• EEV operating profit before tax up 55% to £614m (2005: £395m).
• EEV up 11% to £5,608m (2005: £5,048m including IPO proceeds), equivalent to 258p per share.
Group Chief Executive, Sandy Crombie, said: “We have achieved a strong improvement in our financial performance in 2006. Our strategy of concentrating on higher margin and less capital intensive products has delivered strong growth in new business volumes and profitability.
“Notwithstanding this strong progress, there is more we can do to increase the efficiency of our operations and to deliver further earnings growth and higher returns. Today we announce the next phase of our continuous improvement strategy, which will deliver a leaner and fitter Standard Life.
“These initiatives are in addition to the targets announced at the time of the IPO and will enhance our ability to grow profitably in the medium term. We are on track to achieve our return on embedded value target for 2007 of 9-10%, and increasing thereafter.”
Life and Pensions by country UK 372 272 Canada 163 131 Europe 45 53 Other (8) (2) HWPF TVOG 44 -
IFRS pro forma underlying profit for the year ended 31 December
Banking 38 24 Healthcare and general insurance 16 7 Group corporate centre costs (89) (58) Other 12 (47) Total underlying profit before tax 540 145
These results have been calculated for the year ended 31 December 2006 using assumptions to show the results which would have been attributable to shareholders had the company been owned by shareholders under the terms of the Scheme of demutualisation (the Scheme) throughout the year. The Scheme did not take effect until 10 July 2006. For further information please refer to basis of preparation sections 1.4.1 and 1.5.3.4 below for EEV and IFRS respectively. No account has been taken of any prospective tax changes announced by the Chancellor of the Exchequer on 21 March 2007.
Standard Life Investments’ third party funds under management increased by 32% to £38.5bn at the end of 2006, reflecting continued investment outperformance, which has driven record levels of both institutional and retail third party mandate wins. Standard Life Investments’ operating profit before tax increased 50% to £66m on an IFRS basis as a result of the higher funds under management leading to a significant improvement in the EBIT margin to 27.0% (2005: 22.3%). The pipeline of new business remains strong and this, along with Standard Life Investments’ impressive performance track record and the successful introduction of additional products in both the retail and institutional markets, provides a powerful platform to deliver continued growth in 2007.
Standard Life Bank increased underlying profit before tax by 58% to £38m on an IFRS basis as a result of improved interest margin and cost control in a year when gross mortgage lending was similar to the prior year. In 2007 we expect Standard Life Bank to benefit from continued reduction in its cost income ratio and increasing SIPP and Wrap balances. Credit quality remains extremely high; the arrears rate of 0.17% at the year end continues to be well below the industry average of 0.95%.
We are announcing today further initiatives to increase the efficiency of our UK businesses and enhance their growth prospects. These initiatives focus on driving synergy benefits from UK Life and Pensions, Standard Life Healthcare, Standard Life Bank and shared services for Standard Life Investments. In due course we will look at achieving additional savings in our Canadian, German and Irish businesses.
At the time of the flotation in July 2006 we announced a target to reduce UK Life and Pensions’ expenses by £30m by the end of 2007; £15m has been achieved to date. This commitment is being achieved at the same time as delivering strong sales growth. We also committed to reduce corporate costs in 2007 to £58m per annum, the 2005 level, despite the incremental costs of being a listed company. This target is also expected to be achieved. The initiatives announced today are in addition to those targets.
We are establishing a UK Retail Division, headed by Trevor Matthews, currently Chief Executive of Standard Life Assurance Limited. He will be responsible for the continued development of UK Life and Pensions, Standard Life Bank and Standard Life Healthcare and for driving synergies in both costs and revenues by streamlining common functions and enhancing our capability to grow. Duplication of activities which are currently taking place across multiple business units, divisions and product lines will be targeted.
Other key initiatives include the expansion of the use of shared service activities, rationalisation of group central functions, reengineering of key processes and the implementation of smarter sourcing of services.
These additional actions will strengthen further our customer focus and improve the efficiency of our operations. This will enhance our ability in the medium term to increase new business margins, drive higher profitability and augment future embedded value.
The trading performance across the group for the first two months of 2007 remains strong with the positive sales momentum continuing in the UK.
For further information please contact: Media: Equity Investors: Debt Investors: Newswires
A conference call will take place for newswires and online publications from 8.00-9.00am. Participants should dial 020 7162 0125 and quote Standard Life Results.
There will also be a live listen only teleconference to the investor and analyst presentation at 9.30am. UK investors should dial 0845 245 5000, and overseas investors should dial +44 1452 562 719. Callers should quote Standard Life Results. The conference ID number is 1704831. A replay facility will be available for two weeks on +44 1452 55 00 00. The pass code is
Chief Executive and David Nish, Group Finance Director. Dial in telephone number for international participants +1 866 779 1135 and UK participants 020 7162 0125. Callers should quote Standard Life Results. A recording of this call will be available for replay for one week by dialling +1 954 334 0342 (international) and 020 7031 4064 (UK), access code: 741172.
1 Business Review ..................................................................................................................................................................1 1.1 European Embedded Value (EEV) – Group ...................................................................................................................1 1.2 International Financial Reporting Standards (IFRS) – Group .........................................................................................4 1.3 New business...............................................................................................................................................................6 1.4 EEV pro forma income statement...............................................................................................................................10 1.5 IFRS pro forma underlying profit................................................................................................................................16 1.6 Capital management .................................................................................................................................................23 2 European Embedded Value Basis .....................................................................................................................................25 2.1 Basis of preparation ...................................................................................................................................................29 2.2 Segmental analysis – covered business.......................................................................................................................30 2.3 Analysis of new business contribution ........................................................................................................................31 2.4 Experience variances ..................................................................................................................................................31 2.5 Operating assumption changes .................................................................................................................................32 2.6 Time value of options and guarantees (TVOG) ..........................................................................................................32 2.7 Non-covered business................................................................................................................................................32 2.8 EEV – reconciliation of movements in consolidated balance sheet .............................................................................33 2.9 Reconciliation of EEV net assets to IFRS net assets ......................................................................................................33 2.10 Analysis of life and pensions EEV PVIF and net worth movements (net of tax) ...........................................................33 2.11 Market value of subordinated liabilities within covered business ................................................................................35 2.12 Principal economic assumptions – deterministic calculations – life and pensions........................................................35 2.13 Principal economic assumptions – stochastic calculations ..........................................................................................37 2.14 Sensitivity analysis – economic and non-economic assumptions ................................................................................38 2.15 European embedded value methodology ..................................................................................................................39 3 International Financial Reporting Standards Basis..........................................................................................................45 3.1 Accounting policies....................................................................................................................................................51 3.2 The Demutualisation of The Standard Life Assurance Company and the Company’s Initial Public Offering................52 3.3 Segmental analysis.....................................................................................................................................................56 3.4 Administrative expenses.............................................................................................................................................62 3.5 Earnings per share .....................................................................................................................................................63 3.6 Dividends...................................................................................................................................................................64 3.7 Deferred acquisition costs ..........................................................................................................................................64 3.8 Share capital ..............................................................................................................................................................65 3.9 Share premium reserve ..............................................................................................................................................66 3.10 Retained earnings ......................................................................................................................................................66 3.11 Reconciliation of movements in other reserves ..........................................................................................................67 3.12 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets .................................................................................................68 3.13 Movement in components of unallocated divisible surplus (UDS)..............................................................................73 3.15 Subordinated liabilities...............................................................................................................................................76 3.16 Net (increase)/decrease in operating assets and liabilities ..........................................................................................78 3.17 Contingencies............................................................................................................................................................79 3.18 Commitments............................................................................................................................................................79 3.19 Event after the balance sheet date .............................................................................................................................80
Pro forma period Audited period 1 January 2006 10 July 2006 Pro forma Pro forma to 10 July 20061 to 31 December 2006 Full year (FY) 2006 Full year (FY) 2005 (H1) (H2) £m £m £m £m
1 Including adjustments to arrive at 10 July 2006 opening position. 2 Operating profit after tax for 2006 is £429m (2005: £270m).
3 New business contribution as a percentage of present value of new business premiums. 4 Earnings per share is based on operating profit after tax including notional interest on IPO proceeds where appropriate and on 2,102m shares for basic EPS and 2,173m shares for diluted EPS. For consistency 2005 has been restated based on 2,102m shares for basic EPS and 2,173m shares for diluted EPS (notional interest £21m H1, £nil H2, £31m FY 2005).
The Group EEV operating profit before tax increased by 55% to £614m (2005: £395m).
Expected return increased by £64m and positive experience variances increased by £62m – see section 1.4.2.2.
Non-life losses reduced to £2m (2005: loss £59m), reflecting higher profits from the main subsidiary companies, along with the transfer of the cost of carry of the subordinated debt to covered business – see section 1.4.2.2.
Non-operating income increased by 9% to £408m (2005: £375m). This reflects the favourable impact of market changes and other movements, offset by lower economic assumption changes, reflecting current market conditions – see section 1.4.2.3.
The increase to 1.4% (2005: 0.4%) is largely due to UK performance, where margins have increased from 0.4% to 1.5%. In addition, new business margins in Canada rose from -0.1% to 1.6% – see section 1.4.2.2. The H2 margin was impacted by the doubling of sales of UK institutional pensions business which generates relatively low margins.
This is based on operating profit after tax with an adjustment for notional interest on Initial Public Offering (IPO) proceeds, and shows an increasing trend from full year 2005. EPS for all periods was calculated using 2,102m shares for basic EPS and 2,173m shares for diluted EPS, to allow comparison.
