reliably calculated and is dependent on a determination at some point in the future, the Group has not attempted to quantify this amount.
Authorised and contracted for but not provided and incurred: Property, plant and equipment - 357
Of the amounts above, £283m (2008: £115m) and £13m (2008: £12m) relates to the contractual obligations to purchase, construct or develop investment property and repair, maintain or enhance investment property respectively.
Sale to: Purchase from: Transactions with associates shown above relate primarily to the sales and purchases of holdings in investment funds managed by the Group.
Held within life assurance funds - 617 - 617 - 617 - 617
Changes to the valuation of contract liabilities 1,485 20 - 1,505 (75) 1,430 - 1,430
Exclusion of deferred acquisition costs and other inadmissible assets (143) (496) (484) (1,123) (87) (1,210) (119) (1,329)
Analysed as follows: Capital not subject to constraints - - 3,112 3,112 422 3,534 432 3,966 * Capital resources amounting to £13m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column shown above.
Changes to the valuation of contract liabilities 2,198 19 - 2,217 15 2,232 - 2,232
Exclusion of deferred acquisition costs and other inadmissible assets (162) (511) (517) (1,190) (52) (1,242) (64) (1,306)
Changes to the valuation of other assets and liabilities (78) (86) (27) (191) (77) (268) 257 (11)
UK regulated life business SLAL’s regulatory solvency position is determined using the FSA’s ‘twin peaks’ approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak increases the amount of the Capital Resources Requirements (CRR).
Group capital requirement The Group must also calculate a group solvency position under the Financial Groups Directive (FGD). The FGD calculation is a very prudent aggregate value for the Group’s capital resources, because capital held within the long-term business funds of approximately £1.9bn (2008: £3.2bn) is restricted to the level of the CRR of those funds of approximately £1.6bn (2008: £1.7bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
Movements in capital The movements in the total capital resources shown in the capital statement are set out below.
Change in assumptions used to measure life assurance contract liabilities and experience differences 19 13 - 32 7 39 - 39
Total UK regulated life business Overseas life operations Total life business
Equity holder/inter-fund transfers include the transfer of £844m (2008: £367m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £25m (2008: £39m) to the Proprietary Business Funds (PBF) in relation to additional expenses charged on German unitised with profits business. In addition, £88m was transferred to the Shareholder Fund from the PBF. In 2008, £338m was transferred from the Shareholder Fund to the PBF.
Liabilities of discontinued banking operations classified as held for sale 9,101 112 www.standardlife.com
As a result of entering into the disposal agreement, the assets and liabilities of Standard Life Bank plc were measured as at fair value less costs to sell, and this has resulted in a loss of £10m being recognised in the year ended 31 December 2009.
As a result of a statutory pension fund valuation carried out under Section 75 of the Pensions Act 1995, a payment of £25m was made in January 2010 by Standard Life Bank plc to the Standard Life UK staff pension scheme. As part of the disposal agreement, a corresponding payment of £25m was made by Standard Life Assurance Limited to Standard Life Bank plc in January 2010.
Group assets under administration managed by: Standard Life Group entities 138.5 152.4
4.2 Exposure to investment property and financial assets Group exposure to investment property and financial assets
The total Group exposure to investment property and financial assets has been segmented below based on the stakeholder subgroup with which the market and credit risk relating to those assets lies.
(unit linked) TPICF and NCI* Total 2009 £m £m £m £m £m
Investments in associates and joint ventures 47 1,138 686 72 1,943
Investments in associates and joint ventures 17 15 - - 30 195 47 210 118 www.standardlife.com
The Group’s exposure to debt securities has been further analysed in the tables below. The high quality of the debt security portfolio has been maintained, with 57% of debt securities rated AAA (2008: 65%) and 95% (2008: 97%) being rated as investment grade.
(unit linked) TPICF and NCI* Total * Third party interest in consolidated funds and non-controlling interests.
4.2 Exposure to investment property and financial assets continued Shareholder exposure to debt securities
Further details of the shareholder exposure to debt securities, including credit ratings, are presented below.
Standard Life Bank’s high-quality mortgage portfolio continues to perform well despite the adverse economic conditions, with arrears figures remaining low in comparison to the Council of Mortgage Lenders’ (CML) average. Only 0.84% (2008: 0.40%) of total mortgages were three or more months in arrears or in repossession at the end of 2009, almost a third of the CML industry average of 2.51% (2008: 2.09%). Impairment charges increased to £8m in 2009 (2008: £5m). However, net write-offs for 2009 were only £3m (2008: £1m).
4.4 Total expenses and operating cost base 2009 2008 £m £m
Total expenses attributable to savings and mortgages included within profit/(loss) for the year from discontinued operations 299 706
Less claims, commissions and changes in provisions and liabilities (15,078) 17,238
The Preliminary Results 2009 are published on the Group’s website at www.standardlife.com The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements. Access to the website is available outside the UK, where comparable information may be different.