• IFRS profit after tax attributable to equity holders more than doubled to £432m
• Core EEV operating profit before tax from continuing operations up 24% to £629m
Unless otherwise stated, all comparisons are in Sterling and are for the year ended 31 December 2009.
Standard Life is a leading, long-term savings and investments business, with customers’ needs at the heart of everything we do. Over the year we’ve increased the metabolic rate at which we are delivering our strategy and have made step changes in our operational performance. We have a new, talented top team and over 40 per cent of the wider leadership team has changed in 2010.
In March 2010, we set our key strategic priorities and targeted a significant increase in the level of investment to grow our business. We are now just over one year into our three year transformation to deliver our strategy and drive improved performance. We are making strong progress and are firmly on track to deliver.
We delivered a number of exciting new propositions over the year, including the launch of our Corporate ISA and Trust Based Pensions, where we have already won several new schemes. We also significantly enhanced the web-based support we give both to our intermediaries and customers and launched Active Money Life Plan, an easy way of saving for retirement.
February 2011 saw a significant step-up in our delivery of propositions with the launch of Lifelens, our innovative benefits solution for Corporates. We have a strong pipeline of business already, with a number of Corporates going live on this new technology in 2011.
Standard Life Investments continued its excellent record of strong and profitable growth in 2010. Our Global Absolute Returns Strategies (GARS) fund now totals over £7bn and is among the top sellers on five of the UK’s leading investment platforms. We have also achieved significant growth in our UK retail business, becoming the third largest manager by net retail sales of mutual funds. Significant progress has been made across a number of asset classes.
We took a 75.1% stake in Aida Capital to extend our alternative investments offering, and our strategic alliance with the Chuo Mitsui Asset Trust and Banking Company gives us access to the Japanese market and helps extend our global franchise.
Performance across our joint venture businesses in Asia has been very strong in 2010, with net flows increasing by 20%. Our Indian joint venture, HDFC Life, marked its tenth anniversary with a strong year for the business, with exceptional trading and a strong rise in market share despite difficult market conditions. HDFC Asset Management, in which we have a 40% share, is also the fastest growing and second largest mutual fund company in India. We continue to be focused on driving the performance from our business in China.
We’ve sold Standard Life Bank and Standard Life Healthcare. The acquisitions of Aida Capital, threesixty and Focus Solutions are all in line with our strategic, customer-centric focus on long-term savings and investments.
Our International businesses in Ireland and Hong Kong have had a strong start to trading in 2011. Volumes and margins are weaker in the Indian market following the regulatory changes introduced in September. However, our long-term savings joint venture with HDFC continues to perform very strongly relative to competition, increasing its market share. In China, we are continuing to work with our joint venture partner TEDA to develop the business.
We have made good progress in 2010 and have had a strong start to 2011. There will be no let up in our pace of delivery as we continue to invest to develop market leading propositions. Our programme of delivery in 2011 includes the following propositions that will drive revenue growth: Corporate
• Broader investment solutions, including model portfolio, blended funds and discretionary fund management
• Leveraging the capabilities of Focus Solutions in bank and retail distribution
We are excited by the opportunities in our chosen markets and are confident that the investments we are making and the propositions we are launching will lead to continued strong growth in assets and cash profitability, supporting the Group’s progressive dividend policy.
Total AUA backing products (£bn) 20.5 3.1 (3.1) - 3.6 24.1
Fee business AUA in Canada is 24% higher at £14.0bn, mainly driven by positive market movements. Net inflows of £0.4bn include a good performance in individual insurance, savings and retirement product lines. The average revenue yield has strengthened to 118bps (2009: 116bps).
Canada spread/risk business AUA has increased by 10% to £10.1bn. Positive market movements have more than offset £0.4bn of net outflows in the year.
Wholly owned fee business AUA (£bn) 9.1 2.2 (0.8) 1.4 0.6 11.1
Fee business AUA across our wholly owned International operations is 22% higher at £11.1bn. Net inflows were 56% higher at £1.4bn with a strong performance in both Ireland and Hong Kong. In Ireland, we have seen higher inflows into offshore bonds and our domestic business. Flows in Germany were 1% lower in constant currency, reflecting the challenging conditions across the whole industry. Flows in Hong Kong almost tripled, helped by the launch of a new product in the second half of the year.