Covered business Free surplus 720 163 Required capital 562 549 Net worth 1,282 712
Present value of in-force 3,480 3,153 Cost of required capital (263) (264) Total embedded value of covered business 4,499 3,601
Other Pension scheme deficit (140) (228) Mark to market of subordinated debt – (219) Total Group embedded value 5,608 3,744
The present value of in-force (PVIF) increased by 10% to £3,480m (2005: £3,153m). The increase was largely attributable to new business contribution and the expected return on existing business, partially offset by transfers of emerging profits to free surplus.
The Group’s IFRS cash flow statement, included in section 3, combines cash flows relating to both policyholders and shareholders. The analysis of free surplus arising within EEV is the preferred method used by the Group to monitor the shareholder cash flow generation of the life and pensions business.
The ability of the life and pensions operations to finance the writing of new business out of cash flows from existing business is a key consideration in capital management. Any new business strain that cannot be funded by net cash received from in-force business would have to be met from existing excess working capital in the business or from additional capital sources. There has been a significant improvement in underlying cash flow generation in 2006, to £179m from £9m in 2005, as illustrated in the table below: Pro forma 2006 Pro forma 2005 Free Required Net Free Required Net surplus capital worth surplus capital worth £m £m £m £m £m £m
Expected cash flows from existing business 451 (15) 436 339 12 351 Operating cash flows from new business and expected return 116 17 133 7 38 45 Cash flows from variances, development costs and assumption changes 63 48 111 2 (25) (23)
* Cash movements are shown net of tax for covered business including the current profits and losses of Standard Life Investments (SLI) on its management of funds relating to the life and pensions business. Net (expense)/income directly recognised in the EEV balance sheet, including exchange differences and capital movements are not included as these are not trading related cash flows. Separate cash flows are shown for free surplus (which shows the free cash flow after setting up required capital) and net worth (where required capital and free surplus are combined). In general, cash flows are on the free surplus basis, while movements in net worth are referred to as capital generation.
New business strain is virtually unchanged at £335m in 2006 (2005: £332m) despite a significant increase in new business premiums – see section 1.3. This reflects our strategy of focusing on more capital-efficient products. It also reflects a change in the commission payment structure on certain new products.
4 Standard Life 1.2 International Financial Reporting Standards (IFRS) – Group IFRS condensed income statement
As a result of the different operating models of the Group pre- and post-demutualisation, comparisons of the performance of the business over the periods shown in the IFRS condensed income statement above cannot be derived from the profit figures. IFRS pro forma underlying profit before tax (non-GAAP measure) figures have been provided in section 1.5.2 and, read in conjunction with the IFRS statutory income statement in section 3, may provide a more meaningful analysis of our results.
Total net revenue decreased by 16%, primarily due to a decrease in investment return, which is consistent with the performance of equity and debt markets in 2006.
Net earned premiums increased by 13% to £3,963m (2005: £3,516m) largely due to annuity sales. As detailed in section 1.3, most of the Group’s new business is in respect of non-participating investment contracts, the premiums on which are excluded from the income statement under IFRS accounting rules.
Net insurance benefits and claims increased by £2,461m, up 60% on 2005. The increase is primarily due to lapses post 10 July 2006 in relation to demutualisation and A-Day.
Net change in policyholder liabilities of £5,638m (2005: £11,354m) was lower than 2005 due to the increase in claims paid and investment return volatility.
Equity Share capital and share premium reserve 1,009 Retained earnings 298 Other reserves 1,571 Capital and reserves attributable to equity holders of Standard Life plc 2,878 Minority interest 307 340 Total equity 3,185
Subordinated liabilities 1,834 1,878 Other liabilities 3,905 3,222 Customer accounts related to banking activities and deposits by banks 5,071 5,134 Total liabilities 129,406 119,920
The 2006 balance sheet reflects the change in the ownership structure following demutualisation. The Group raised £1.3bn from IPO proceeds, net of transaction costs. Of this, £737m was transferred to Standard Life Assurance Limited (SLAL) to support its operations. The remaining portion is to be used for corporate purposes. Note 3.2 and Notes 3.8 to 3.11 provide details of the demutualisation and the equity sections of the balance sheet.
Individual insurance, savings and retirement 460 565 (19%) 49 71 (31%)
The effectiveness of our strategy of developing a product portfolio that meets our customers’ needs and adds value to our business is evident – with worldwide NBC of £205m, up 521% on 2005 at a PVNBP margin of 1.4% (2005: 0.4%). See section 1.4.2.2 for a more detailed discussion about NBC and PVNBP margin.
** 2004 figure is the 12 month calendar figure, actual 2004 was a 13.5 month period and totalled £1,443m.
Strong growth in new business volumes was driven mainly by our market leadership in SIPP, superior investment performance and the heightened activity in the pensions market as a result of A-Day. We continued our focus on profitable areas of the market that offer favourable margin opportunities. As a result, single premium business increased by 89% compared to 2005 and represented 65% of UK life and pensions APE sales. Although life and pension product lapses continued at levels in excess of long-term assumptions, net fund flows remained strongly positive and amounted to £3.2bn during the year.
Institutional TIP sales increased by 153% to £231m (2005: £91m). This was principally a result of strong investment performance, but also included a bulk TIP mandate from Citigroup – announced in the fourth quarter – which generated £84m of APE.
Excluding this bulk TIP transaction, total underlying UK life and pension sales were £1,358m, an increase of 45% compared to the previous year.
The increase in annuities sales volumes was largely driven by business from customers who had postponed their retirement until after A-Day and demutualisation. Over 93% of annuity sales during 2006 came from customers with maturing Standard Life pensions.
We anticipate further strong growth in UK life and pensions as we continue to enhance our product offering and build on our commitment to our customers.
• PVNBP sales increased by 69% to £11,400m • APE sales increased by 54% to £1,442m
The Canadian operations focused on building sustainable and profitable new business during 2006, and this had a positive impact on NBC with all product lines generating positive new business contribution by the year end – see section 1.4.3.2. Certain individual insurance products were repriced as part of the focus on profitability and this had an effect on new business volumes. Overall APE sales of life and pension products decreased by 10% (15% in constant currency) to £166m (2005: £184m) amid increasing pricing pressures across all product lines.
We maintained our position as a leader in group savings and retirement, where we witnessed a 10% increase in sales (3% in constant currency) to £98m, with two large cases in each half year offsetting a weak market. Retention rates also remained strong in challenging conditions.
APE sales declined by 31% (35% in constant currency). This is largely explained by the repricing of our main Universal Life product in late 2005 and the repositioning of our overall individual insurance offering. Our segregated funds grew 29% in constant currency during 2006.
Sales were 21% lower (25% in constant currency) at £19m (2005: £24m), affected by our commitment to protecting margins in an aggressive price-driven market.
Standard Life Ireland sales on an APE basis were 35% higher than in 2005, following the continued success of the Synergy suite of products launched in 2005 and the introduction of new products based on the UK SIPP platform in 2006. Sales momentum is set to keep building in 2007, driven by new product launches, enhancements to existing products and market growth.
• PVNBP sales increased by 36% to £330m • APE sales increased by 35% to £46m
Growth in Asia continues to accelerate, with total APE sales of the Asian life insurance businesses up 55% (61% in constant currency). The Indian joint venture, HDFC SL, and the China joint venture, Heng An SL, contributed APE of £25m and £4m respectively. We anticipate further sales growth in 2007 as our joint venture operations continue to expand.
Third party gross inflows rose to £9.0bn and net inflows increased to £6.4bn – equating to 22% of third party funds under management at the start of the year – including record levels of UK institutional business. This reached £3.3bn, up 24% on 2005.
SLI experienced its strongest ever year for UK mutual fund sales since it was launched in 1998, with gross inflows up to £1.7bn, (2005: £0.6bn). Net sales of £1.3bn were up 339% on 2005.
The pipeline of new business remains strong. SLI’s impressive performance track record and the successful launch of new products including the Dynamic Distribution Fund, UK Property Development Fund and the Global Absolute Return Strategies Fund gives us the platform to deliver continued growth in 2007.
Gross lending in 2006 was similar to 2005 (£3.0bn for 2006 compared to £3.1bn for 2005), however SLB’s market share of gross lending for 2006 is expected to be 0.9% lower than 2005 (1.1%) due to the growth in the size of the market. Mortgages under management at SLB were £10.4bn (2005: £10.6bn), due to higher levels of mortgage attrition, primarily as a result of the increased numbers of customers coming to the end of tie-in periods driven by high volumes of business written in 2004.
We expect to see improved growth in gross lending in the first quarter of 2007, assisted by a strong pipeline of new business. Sales in the remainder of the year are expected to benefit from enhanced offerings.
• Third party funds under management (FUM) • Total FUM increased by 11% to £132.1bn • increased by 32% to £38.5bn • Third party net inflows £6.4bn (2005: £5.5bn)
Where figures are described as pro forma, this means that they have been prepared for periods before demutualisation occurred, indicating the profits that would have occurred if the post-demutualisation structure had applied.
EEV methodology has been applied to ‘covered’ business, which mainly comprises the Group’s life and pensions business. Non-covered business is generally reported on an IFRS basis.
A full description of the basis of preparation and EEV methodology can be found in section 2.
The following provides a detailed analysis of the Summary EEV pro forma income statement disclosed in section 1.1.
Pro forma Notes Audited period period from 1 January from 10 1 January 2006 July 2006 to 2006 to to 10 July 31 December 10 July 2006 2006 2006 Pro forma Pro forma (H1) (H2) FY 2006 FY 2005 £m £m £m £m
Contribution from new business 100 (a) 105 205 33 Contribution from in-force business
Notes: (a) New business contribution includes £9m for the period 1 July to 10 July 2006.
(b) There was £5m expected profit from the in-force business for the period 1 July to 10 July 2006.
(c) An additional £38m arose as a result of enhancing the modelling of the guarantee deduction framework in the TVOG, and from other model changes reflecting the final detailed operation of the Scheme.
(h) The movement in the UK subordinated debt in the period 1 July to 10 July 2006 before it was transferred to covered business was £3m.
(i) The movement in the pension scheme deficit has been allocated out between the covered business, non-covered business and the statement of recognised income and expense (SORIE).
(j) The attributed tax impact of the above noted adjustments totals £3m.
Operating profit before tax increased to £614m (2005: £395m). Life and pensions operations contributed £162m of the increase, the main driver being new business contribution, which increased by £172m to £205m. In addition, increases in expected return and positive experience variances also contributed to the rise in operating profit. These increases were partly offset by the impact of assumption changes, including increases in lapse assumption costs of £157m, reduced return on free surplus and increased development expenses. The non-life companies also made a sizeable contribution with an increase of £57m to operating profit. This was largely driven by improvements in IFRS underlying profits of the main non-life subsidiaries – SLI, SLB and SLH – along with the transfer of the cost of carry of the subordinated debt to covered business in 2006.
A segmental analysis of EEV operating profit before tax is contained in section 1.4.3.
New business contribution is a key component of operating profit. An analysis of new business contribution and its profitability by territory is given below: New business contribution Pro forma PVNBP margin1 Pro forma NBC
UK life and pensions 1.5 0.4 167 27 Canada life and pensions 1.6 (0.1) 28 (2) Europe life and pensions 1.2 0.9 10 8 Asia Pacific life and pensions – – – –
1PVNBP margin is calculated by dividing NBC by PVNBP which is provided in section 1.3.
New business contribution was £205m, £172m higher than 2005. This increase is the result of significantly higher sales volumes in the UK and Ireland and improvements in margins and product mix in almost all territories. Section 1.3 covers new business results in more detail.
Experience variances were £122m, compared to £60m in 2005. The UK produced £90m of variances in 2006 (2005: £48m), whilst the HWPF TVOG showed £41m of variances, which includes £28m arising from the net impact of management actions taken to hedge guarantees and increase the equity backing ratios in the HWPF. The balance reflects various items, including mortality effects in respect of the annuity books. These were partially offset by £16m of negative experience variances in Canada life and pensions.
Operating assumption changes were £58m negative compared to £37m positive in 2005. This fall in contribution was largely driven by reduced maintenance expense assumption changes, and increased lapse assumptions. These were partially offset by mortality changes.
In 2006 there were £88m of positive changes in relation to maintenance expenses, reflecting continuing efficiencies achieved in the business. In addition there were £65m of favourable mortality effects, reflecting the movement to new industry tables and internal experience. There were also £49m of other changes which are principally attributable to the UK and Canadian life operations.
Development costs totalled £25m (2005: £17m). The increase arose mainly in Germany and Ireland, reflecting new major product developments and other one-off project costs.
Operating profit after tax increased by 59% to £429m (2005: £270m). This increase includes a change in the attributed tax rate to 30% (2005: 32%), which reflects the change in the mix of profits arising from different territories and business with different tax rates.
Non-operating items contributed £408m before tax in 2006 (2005: £375m), an increase of 9%. The life and pensions businesses produced a profit in 2006 of £283m, including long-term investment variances of £252m (2005: £187m) plus £31m (2005: £232m) in relation to changes made to economic assumptions to reflect current market conditions. Within the £31m of assumption changes were positive adjustments of £92m from investment, tax and other, offset by losses of £36m and £25m from changes in risk discount rates and inflation respectively.
Outside life and pensions, the other main component was a gain of £107m arising in the period ended 10 July 2006 from the mark to market adjustment of the UK subordinated debt before demutualisation. This was a result of higher bond yields narrowing the gap between the market value of the debt and its IFRS value. From 10 July 2006 the market value movement on these liabilities is included within the UK life and pensions results in line with the treatment of the assets, and flows through investment return variances.
In 2006 the pension scheme deficits that could be attributed to staff working in life and pensions operations were transferred to covered business. The main UK scheme remains the only scheme that is shown in non-covered business as it covers staff in all UK operations – not just life and pensions. The movement in relation to the UK scheme is included in other non-covered business losses, and actuarial gains and losses are disclosed in the SORIE.
The remaining items relate to positive economic hedge gains in SLB of £48m, partially offset by an impairment charge of £13m and a restructuring expense provision of £17m in relation to SLH.
Pro forma period Audited period from from 1 January 2006 10 July 2006 to Pro forma Pro forma to 10 July 2006 31 December 2006 FY 2006 FY 2005 £m £m £m £m
Healthcare and general insurance 3 13 16 7 Group corporate centre costs (42) (47) (89) (58)
An analysis of life and pensions operating profit by territory is given below: UK Canada Europe Other HWPF TVOG Total £m £m £m £m £m £m
Contribution from new business 167 28 10 – – 205 Contribution from in-force business
Expected return on existing business 268 93 31 – – 392
Expected return on free surplus (10) (3) 1 (8) – (20)
Contribution from new business 27 (2) 8 – – 33 Contribution from in-force business
Expected return on existing business 225 70 33 – – 328
UK operating profit before tax (excluding HWPF TVOG) increased by 37% to £372m (2005: £272m). This is mostly attributable to increased new business contribution of £167m (2005: £27m). The higher expected return on existing business of £268m (2005: £225m) reflects the higher opening embedded value. The £42m increase in positive experience variances to £90m (2005: £48m) was offset by a £106m increase in negative assumption changes to £128m (2005: negative £22m) and a negative return on free surplus of £10m (2005: positive £11m). This latter item is largely due to the inclusion of £19m cost of carry within the UK life and pensions business, since the subordinated debt is now shown within UK covered business, whereas previously it was included at Group level. Development costs totalled £15m for 2006 (2005: £17m).
UK life and pensions 1.5 0.4 167 27 * The 2005 PVNBP figures have been restated to reflect the inclusion of the non-insured element of SIPP, which has been included in the 2006 figures.
Operating losses due to assumption changes in the UK increased to £128m (2005: £22m). These comprise increases in short-term lapse provisions on 30 June 2006 – £79m in relation to A-Day and £21m in relation to demutualisation, plus £107m due to further changes in long-term lapse assumptions made at the year end. This is made up of £59m in respect of pensions, based on recent experience and the expectation that A-Day will be a trigger for increased consolidation activity in the years leading to retirement. The balance of £48m arises on life with-profits business, a reflection of continued high levels of outflows.
These negative movements are partially offset by positive changes of £26m in relation to mortality – largely attributable to annuities, £26m in relation to expense assumption changes and £27m of other (mainly updated valuation assumptions reported at the half year). The losses in 2005 included significant negative assumption changes in relation to annuity reserves and lapse assumptions in relation to with-profits bonds, partially offset by large positive movements for expense savings and increased charges on Capital Investment Bonds.
Canada operating profit before tax increased by 24% to £163m (2005: £131m). This increase comprises an improvement in new business contribution to a profit of £28m (2005: loss £2m), an increase in expected return on in-force business to £93m (2005: £70m) and positive assumption changes of £61m (2005: £58m). These positive movements are partially offset by negative experience variances of £16m (2005: positive £2m) and a negative return on free surplus of £3m (2005: positive £3m).
Canada operating assumption gains of £61m comprised £50m of maintenance and investment expense cost reductions, £37m of gains from changes in mortality and morbidity assumptions (mainly relating to individual and group insurance products) and other gains of £23m. These other gains include the release of annuity provisions offset by modelling changes for group insurance. These gains were partially offset by negative lapse assumption changes of £49m which mainly arose from group savings and retirement products.
16 Standard Life 1.4.3 Segmental analysis of EEV pro forma operating profit (continued)
The 2006 operating profit before tax for Europe of £45m is £8m lower than 2005. This is largely due to an increase in development costs to £10m (2005: £nil) in respect of new product developments. Negative lapse experience on Ireland life with-profits business and lower expected return on existing business in Germany were partially offset by a £2m increase in NBC and positive expense assumption changes in Ireland.
‘Other’ no longer includes the cost of carry of the subordinated debt in 2006, as this has been moved to covered business. This totalled £28m in 2005. Other non-covered business losses were £5m (2005: loss £19m). 2006 losses largely comprise Mutual Fund and Wrap expenses due to new business strain, partially offset by income on assets held in the Group’s holding company, Standard Life plc.
1.5 IFRS pro forma underlying profit IFRS pro forma underlying profit before tax increased by 272% to £540m in 2006 (2005: £145m). The increase reflected higher fee and commission income arising from the increase in funds under management (FUM), and the result of business-wide focus on profitability and cost management. The increase also reflected the impact of assumption changes, in particular the inclusion in 2005 of £189m reserve strengthening in relation to the UK life and pensions business. A further breakdown and discussion of the results are provided in section 1.5.2 and should be read in conjunction with the information in section 3.1.
The following section provides analysis of the IFRS underlying profit attributable to equity holders for the period from 10 July 2006 to 31 December 2006. It also includes pro forma results for the full year 2006 and comparative results for 2005.
Underlying profit is a ‘normalised’ profit measure that the Group uses to provide a more meaningful analysis of the underlying business performance. Underlying profit is calculated by adjusting profit for the period for items such as volatility arising from different IFRS measurement bases for assets and liabilities, impairment of intangibles and certain restructuring expenses.
Pro forma period Period from from 1 January 2006 10 July 2006 to Pro forma Pro forma to 10 July 20061 31 December 2006 FY 2006 FY 2005 £m £m £m £m
2 Basic EPS is based on 2,102m shares and underlying pro forma profit after tax attributable to equity holders of Standard Life plc of £474m (2005: £127m), refer to note 3.5.
The 2005 figure is after £189m of annuity reserve strengthening due to changes in expected future rates of mortality improvement and annuity enhancements post A-Day. There was no similar effect in 2006. Excluding this adjustment the 2005 figure would have been £205m.