Assets under management (AUM) in our third party fee business are up 26%, reaching a record level of £71.6bn. Strong growth in domestic and overseas business saw net inflows, excluding volatile UK money market and India cash funds, 50% higher at £7.3bn (2009: £4.8bn), representing 14% of third party assets under management at the start of the year. We continue to see strong demand for our fixed interest and GARS products. Sales of mutual funds in the UK were up considerably making us the third largest manager by Net retail sales
. We increased our market share of gross retail sales to 3.8%
(2009: 2.6%). Our SICAV range in Europe continues to remain popular. The success of GARS and our UK
wholesale business has pushed up the average revenue we made on new business. The average revenue yield across our third party business has strengthened to 35bps (2009: 34bps).
Investment performance has been strong. The money-weighted average performance for third party assets remains above median over one, three, five and ten years.
For more information please read Section 1.9 – Basis of preparation and the IFRS pro forma reconciliation of consolidated operating profit to profit for the year in Section 2 of the Preliminary Results 2010.
Last year we said that we would increase our investment for growth in product development, marketing and technology. The programme is progressing well, with a number of customer propositions launched in 2010. The total investment spend expensed against IFRS operating profit has increased by 41% to £149m. The total amount invested in 2010 was £201m, including amounts invested in the China and India joint ventures and technology spend capitalised.
At our Preliminary Results last year we said that we were targeting £100m of annual margin improvement by 2012. We achieved a margin improvement of £61m in 2010 of which £34m relates to our 2012 target. All previous cost savings targets have been achieved. We remain on track to achieve our 2012 target.
EEV cash flow comfortably covering new business strain and growth investment
In total, operating capital and cash generation from continuing operations was 23% lower at £287m, largely due to reserve releases in respect of deferred annuities which drove a £71m back book management result in 2009.
We continue to work on driving increased value from the management of our back book. The positive back book management result of £26m includes profits arising from the change in the UK pension scheme. In 2009 the back book management result of £349m benefited from a number of management actions to de-risk the business. As a result, EEV operating profit before tax from continuing operations was 7% lower at £787m.
The Board have proposed a final dividend of 8.65p per share (2009: 8.09p). This makes a total of 13.00p (2009: 12.24p) for the year, an increase of 6.2%. The Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group’s financial performance.
We will hold a conference call for newswires and online publications from 8:00 – 9:00am. Participants should dial +44 (0)1452 555566 and quote Standard Life 2010 Preliminary Results. The conference ID number is 47499346. A replay facility will be available for seven days. Investors and analysts should dial +44 (0)1452 550000. The pass code is 47499346#.
Notes to Editors: 1 Assets under administration (AUA), net flows, IFRS and EEV operating profit and EEV capital and cash generation exclude our discontinued banking and healthcare operations. Prior period figures have been restated accordingly.
2 AUA are the adjusted gross assets of the Group and include assets administered on behalf of customers, including both those managed by the Group and those placed with third party managers.
Other assets included within AUA of £10.2bn (2009: £8.9bn) comprise assets not backing products, joint ventures, non-life assets and consolidation / elimination adjustments.
3 The 46% increase in net inflows across the Group to £8.3bn excludes net flows in respect of UK money market funds and India cash funds. Outflows from these lower revenue yield and highly volatile funds amounted to £1.1bn in 2010 (2009: net inflow of £0.8bn). Including these funds, total net flows across the Group increased by 11% to £7.2bn (2009: £6.5bn).
1.4 Business segment performance 22 1.4.4 Global investment management 29 1.5 Capital and cash generation 31 1.9 Basis of preparation 42 2 International Financial Reporting Standards (IFRS) 43 IFRS primary statements 44
We have performed strongly during 2010 and are well placed to benefit from future regulatory and demographic changes in all our markets. We believe that changing customer behaviours, the Retail Distribution Review, auto enrolment and the continuing pensions savings gap will create opportunities for our business.
Although the financial crisis continued to weigh heavily on the global economy in 2010, average market values were substantially higher than in 2009. For example, the average daily FTSE All-Share Index rose by 21% between 2009 and 2010. Combined with similar rises in other major world markets, this contributed to a 16% increase in our fee based revenue to £1,131m. Higher market levels have a positive impact on our business as a significant proportion of our revenue is based on a percentage fee applied to assets under administration.