IFRS pro forma underlying profit before tax of £120m for the period 1 January to 10 July 2006 was boosted by a sizeable release of SIPP sterling reserves of £30m which flows through the RCF. This was due to a sharp fall in unit costs, resulting from the significant increase in the size of the SIPP book of business over this period.
The 2006 result includes the cost of carry of subordinated debt of £19m and losses in relation to non-covered business of £25m. In 2005 these items were not included in the UK life and pensions result but were disclosed as part of ‘Other’ – see 1.5.2.7.
Canada life and pensions IFRS pro forma underlying profit before tax increased by 95% to £168m (2005: £86m).
IFRS underlying profit before tax of £100m for the period 10 July to 31 December 2006 reflected the increase in investment and fee income as equity markets rallied in the second half of 2006. Investment return also benefited from the decrease in interest rates in the second half of the year. In addition, the repositioning of the individual life products and the subsequent fall-off in sales led to a decrease in commission and other acquisition expenses.
Pro forma underlying profit before tax of £68m for the period 1 January to 10 July 2006 was lower than the second half results. This was due largely to investment returns.
The 2005 figure is after £55m of reserving strain for Germany. Excluding this adjustment the 2005 figure would have been £128m. The decrease in 2006 compared to the adjusted 2005 amount is due to margins earned in 2005 on the exceptional sales experienced in 2004 and the first quarter of 2005 (due to changes in German tax legislation) coming to an end.
Investment management revenue1 £242m £189m Fee and commission expenses (£15m) (£10m) Net investment management revenue £227m £179m
Revenue/average monthly FUM3 18.3bps 17.0bps Expenses/average monthly FUM4 (13.7)bps (13.4)bps 1 Total investment management revenue includes fee and commission income and other income. 2 EBIT margin is calculated by dividing EBIT by net investment management revenues plus net investment return excluding interest received of £3m (2005: £nil).
EBIT is derived by taking IFRS profit before tax attributable to equity holders and adding back interest expense of £1m (2005: £1m) and deducting interest received of £5m (2005: £5m).
Net investment management revenue increased by 27% to £227m in 2006 (2005: £179m). The increase was primarily due to strong inflows into third party funds during 2006, together with the favourable market conditions in the period, which boosted the value of underlying FUM.
Net interest income1 £88m £73m Non-interest income £10m £11m Expenses (£60m) (£60m) Underlying profit before tax £38m £24m
The increase in underlying profit before tax occurred despite mortgages under management decreasing due to a focus on improving margins and controlling costs. Staff numbers reduced to 725 during 2006 (2005: 795). This was reflected in improvements to the cost income ratio, net interest income and interest margin.
IFRS pro forma underlying profit before tax within Standard Life Healthcare (SLH) increased by £8m to £12m. This is before taking into account significant one-off costs of £21m relating to the purchase of FirstAssist’s private medical portfolio and the subsequent restructuring – including the relocation of the head office to Bournemouth.
The one-off costs include an impairment charge of £7.8m on the goodwill purchased as part of the FirstAssist deal.
1.5.3 Derivation of pro forma underlying profit and additional basis of preparation information
Detailed below is a reconciliation of the IFRS mutual results to pro forma profit. A reconciliation of the IFRS underlying profit is provided in section 3.
Total net revenue 5,074 18,307 Total operating expenses (4,967) (17,792) Share of profits from associates and joint ventures 63 99 Profit before tax 170 614 Tax expenses (118) (531) Profit for the period 52 83
Adjustments to derive HFI profit Profit attributable to minority interests (52) (83) HFI adjustment to unallocated divisible surplus 83 30 HFI adjustment to tax 2 39 HFI profit before tax attributable to equity holders and after minority interest 85 69
Adjustments to derive pro forma profit Deferred acquisition costs 94 157 Assumed interest on proceeds of share issue 18 33 New business reserving strain (4) (55) Pro forma profit before tax attributable to equity holders and after minority interest 193 204
The estimated shareholder tax on underlying profit is assumed to be £27m for the period 1 January to 10 July 2006 (FY 2005: £18m).
The HFI results have been prepared in order to show the results which would have been attributable to shareholders and policyholders had The Standard Life Assurance Company (SLAC) been a company owned by shareholders under the terms of the Scheme during the two accounting periods. The pro forma results comprise the income statement as set out on the HFI results basis, adjusted to reflect the profit that would have arisen had the Scheme and anticipated post-demutualisation capital and debt structure been in place at the start of each period.
After demutualisation, the recourse cash flow (RCF) formulae are used to determine the amount attributable to shareholders in respect of in-force business. The results of new business written (with the exception of increments written in the Heritage withprofits Fund) will be directly attributable to shareholders. Therefore the RCF formulae will not apply to that new business. This distinction means that acquisition costs and certain reserving strains are treated differently in the HFI in comparison to the way that those costs are actually treated post-demutualisation. These differences are adjusted in the pro forma profit calculation – see section 1.5.3.4.
The terms of the Scheme have been reflected in the preparation and presentation of the HFI results. Further details about the terms of the Scheme are discussed in the Company’s Prospectus. The HFI results have been derived using the SLAC Group accounting records and in accordance with the accounting policies set out in the Prospectus. The principal adjustments made to the underlying Standard Life Group accounting records are summarised below.
(b) The recharge in respect of business written in the German branch.
In order to calculate the shareholder profit/loss that would have arisen in the two accounting periods in relation to (a), (b) and (e) above long-term insurance premiums, claims and commissions, associated reinsurance and operating costs and actuarial reserves have been derived from the accounting and actuarial records of the Group and have been allocated to each business unit and product category by reference to the nature of the individual products giving rise to the transactions. The RCF is then calculated for each product category by reference to formulae defined in the Scheme.
In addition, the post demutualisation results for Germany arise from a recharge of expenses to the HWPF, whereas the pro forma results were calculated based on a method which allocated the results between shareholders and policyholders on a basis that is consistent with business written in the UK and Ireland.
The pro forma results are calculated by adjusting the HFI results for the following items: (a) Deferral of acquisition costs
The adjustment shown in the pro forma income statement reflects the deferral of that element of acquisition costs, which would have been attributable to shareholders had the new business been written in the Proprietary Business Fund.
The primary role of the residual estate, as set out in paragraph 4.1 of schedule 1 of the Scheme, is to ensure a prudent amount is retained in the HWPF in respect of any amounts which may be charged to the HWPF in accordance with the Scheme. To the extent that the SLAL Board is satisfied that the residual estate exceeds that required to meet its primary role, the excess residual estate shall be distributed over time in as fair and equitable manner as is practicable as an enhancement to final bonus payable on the remaining HWPF with-profits policies. As reported by SLAC’s with-profits actuary in its members’ circular issued in April 2006, it was estimated that, as at 31 December 2005, after allowing for estimates of the effects of the various transactions and asset and liability movements associated with demutualisation, the residual estate would have been expected to be in excess of £0.5bn. As at 31 December 2006, the residual estate increased to approximately £1.3bn.
Life and pensions UK 214 Europe 11 Canada 80 Other (7) HWPF TVOG 31 Life and pensions operating profit 329
Investment management* 23 Banking 21 Healthcare and general insurance 13 Group corporate centre costs (47) Other 7 Operating profit before tax 346
Basic EPS (pence) 11.8 Weighted average number of ordinary shares in issue (millions) 2,102
Fair value gains/(losses) on cash flow hedges 4 Actuarial (losses)/gains on defined benefit pension schemes (2) Foreign exchange rate movements* (105) Aggregate tax effect of items not recognised in income statement (6) Net (expense)/income recognised directly in consolidated balance sheet (109) Profit after tax 515 Total recognised income and expense for the period attributable to equity holders 2.8 406 * Foreign exchange rate movements primarily relate to Canada.
The Group’s covered business is its life assurance and pensions businesses in the United Kingdom, Europe (Germany and Ireland), Other (including Asia) and Canada, as well as the current and future profits and losses from Standard Life Investments (SLI) arising on its management of funds relating to the life and pensions businesses. As the businesses included in ‘other’ are not material in the context of the Group they have been included at their IFRS value.
UK covered business also includes: • Non-insured Self Invested Personal Pension (SIPP) business.
The Group’s non-covered business mainly includes the business of Standard Life Bank (SLB), Standard Life Healthcare (SLH), the third party investment management business of SLI as well as other non-life and pensions entities.
Expected return on existing business 136 15 47 – – 198
Expected return on free surplus 6 1 (3) (7) – (3)
HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With-Profits Fund (HWPF). Although this fund includes business written by UK, Germany and Ireland, it is managed at a combined level and therefore is not included within the results of each individual territory. The results for Canada include the cost of the Canadian TVOG, and the results for Europe include the cost of TVOG arising on business written outside of the HWPF in Germany.
Transfer back of surplus to SLI (9) – – – – (9) Actuarial gains/(losses) on defined benefit pension schemes – 1 9 – – 10
2.4 Experience variances (continued) UK mortality variances arise from profits on annuity business and the impact of changes in deferred annuity reserving bases.
The UK lapse assumption change includes charges of £59m for pensions, reflecting increases in exit rates as a result of the greater freedom now available to customers in the approach to retirement, and £48m arising from increased withdrawal rates for with-profits life policies. The maintenance expenses change reflects continued efficiency gains in the business. The main change in mortality assumption is in respect of annuities, reflecting the combined effect of a number of factors including changes to the underlying mortality tables and a widening in margins between valuation and best estimate assumptions.
Present value of in-force life and pensions business (3,217) Adjustment of long-term debt to market value 92 Canadian mark to market 273 Deferred acquisition costs/(Deferred income reserve) 98 Other 24 Net assets on an IFRS basis 2,878
2.10 Analysis of life and pensions EEV PVIF and net worth movements (net of tax) (a) Total 10 July 2006 to 31 December 2006 Free Required PVIF net of surplus capital Net worth cost of capital Total £m £m £m £m £m
Expected return on existing business – 12 12 125 137 Expected return transfer to net worth 255 (20) 235 (235) –
Capital injections/(dividends) (3) 3 – – – Transfers (to)/from non-covered business (71) – (71) – (71)
Transfer back of surplus to SLI (9) – (9) – (9) Actuarial gains/(losses) on defined benefit pension schemes 10 – 10 – 10
2.10 Analysis of life and pensions EEV PVIF and net worth movements (net of tax) (continued) (b) UK and HWPF TVOG
10 July 2006 to 31 December 2006 Free Required PVIF net of surplus capital Net worth cost of capital Total £m £m £m £m £m
(c) Europe and Other 10 July 2006 to 31 December 2006 Free Required PVIF net of surplus capital Net worth cost of capital Total £m £m £m £m £m
Expected return on existing business – – – 9 9 Expected return transfer to net worth 42 – 42 (42) –
Investment return and tax variances (1) – (1) 6 5 Economic assumption changes – – – 9 9
Contribution from new business (7) 7 – 12 12 Contribution from in-force business
Capital injections/(dividends) – – – – – Transfer (to)/from non-covered business – – – – –
Subordinated liabilities within EEV are based on the market value of the debt and are part of covered business. The Free Surplus shown in note 2.2(c) is net of these liabilities.
Germany 2.55 Ireland 3.46 * 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.
** 1.69% in 2006 decreasing by 0.10% per year to 1.19% in 2011 and later years.
Germany 2.66 Ireland 3.89 * 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.
(b) Risk discount rates – in-force business 31 December 2006 UK Europe shareholder shareholder
Risk margin – in-force business Risk margin before cost of capital adjustment
Risk margin after cost of capital adjustment 3.00 1.70 3.00 1.70 2.50
The reductions in the HWPF risk margins from 3.5% to 3.0% arise from a reduction in market risk offset by an increase in non-market risk. These movements include the impact of the finalisation of the shareholder interest in German HWPF business, which now has limited exposure to market risk.
(c) Risk discount rates – new business 10 July 2006 to 31 December 2006 UK Europe shareholder shareholder
The asset model simulates economic time series using a monthly time-step over 40 years. The time series produced include a cash account index, a gross redemption yield term structure, an equity total return index, a property total return index, equity dividend yields, property rental yields, price inflation and earnings inflation. Investment returns for corporate bonds are allowed for implicitly in the projection of asset shares. The asset model allows option-pricing techniques to be used to value the guarantees embedded within policies. The model is run in a risk-neutral universe where, on average, all assets return the risk-free rate of return. This risk-free rate of return is taken to be the return on the cash account.
The parameters required to specify the Black-Karasinski model are determined by optimisation to achieve a satisfactory fit to the following calibration instruments: • Bank of England Gilt spot-rate term structure (25 year term structure extrapolated to 40 years using a constant forward rate assumption) adjusted to allow for ‘convenience premium’ associated with Gilt prices.
As there is no property option market it is not possible to determine implied market property volatility, so a level best estimate is used. The property volatility is determined using Investment Property Databank (IPD) UK data and de-smoothing it to determine an estimate for true underlying property return volatility.
Long-term estimates for income yields on property and equity cannot be derived from market instruments. However, these parameters are not of significant consequence as the guarantees being valued are based on total return rather than capital return.
The correlations between the major asset classes are targeted at: • Equity/Property = 0.2
These correlations are determined from historical analysis of asset class returns. It should be noted that the limited quantity of data results in large confidence intervals for the values of the correlations.
2.14 Sensitivity analysis – economic and non-economic assumptions The tables below show the sensitivity of the embedded value and the new business contribution.
Fall in equity/property market values by 10% (157) (6) (42) – – (205)
The value of future shareholder 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 investment management and other services where these relate to covered business. This is referred to as the ‘look through’ into service company expenses.
Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways: • application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk-free rate; • holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments; and
Risk discount rates have been determined as the risk-free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, the Group has opted for an approach whereby the risk margin is determined such that the PVIF, excluding the allowance for the TVOG, calculated using expected ‘real world’ asset returns equates with the PVIF calculated using ‘risk-neutral’ investment returns and discount rates. In this way, the benefits of assuming higher than risk-free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk-free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for non-market risk by applying stress tests to the PVIF using the Group’s internal capital model, and quantifying an additional risk margin based on the results of the stress tests. 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 the Group’s internal capital model.
Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Europe and Canada). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by reassurance into other Group entities) and on policies that are in shareholder owned funds. For HWPF policies, the significant inter-Group reassurance item is the mortality surpluses on annuities, which are reassured out of the HWPF. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification. The risk margins are also reduced to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.
Required capital represents the amount of assets over and above those required to back the liabilities in respect of the covered business whose distribution to shareholders is restricted. As a minimum, this will represent the capital requirement of the local regulator.
The Group has set required capital to be the higher of regulatory capital and its own internally-assessed risk-based capital requirement. In determining the required capital for purposes of assessing EEV, the Group excludes any required capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the Shareholder Fund. Projections show that the surplus in the HWPF is expected, on best estimate assumptions, to cover this level of required capital at the valuation date and in future years.
• UK and Europe (business in shareholder owned funds) – 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life’s internal risk-based capital requirement.
• Canada – the level of required capital is taken as 150% of minimum continuing capital and surplus requirements (MCCSR).
The value of the TVOG arising from the HWPF at any point in time will be sensitive to: • the level of the residual estate (working capital in the HWPF); • investment conditions in terms of bond yields, equity and property values and implied market volatility; and
• the investment profile of the assets backing the applicable policies at the time the TVOG is calculated.
Most with-profits business written post demutualisation is managed in a number of new with-profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date. These guarantees increase each year with the addition of bonuses.
The inflation rates assumed are, in general, based on the market-implied long-term price inflation plus a margin to allow for salary inflation.
Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions. No future productivity gains have been anticipated in deriving expense assumptions.
Development costs represent specific costs incurred which are considered temporary in nature and are not expected to occur again.
Lapse rate assumptions in the UK have been set by reference to expected future trends. For some contracts this includes an assumption that current lapse levels are temporarily high due to the effect of the Group’s demutualisation and other market features, and that these will reduce over time to a lower long-term rate.
Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving the TVOG, to reflect the Directors’ best estimate of how policyholder behaviour may vary in such circumstances.
New business includes new policies written during the period and some increments to existing policies (as discussed below).
• Products substituted due to the exercise of standard contract terms are not deemed to be new business.
For Germany, new business comprises: • New contracts written during the period.
• All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business.
2.15 European embedded value methodology (continued) New business sales are expressed on two bases: Annual Premium Equivalent (APE) and Present Value of New Business Premiums (PVNBP). APE is equal to the total of regular premiums plus 10% of single premiums received during the applicable period. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that the PVNBP is discounted using the relevant opening risk-free rate rather than the risk discount rate.
The opening and closing EEV numbers for the covered business are determined on an after tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. Attributable tax and profit before tax are derived by grossing up profit after tax at the standard rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group’s expectation of the rate of tax applicable to business sold after demutualisation.
For non-covered business, attributed tax is consistent with the IFRS financial statements shown in the Annual Report and Accounts, unless otherwise stated.
Less: Tax expense attributable to policyholders’ returns (118) (239) (357) (531) Tax expense attributable to equity holders’ profits – 58 58 – Profit for the period 52 343 395 83
Earnings per share Basic (pence per share) 3.5 13.5 13.5 Diluted (pence per share) 3.5 13.0 13.0
Profit before tax attributable to equity holders 401 Tax attributable to: Underlying profit (39) Adjusted items (19)
Underlying profit is calculated by adjusting the profit for the period for volatility that arises from different International Financial Reporting Standards (IFRS) measurement bases for liabilities and backing assets, volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS, restructuring costs, impairment of intangibles and profit or loss arising on the disposal of a subsidiary, joint venture or associate. The Directors believe that, by eliminating this volatility from equity holder profit, they are presenting a more meaningful indication of the underlying business performance of the Group.
Assets Intangible assets 60 44 Deferred acquisition costs 3.7 445 290 Investments in associates and joint ventures 3,237 2,608 Investment property 11,338 9,907 Property, plant and equipment 1,067 590 Reinsurance assets 740 779 Loans and receivables 12,021 12,496 Investment securities 97,224 87,431 Other assets 2,497 1,664 Cash and cash equivalents 3,962 4,451 Total assets 132,591 120,260
Equity Share capital 3.8 210 Share premium reserve 3.9 799 Retained earnings 3.10 298 Other reserves 3.11 1,571 Capital and reserves attributable to equity holders of Standard Life plc 2,878
Liabilities Non-participating contract liabilities 3.12 71,133 62,087 Participating contract liabilities 3.12 39,996 41,008 Third party interest in consolidated funds 961 358
Prior to the demutualisation of The Standard Life Assurance Company on 10 July 2006, the parent company of the Group did not issue shares or report retained earnings and reserves were recognised as part of the unallocated divisible surplus. Therefore there are no comparative balances for consolidated equity.