The UK Government has recently announced pension reform measures that retain an annual allowance for pension contributions qualifying for tax relief. There will also be a rise in the state pension age for men and women to age 66 by 2020. We welcome the simple and straightforward nature of the pension tax relief rules as these remove much of the administrative burden that the previous proposals of tiered removal of tax relief based on income would have created. The new three year carry forward rule will also allow high earners, restricted by the current interim rules, to make larger contributions from 6
Changing demographics continue to impact our key markets. The changes include: an ageing population, with people living longer whilst managing more extensive debt; diminishing state and employer pension provision; an increasing wealth gap between rich and poor; and lower long-term birth rates. In the UK, the structure of the population is changing as life expectancy rapidly increases. In 2009 there were 1.4 million people aged 85 and over in the UK and this is expected to increase to around 3.5 million by 2034. This emphasises the need for individuals to ensure that they have adequate pension provision to fund their retirement.
There are currently a number of legislative and regulatory initiatives under discussion. The key initiatives and their potential impact on Standard Life are set out below: Description Potential impact on Standard Life
The Retail Distribution Review (RDR) is designed to increase transparency in retail financial services and to raise professional standards. The RDR is due to be implemented by the end of 2012. The review has significant implications for those providing retail financial advice and involves new qualification standards for all advisers. The objectives of the RDR are to: • Improve the clarity with which firms describe their services and fees to consumers
• Address the potential for adviser remuneration to distort consumer outcomes
Our customer service, brand and technology enable us to win significant levels of business without paying commission. This will position us strongly once the playing field has been levelled through the RDR.
From October 2012 all employers will be required to automatically enrol eligible employees into a qualifying pension scheme and make combined employer and employee contributions of 8%. Not all employees are eligible for auto enrolment and employees have the right to opt out of the pension scheme if they wish.
We expect to benefit from auto enrolment from both more scheme wins as employers look to offer their employees a tailored solution, and also through increased participation in our current schemes as employees decide not to opt out.
This scheme aims to solve the problems of low portability and high charges. It is intended to operate as a large, multi-employer occupational pension scheme and extend the benefits of employer schemes to those who currently don’t have access to them – typically those on low-to-moderate incomes.
NEST is targeted at employers with employees on low-to-moderate incomes. Many employers will be looking for greater flexibility when setting up a pension scheme, so we do not consider NEST to be a major threat to our corporate pensions business. Our position has been strengthened further with the introduction in February 2011 of our combined pension and flexible benefits proposition called Lifelens. This allows employers to offer even more flexibility and accessibility to their employees.
There is some market belief that NEST will lead to generally lower margins. However, although marketed as a low cost option, NEST will have an initial charge of 1.8% with an annual management fee of 30 basis points. This is broadly comparable with many of the commercial options in the market at the moment. Therefore, we do not see a significant pressure on revenue margins after NEST is introduced.
The International Accounting Standards Board (IASB) has published an exposure draft setting out draft proposals for a new accounting standard for insurance contracts (IFRS 4 Phase II).
We have actively contributed to industry responses to the proposals outlined in the exposure draft. The proposals will have a significant impact on reported earnings and business systems within the industry.
On 1 March 2011, the European Court of Justice ruled that the use of gender as a factor in determining premiums and benefits in insurance contracts will no longer be permitted. This change will take effect from 21 December 2012.
We continue to invest in our technology to ensure that our propositions deliver a competitive advantage through a model that lowers the cost to acquire and serve customers. By building more automation into our processes we will remove barriers to growth and give our customers more control over their finances. New technologies will play an increasingly important role in the way we operate.
In June 2010, ‘Take to Market’ divisions were created in all our businesses. This brought sales, marketing and distribution closer together, increasing our speed to market. Standard Life Investments and the UK Take to Market business are jointly developing investment solutions for customers. This includes the launch of MyFolio, a proposition designed to help customers find the right investment solution for them. Since its launch in September 2010, MyFolio has already secured over £100m of assets under management, with higher than expected investment into actively managed funds at Standard Life Investments.
We are also driving an increased focus on performance throughout the Group. This includes aligning management and staff incentives to improve performance and increase Group IFRS operating profits. More details on our management incentives are included in Section 1.8 and the Directors’ remuneration report in the Annual Report and Accounts 2010.