Revaluation of land and buildings 44 22 66 11 Exchange differences on translating foreign operations (101) (113) (214) 218 Equity movements transferred to unallocated divisible surplus – 1 1 – Retained earnings recognised on demutualisation – 17 17 – Aggregate policyholder tax effect of items not recognised in income statement 4 – 4 – Aggregate equity holder tax effect of items not recognised in income statement – (8) (8) –
Net (expense)/income not recognised in income statement (45) (78) (123) 248
Profit for the period 52 343 395 83 Total recognised income
Subsequent to the listing of the shares of Standard Life plc on the London Stock Exchange on 10 July 2006, there have been significant movements in equity from that date which are summarised below: Period 10 July 2006 to
Total recognised income for the period 265 Issue of share capital for cash, net of transaction costs 3.8, 3.9 1,363 Issue of share capital other than in cash 3.8 146 Difference between fair value and book value of the Group at demutualisation 3.11 (2,065) Merger relief on issue of demutualisation shares 3.11 3,214 Reserves credit for employee share-based payment schemes 3.11 15 Equity at 31 December 3,185
IFRS Consolidated statement of recognised income and expense For the year ended 31 December 2006 49Standard Life
Supplemental disclosures on cash flow from operating activities Interest received 3,054 2,910 Dividends received 1,452 1,110 Rental income received on investment properties 634 618
The consolidated income statement presentation has been revised as described in notes 3.1(b) and 3.2(b). In accordance with these revisions, the ‘Change in unallocated divisible surplus’ has been moved from the line presented in the consolidated cash flow statement for the year ended 31 December 2005 to be included in the reconciliation of ‘Profit before tax’ to ‘Net cash flows from operating activities’.
The accounting policies as set out in the Group’s Annual Report and Accounts for the year ended 31 December 2006 have been applied in the preparation of this preliminary announcement.
(b) Presentation of the primary statements On 10 July 2006, The Standard Life Assurance Company (SLAC) demutualised and the shares of a new holding company for the Standard Life Group, Standard Life plc (the Company), were listed on the London Stock Exchange. As a result, the Group operated under two different operating models in the periods that are presented in the consolidated financial statements. For the year ended 31 December 2005 and the period from 1 January 2006 to 10 July 2006, the parent company of the Group was a mutual insurer and for the period from 10 July to 31 December 2006, the Group is equity holder owned.
To reflect the different operating models in place over the reporting periods, the 2006 consolidated income statement has been split to show the period from 1 January 2006 to 10 July 2006 and the period from 10 July to 31 December 2006 in two separate columns with a third column which combines these periods to show the total for the year ended 31 December 2006.
The consolidated income statement included in the financial statements for the year ended 31 December 2005 was appropriate when the parent company of the Group was a mutual insurer and the presentation reflected that the Group did not report profit. Prior to the demutualisation of SLAC, the balance on the consolidated income statement was transferred to the unallocated divisible surplus. Subsequent to the demutualisation of SLAC, the format has been revised to align the presentation more closely with that of an equity holder owned company. Within the revised format of the consolidated income statement, certain items are presented on different lines: • The amounts included in ‘Transfer to the unallocated divisible surplus’ for the year ended 31 December 2005 and for the period from 1 January to 10 July 2006 are reported within expenses; • The amounts included in ‘Result before tax’ for the year ended 31 December 2005 and for the period 1 January to 10 July 2006 are reported in ‘Profit before tax’. Given that the ‘transfer to unallocated divisible surplus’ is reported within expenses, the amounts reported as ‘Profit before tax’ for those periods are the tax expense and the increase in net assets attributable to minority interest; and
The pro forma reconciliation of underlying profit to profit before tax is presented directly after the consolidated income statement to facilitate consideration of this measure in conjunction with the equity holder profit. In this reconciliation, certain items are adjusted against equity holder profit, and in doing so the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group. The reconciliation is only relevant for the period from 10 July to 31 December 2006 when the Group reported a profit and, therefore, reconciliations for the year ended 31 December 2005 and for the period 1 January to 10 July 2006 are not presented.
The consolidated statement of recognised income and expense has been revised in line with the consolidated income statement and in 2006 has similarly been split between the period from 1 January to 10 July 2006 and the period from 10 July to 31 December 2006 with a third column which combines these periods to show the year from 1 January to 31 December 2006. As a result of the revision, for the period from 1 January to 10 July 2006 and the year ended 31 December 2005, the ‘Total recognised income for the period’ represents an amalgamation of the ‘Net (expense)/income not recognised in the income statement’ and the increase in net assets attributable to minority interest.
(b) SLAC’s investment in certain operating subsidiaries (including Standard Life Bank Limited, The Standard Life Assurance Company of Canada, Standard Life Healthcare Limited and Standard Life Investments Limited) were transferred to SLAL’s Shareholder Fund or Proprietary Business Fund.
(c) SLAC’s liabilities as at 10 July 2006 in respect of its staff pension schemes for employees in the UK and Ireland were transferred to the Proprietary Business Fund.
(d) All remaining assets and liabilities transferred were transferred to the HWPF.
Immediately prior to the demutualisation of SLAC, it repaid its liabilities to its subsidiaries that had issued subordinated guaranteed bonds and Mutual Assurance Capital Securities (‘the instruments’) and lent it the funds received. The repayment proceeds were transferred to the Company in return for its assumption of the obligations under the instruments. At the time of the demutualisation transaction the Company entered into a loan arrangement with SLAL under which it lent the proceeds it had received for assuming the obligations under the instruments. The instruments were re-listed on the London Stock Exchange with the Company as the new issuer.
(a) Impact of demutualisation transaction and Initial Public Offering (continued) Also, immediately prior to the demutualisation of SLAC, it transferred its Canadian branch business (excluding the Stacking Policy and Structured Settlement businesses) to The Standard Life Assurance Company of Canada, a Canadian registered subsidiary of SLAC, in return for additional shares in The Standard Life Assurance Company of Canada. The Stacking Policy business was transferred to the Proprietary Business Fund of SLAL and the Structured Settlement business remained in SLAC.
On 10 July 2006, the Company’s shares were listed on the London Stock Exchange and as a result of its Initial Public Offering (IPO) issued 556,944,945 shares raising £1,224m before transaction costs. Subsequently, the exercise of an over-allotment provision resulted in the issue of 83,541,742 shares raising further capital of £192m before transaction costs. The transaction costs directly attributable to the issue of the shares were £53m, therefore the total capital raised net of transaction costs was £1,363m.
On 21 July 2006, the Court of Session of Scotland confirmed a reduction of £500m in the Company’s share premium account and the cancellation of SLAL’s entire share premium account. These capital reductions were undertaken to create distributable reserves of £500m in the Company and to remove a possible restriction upon declaring and paying dividends to the Company out of future surplus cash flows derived from the long term business of SLAL.
The demutualisation transaction is a group reconstruction which is not a business combination within the scope of IFRS 3 Business Combinations. Therefore merger accounting principles have been applied to the transaction in the consolidated financial statements of the Group resulting in assets and liabilities being transferred to new Group entities at their carrying value prior to the transfer.
(a) Impact of demutualisation transaction and Initial Public Offering (continued) The impact of the demutualisation and IPO transactions on the consolidated balance sheet is shown below.
Demutualisation eligible liabilities and Apportionment IPO Demutualisation 10 July 2006 members non-par PVFP of non-par PVFP proceeds Other 10 July 2006
Other liabilities and minority interest (83,590) (59) (7) – – (83) (83,739)
Note 1 It is the Group’s policy that liabilities under participating contracts, including unallocated divisible surplus (UDS), are measured at a value equal to the value of the assets held in the related with-profits fund. Therefore the value of the net assets, and thus equity, recognised by the Group following the demutualisation transaction equalled the value at which the net assets not transferred to the HWPF were carried at in the Group prior to the demutualisation transaction.
Note 3 Non-participating contract PVFP can be apportioned between the component related to contracts whose future cash flows under the Scheme will be transferred out of the HWPF to equity holders and the component related to contracts whose future cash flows remain in the HWPF thus contributing to the planned enhancement component of participating liabilities. These components are offset in the measurement of the UDS and participating contracts respectively.
• As described in note 3.1(b), the consolidated income statement has been split to show the period from 1 January to 10 July 2006 and the period from 10 July to 31 December 2006 in two separate columns, with a third column which combines these periods to show the result for the year ended 31 December 2006. Further detail is provided in note 3.2(b).
• The valuation of insurance liabilities written in the UK is derived from regulatory requirements. The transfer of business from SLAC to SLAL on demutualisation gave rise to a change in the realistic valuation of liabilities. Note 3.12 analyses the movement in insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets between the periods 1 January to 10 July 2006; demutualisation on 10 July 2006; and 10 July (post-demutualisation) to 31 December 2006.
(b) Presentation of the consolidated income statement As described in note 3.1(b), the revised format of the consolidated income statement has resulted in certain items being presented on lines different to that reported for the year ended 31 December 2005. The following items, reported in the consolidated income statement for the year ended 31 December 2005, have been presented within the consolidated income statement on different lines as follows: • The amount reported as ‘transfer to the unallocated divisible surplus’ for the year ended 31 December 2005 is reported within expenses resulting in an increase to the amount reported as ‘total expenses’ of £901m; • The amount reported as ‘Profit before tax’ represents the sum of ‘tax expense’ (of £531m) and ‘increase in net assets attributable to minority interest’ (of £83m) that were reported in the consolidated income statement for the year ended 31 December 2005; and
2005 as reported in financial Increase in Income statements for Transfer to net assets arising from the year ended unallocated attributable associates 2005 31 December Presentation divisible to minority and joint comparatives 2005 changes surplus interest ventures reported £m £m £m £m £m £m
Revenue from external customers Net earned premium 3,714 249 – – – – 3,963
Share of profits from associates and joint ventures 104 7 4 – 2 – 117
The consolidated income statement presentation has been revised as described in notes 3.1(b) and 3.2(b). An impact of the revisions is that the amounts included in ‘Transfer to unallocated divisible surplus’ for the period from 1 January to 10 July 2006 and for the year ended 31 December 2005 are reported within ‘Total expenses’ and are therefore included in ‘segment expenses’. For the period from 1 January to 10 July 2006 and for the year ended 31 December 2005, ‘increase in net assets attributable to minority interest’ was included below the ‘Result before tax’ and in the revised income statement presentation, these are reported in ‘Profit before tax attributable to equity holders’ which appears above the ‘Profit for the year’.
There are legal restrictions surrounding the holding of shares by occupational pension scheme trustees. Therefore, on demutualisation of SLAC, the shares to which the occupational pension scheme members were entitled were sold as part of the Institutional Offer. The cash raised on the sale of the shares was subsequently remitted to the Group and used to enhance benefits under the policies. £224m is included in the net premium earned in respect of the proceeds raised from the sale of these shares.
From 10 July 2006 new UK business is written in the Proprietary Business Fund and equity holder profit is recognised on an earned basis. Any with-profits element is transferred to the appropriate with-profits fund.
(a) Primary reporting format – Business segments (continued) (i) Segmental income statement (continued)
Healthcare 12 months to 31 December 2005 Life and and general Investment pensions insurance management Banking Elimination Total £m £m £m £m £m £m
Revenue from external customers Net earned premium 3,308 208 – – – 3,516
Total revenue from external customers 17,387 210 92 618 – 18,307
Segment result for the year 598 1 14 1 – 614
Other items included in the income statement are: Impairment losses recognised 9 – – 1 – 10 Impairment losses reversed (8) – – – – (8) Amortisation of intangible assets 3 – – 4 – 7 Amortisation of deferred acquisition costs 44 27 1 – – 72 Depreciation of property, plant and equipment 17 – – – – 17
Investments in associates and joint ventures 2,765 170 38 – 264 – 3,237
(a) Primary reporting format – Business segments (continued) (ii) Segmental balance sheet (continued)
Capital expenditure incurred during the year on: Property, plant and equipment 84 – – – – 84
3.3 Segmental analysis (continued) (b) Secondary reporting format – Geographical segments The geographical segments are the United Kingdom, Canada and International operations, which includes all other geographical regions.
Segment revenue from acquisition costs, and property, external customers Segment assets plant and equipment £m £m £m
Commission expenses 493 410 Interest expense 558 546 Staff costs and other employee related costs 599 545 Restructuring and demutualisation expenses 100 84 Other administrative expenses 441 565 Total administrative expenses 2,191 2,150
3.5 Earnings per share (a) Basic earnings per share Basic earnings per share is calculated by dividing profit attributable to equity holders of Standard Life plc by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally in employees.
(b) Diluted earnings per share Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has two categories of dilutive potential ordinary shares – bonus shares committed to at the time of the demutualisation of SLAC and flotation of Standard Life plc (as described in note 3.2) and share awards and share options.
As part of the offer on the demutualisation of SLAC and flotation of Standard Life plc, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who hold shares for a continuous period of one year, will be eligible to receive, at the end of that one year period, one bonus share for every twenty shares retained. The expected number of bonus shares to be issued is based on the number of shares that, at 31 December 2006, still meet the continuous holding requirement.
For share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of shares that would have been issued assuming the exercise of the share options.
3.5 Earnings per share (continued) (c) Alternative earnings per share Earnings per share is also calculated based on the underlying profit before tax and certain non operating items as well as on the profit attributable to equity holders of Standard Life plc. The Directors believe that earnings per share based on underlying profit provides a better indication of operating performance.
Tax attributable to: Underlying profit (39) (1.8) Adjusted items (19) (0.9)
Profit attributable to minority interest (60) (2.9) Profit attributable to equity holders of Standard Life plc 283 13.5 3.6 Dividends Subsequent to 31 December 2006, the Directors have proposed a dividend for the period from 10 July 2006 to 31 December 2006 of 5.4 pence per ordinary share, an estimated £114m in total. The dividend will be paid on 31 May 2007, subject to approval at the Annual General Meeting on 29 May 2007. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2007.
At 1 January Cost 692 636 Accumulated amortisation and impairment (402) (367) Opening net book amount 290 269
deferred explicitly as they were taken into account in the measurement of the present value of future profits for nonparticipating contracts. For the same reason acquisition costs on non-participating investment contracts were not deferred explicitly except to the extent of any deferred income recognised on these contracts.
Following demutualisation the Group’s new insurance and investment contracts are written in proprietary business funds. Acquisition costs are explicitly deferred on these contracts since they are not taken into account in the measurement of the contract liabilities and the present value of future profits on non-participating contracts is not separately recognised.
3.8 Share capital (a) Authorised share capital At 31 December 2005 the authorised share capital of the Company was 1,000 £1 ordinary shares.
Ordinary shares of £0.10 each 3,000,000,000 300 Redeemable preference shares of £1 each 50,000 –
(b) Issued share capital At 31 December 2005, the Company had allotted and issued share capital of 2 £1 ordinary shares.
On 10 May 2006, each of the 2 issued ordinary shares were subdivided into 10 £0.10 ordinary shares. An additional 10 ordinary shares of £0.10 each were issued on the same date at par for cash. During the year, a further 2,106,070,439 £0.10 ordinary shares were allotted and issued by the Company as follows: Number £m
As detailed in Note 3.2, on 10 July 2006 The Standard Life Assurance Company demutualised. 1,463,516,990 demutualisation shares were issued by the Company to eligible members of The Standard Life Assurance Company to compensate them for the loss of their membership rights. A further 556,944,945 shares were issued on 10 July 2006, raising £1,224m of new capital before transaction costs. An over-allotment provision was granted to Merrill Lynch International to subscribe for additional ordinary shares at the original offer price. It was exercised on 19 July 2006 with a further 83,541,742 shares issued on that date, raising £192m before transaction costs.
All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and the rights to receive dividends and other distributions declared or paid by the Company.
3.9 Share premium reserve The premium arising on the shares issued during the year was: £m
In 2005, the Company had not issued any ordinary shares at a premium and, therefore, there was no share premium reserve.
Prior to the demutualisation of The Standard Life Assurance Company, the parent company of the Group was a mutual insurer and the balance on the income statement was transferred to the unallocated divisible surplus, which was attributable to participating policyholders. Therefore, during the year ended 31 December 2005 and in the period from 1 January to 10 July 2006 the Group did not recognise any retained profits.
Reserve Revaluation Foreign Equity arising of land and Cash flow currency Merger compensation Special on Group buildings hedges translation reserve reserve reserve reconstruction Total £m £m £m £m £m £m £m £m
3.11 Reconciliation of movements in other reserves (continued) Special reserve: As detailed in note 3.2(a), on 21 July 2006 the Court of Session of Scotland confirmed a £500m reduction in the share premium account of the Company. Following the reduction, a Special Reserve was created for the same amount. The Special Reserve forms part of the Company’s distributable profits for the purpose of section 263 of the UK Companies Act 1985.
3.12 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets £m £m
Participating contract liabilities Participating insurance contracts 20,225 19,633 Participating investment contracts 18,563 18,076 Present value of future profits on non-participating contracts – (1,528) Unallocated divisible surplus 1,208 4,827
Non-participating insurance contracts include £152m (2005: £118m) relating to Standard Life Healthcare Limited and £3m (2005: £3m) relating to general insurance, conventional term assurance (Lifetime Protection Series or LPS), life contingent annuities, Perspecta Universal Life in Canada, and a small amount of linked Homeplan business.
Unallocated divisible surplus before apportionment 2,968 Non-participating PVFP deducted (1,760) Unallocated divisible surplus after apportionment 1,208
(a) Insurance contract liabilities, participating investment contract liabilities and reinsurance assets
Change in Unearned Premium Reserve* – 68 – 68 – 68
* Change in Unearned Premium Reserve includes the liabilities acquired in relation to the private medical business of FirstAssist.
The table above has been split to show the movements for the period from 1 January 2006 to demutualisation on 10 July 2006 and the period from demutualisation on 10 July 2006 to 31 December 2006. The demutualisation impact is disclosed in note 3.2.
Included in the movement in actuarial liabilities in the period from 1 January to 10 July 2006 is an amount of £307m arising from periodic adjustments to asset shares to bring the credited investment return in line with the actual returns generated, and from a change in the allocation of fixed income returns to adjust allocations previously determined.
Non-economic experience changes in the period from 1 January to 10 July 2006 primarily represent lower than expected claims (including deaths, surrenders, maturities and lapses) whereas experience changes in the period from 10 July to 31 December 2006 reflect higher than expected claims.
Effect of changes in: Effect of: Total change in contract liabilities 1,379 1,605 2,183 5,167 (112) 5,055
Economic assumptions reflect changes in fixed income yields, leading to lower valuation rates on non-participating business and other market movements. Experience changes in 2005 primarily represent higher than expected investment returns, increasing the participating liabilities.
Changes in methodology and models include refinement of the realistic liability models, including enhanced modelling of the cost of guarantees for Germany.
(b) Present value of future profits on non-participating contracts The change in the present value of future profits on non-participating contracts was as follows: £m
Expected change, including unwind of discount (25) Methodology/modelling changes 303 Effect of changes in economic and non-economic assumptions (122) Effect of economic and non-economic experience 88 New business 244 Foreign exchange adjustment (1)
(c) Non-participating investment contract liabilities The change in non-participating investment contract liabilities was as follows: £m
Contributions 4,960 Initial charges and reduced allocations (5) Account balances paid on surrender and other terminations in the year (2,355) Investment return credited and related benefits 1,693 Foreign exchange adjustment (187) Other 3 Recurring management charges (126)
Contributions 6,057 Initial charges and enhanced allocations 16 Account balances paid on surrender and other terminations in the year (3,024) Investment return credited and related benefits 3,851 Foreign exchange adjustment (817) Other 87 Recurring management charges (151)
Contributions 6,952 Initial charges and reduced allocations (7) Account balances paid on surrender and other terminations in the year (3,407) Investment return credited and related benefits 5,996 Foreign exchange adjustment 913 Other 71 Recurring management charges (186)
Fair value gains on cash flow hedges – 14 – – 14 – 14 Actuarial losses on defined benefit pension
UDS at 10 July 2006 – before demutualisation 71 10 26 5,066 5,173 Revaluation of land and buildings (71) – – – (71) Cash flow hedges – (10) – – (10) Foreign currency translation – – (26) – (26) Cumulative UDS movements not recognised in the income statement – – – 107 107 Net assets transferred out of the with-profits fund 3.2(a) – – – (1,359) (1,359) Other adjustments to UDS 3.2(a) – – – (2,504) (2,504)
The shaded boxes represent those line items that are not applicable to a particular period given the demutualisation of The Standard Life Assurance Company on 10 July 2006.
Prior to demutualisation all the Group’s assets and liabilities were ultimately held for the benefit of The Standard Life Assurance Company’s with-profits fund. The UDS, being a component of participating contract liabilities, represented the difference between the Group’s recognised assets and all other recognised liabilities and minority interest.
currency UDS before recognised Revaluation translation income in the of land and Cash flow of foreign Remaining statement income
Fair value losses on cash flow hedges – (4) – – (4) – (4) Actuarial gains on defined benefit
Transfer to unallocated divisible surplus 3.2(b) – – – – – 901 901 Foreign exchange adjustment – – – 25 25 – 25 3.14 Borrowings £m £m
Certificates of deposit, commercial paper and medium term notes 3.14(a) 1,812 1,963 Securitisations – mortgage backed floating notes 3.14(b) 4,383 4,025 Bank overdrafts 242 105
(a) Certificates of deposit, commercial paper and medium term notes The Group has issued certificates of deposit through its subsidiary Standard Life Bank (SLB). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V., a wholly owned subsidiary of SLB. SLB 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 considered a financial guarantee contract under the revised IAS 39 Financial Instruments: Recognition and Measurement effective from 1 January 2006 and is initially recognised at fair value. The fair value at 31 December 2006 is £nil (2005: £nil).
Due within 1 year Standard Life Bank certificates of deposit – GBP 5.04% 4.45% 734 789 Standard Life Bank certificates of deposit – USD 5.31% – 52 – Standard Life Bank certificates of deposit – EUR 2.89% – 10 – Standard Life Funding B.V. commercial paper – GBP 5.20% 4.60% 20 196 Standard Life Funding B.V. commercial paper – USD 5.45% 4.43% 354 440 Standard Life Funding B.V. commercial paper – EUR 3.65% 2.45% 540 341 Standard Life Funding B.V. commercial paper – JPY – 0.09% – 20 Standard Life Funding B.V. medium term notes – GBP 5.39% 5.60% 3 15 Standard Life Funding B.V. medium term notes – USD – 4.58% – 58
Due between 1 and 5 years Standard Life Bank certificates of deposit – GBP 4.97% 4.54% 6 5 Standard Life Funding B.V. medium term notes – GBP 5.43% 4.80% 12 12
Total certificates of deposit, commercial paper and medium term loan notes 1,812 1,963
Lothian Mortgages No. 1 plc – USD – Maturity 2017 5.78% 4.62% 129 215 Lothian Mortgages No. 1 plc – GBP – Maturity 2035 5.68% 5.09% 570 570 Lothian Mortgages No. 2 plc – GBP – Maturity 2038 5.50% 4.93% 202 202 Lothian Mortgages No. 2 plc – USD – Maturity 2038 5.73% 4.56% 155 333 Lothian Mortgages No. 2 plc – EUR – Maturity 2038 3.95% 2.62% 510 522 Lothian Mortgages No. 3 plc – USD – Maturity 2019 5.65% 4.49% 142 295 Lothian Mortgages No. 3 plc – GBP – Maturity 2039 5.52% 4.95% 786 786 Lothian Mortgages No. 4 plc – USD – Maturity 2006 – 4.41% – 57 Lothian Mortgages No. 4 plc – EUR – Maturity 2040 3.66% 2.33% 381 476 Lothian Mortgages No. 4 plc – GBP – Maturity 2040 5.40% 4.81% 570 569 Lothian Mortgages Master Issuer plc – USD – Maturity 2038 5.52% – 213 – Lothian Mortgages Master Issuer plc – USD – Maturity 2050 5.60% – 26 – Lothian Mortgages Master Issuer plc – EUR – Maturity 2050 3.70% – 319 – Lothian Mortgages Master Issuer plc – GBP – Maturity 2050 5.42% – 380 – Total mortgage backed floating rate notes 4,383 4,025 3.15 Subordinated liabilities £m £m
The maturity date for the Euro denominated bonds is 12 July 2022 and all outstanding obligations under the instruments become immediately due and payable on this date. There are specific conditions surrounding the solvency of SLAL, which allow the repayment of the outstanding obligations to be deferred to the second anniversary of the maturity date. The Company does have the option to redeem at par the bonds on 12 July 2012 and on any interest payment date thereafter until maturity. From 12 July 2012 the Euro Bonds will bear interest quarterly in arrears at a floating rate determined by the three month Euro deposit rate.
The subordinated notes are perpetual securities and as such have no fixed redemption date. However, the notes are redeemable at par at the option of the issuer on 29 June 2015 but if they are not redeemed on 29 June 2015, the interest rate payable will be reset to 2.80% over the gross redemption yield on the appropriate benchmark gilt on the reset date.
3.15 Subordinated liabilities (continued) The payment of interest can be deferred at the option of the Company on any interest payment date and deferral is mandatory on any interest payment date on which the Company does not satisfy certain specified solvency conditions. SLAL has corresponding mandatory deferral rights in relation to the payments under the guarantee. Any interest deferred becomes immediately due and payable on the date the payment of interest is resumed by the Company or SLAL, the date fixed for the redemption or purchase of MACS by the Company, the commencement of winding up of the Company or the date of any declaration or payment of dividends, interest or other payment in respect of securities that rank junior to MACS or the date any of these junior securities are purchased by the Company, SLAL or a subsidiary of the Company.
SLAL issued a subordinated loan note to the Company on 10 July 2006. The loan at all times ranks senior to ordinary share capital and junior to Innovative Tier 1 Capital of SLAL. There is no fixed redemption date for the note, but interest payments cannot be deferred and must be paid on the date they become due and payable. The note is ranked junior to the subordinated guarantee bonds and MACS, therefore any interest deferred on the sterling guarantee bonds or MACS becomes immediately due and payable on the date of interest payment in respect of the note. This removes the discretionary nature of the interest payments on the sterling guaranteed bonds and MACS.
(Increase)/decrease in operating assets: Investment property (1,540) (919) Investment securities (11,497) (12,857) Derivative net assets 10 21 Reinsurance assets (536) (558) Investment in associates* 5 (50) Other debtors (736) (79) Prepayments and accrued income 14 – Deferred acquisition costs (245) (87) Loans and receivables 275 (108)
Increase/(decrease) in operating liabilities: Customer accounts related to banking activities 17 (26) Other liabilities 465 156 Pension and other post retirement benefit provisions (23) (28) Deferred income 19 6 Insurance contract liabilities (120) 2,947 Investment contract liabilities 11,101 11,634 Certificate of deposits, commercial paper and medium term notes and securitisations 327 287 Current, demand and term deposits and deposits by banks (7) 13 Change in liability for third party interest in consolidated funds 116 43
Net (increase)/decrease in operating assets and liabilities (2,355) 395 * Investment in Standard Life Investments (Global Liquidity Funds) plc and certain unit trusts have been classified as operating activities due to the nature of the underlying transactions.
3.17 Contingencies (a) Legal proceedings and regulations The Group, like other financial organisations, is subject to legal proceedings 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, management does not believe that such proceedings (including litigations) will have a material effect on the results and financial position of the Group.
(c) Joint ventures and associates The Group has entered into agreements to share in the assets and liabilities of joint venture and associate investments. The Directors do not anticipate any material losses from such investments, and the operations of such investments are not material in relation to the operations of the Group.
The Group’s share of contingent liabilities of the joint ventures and associates is not significant in relation to the operations of the Group.
Authorised and contracted for but not provided and incurred: Investment properties 137 264 Property, plant and equipment 587 55 £121m (2005: £249m) and £16m (2005: £15m) relates to the contractual obligations to purchase, construct or develop investment property and repair, maintain or enhance investment property respectively.
(b) Off-balance sheet financial instruments The following indicates the contractual amounts of the Group’s off-balance sheet financial instruments that commit it to customers and third parties, as at the year-end: £m £m
Guarantees and stand-by letters of credit – 8 Commitments to extend credit: Original term to maturity of more than one year 2,218 2,299 Other commitments 555 505
3.18 Commitments (continued) (b) Off-balance sheet financial instruments (continued) Included in ‘Other commitments’ is £196m (2005: £296m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through (contractually agreed) additional investments in the subsidiary by the Group and the minority interest. The levels of funding are not necessarily in line with the relevant percentage holdings.
Not later than one year 12 9 Later than one year and no later than five years 13 15 Later than five years 7 6 Total operating lease commitments 32 30 3.19 Event after the balance sheet date The Chancellor of the Exchequer, in his Budget statement on 21 March 2007, announced a number of proposed changes to tax legislation, including a reduction in the rate of UK corporation tax from 30% to 28% with effect from April 2008. These proposed changes in legislation are subject to enactment.
The information contained in this document does not constitute an offer for sale of securities in the United States, Australia, New Zealand or any other jurisdiction. The securities referred to in this document may not be offered or sold, directly or indirectly, into the United States unless they are registered under the U.S. Securities Act of 1933, as amended, or exempt from registration.
This document has been published by Standard Life for the information of shareholders of Standard Life plc. It is based on our understanding as at March 2007 and does not provide financial or legal advice.