IFRS profit after tax attributable to equity holders of Standard Life plc £432m £213m 103%
Group IFRS operating profit before tax from continuing operations 425 399
• Other relates to a change in the basis of future pension increases in the UK staff pension scheme which contributed £59m in 2010
Further explanations for the movements in IFRS operating profit before tax are provided below: Group IFRS operating profit before tax increased to £425m. Fee business revenue, which mainly relates to asset management charges, increased by 16% to £1,131m. This was due to higher asset values following positive market movements and the strong growth in net inflows.
IFRS operating profit before tax from continuing operations £425m (2009: £399m, 2008: £482m)
This was partly offset by a reduction in spread/risk margin. The 2010 results included a £5m (2009: £63m) release of reserves following the review of our deferred annuity data.
Canada recorded an operating profit before tax of £110m. 2010 results benefited from an increase in fee based revenue, as well as a release of reserves due to a review of annuity policy data and changes to reinsurance arrangements. The average revenue yield on fee business increased slightly to 118bps (2009: 116bps). 2009 results benefited from management actions to improve asset and liability matching, which decreased policyholder liabilities.
The joint ventures in India and China contributed an IFRS operating loss before tax of £23m (2009: loss £27m) to the Group, reflecting the continuing investment in developing the operations in these markets.
Find out more about the IFRS operating results of our businesses in Section 1.4 – Business segment performance.
Demand for our innovative products and services remained strong and led to good growth in net inflows which increased by 11% to £7.2bn. Supported by positive market movements, this led to a 16% increase in assets under administration (AUA) to £196.8bn. Of the total AUA, 83% (2009: 82%) related to fee business. The overall increase in AUA was driven by a significant increase in fee business AUA in the long-term savings and third party investment management businesses. Fee business AUA rose by 17% to £163.1bn (2009: £138.9bn). This increase was driven by a 14% growth in net flows to £7.9bn (2009: £6.9bn). Spread/risk business AUA increased by 5% to £23.5bn. This was due to positive market movements offsetting the £1.0bn (2009: £0.6bn) of net outflows. Find out more about the AUA and net flows of our businesses in Section 1.4 – Business segment performance.
Group embedded value increased to £7,321m (2009: £6,435m) representing an EEV per share of 322p. EEV per share has increased by 46p before dividend distributions, representing a return of 16% on the opening EEV per share.
This movement included operating profit from continuing operations of £538m after tax (24p per share). This resulted in a return on embedded value (RoEV) of 8.7%. Non-operating profit from continuing operations was £258m after tax (12p per share). See below for more detail on the operating and non-operating results on a before tax basis.
Non-trading foreign exchange movements were positive £152m. Actuarial gains of £125m after tax largely reflect the £149m after tax increase in the surplus of the UK pension scheme.
The closing EEV of £7,321m consists of £3,483m of net worth or shareholder net assets and £3,838m from the present value of in-force business (PVIF). The increase in total EEV of £886m consists of a movement in net worth of positive £432m and a movement in the PVIF of positive £454m.
EEV profit before tax of £1,152m (2009: £474m) includes an operating profit from continuing operations of £787m (2009: £844m) and a non-operating profit from continuing operations of £348m (2009: loss £463m). EEV profit from discontinued operations was £17m before tax (2009: £93m).
EEV operating profit from continuing operations decreased by 7%. Whilst core profits increased by £120m and efficiency profits rose by £146m, back book profits fell by £323m reflecting the large one-off profits we made in 2009.
Core profits increased by 24% to £629m due to the new business we sold and an improved expected return from our existing business. This also drove an increase in our core RoEV from 6.1% to 7.2%. New business contribution (NBC) increased by 45% – find out more about this under New business profitability. Expected return on our existing business increased by 13% to £422m (2009: £375m).
The total increase in growth investment spend across our business reduced EEV operating profit, but this will help us take advantage of opportunities for profitable growth in the future.
Operating profit from back book management of £26m included a £59m one-off operating profit from the change in the UK pension scheme. We made significant profits last year from one-off activities to reduce market risk associated with the HWPF. This was the main contributor to the overall decrease in EEV operating profit in 2010.
Find out more on new business profitability for each of our businesses in Section 1.4 – Business segment performance.
Total EEV non-operating profit before tax from continuing operations of £348m (2009: loss £463m) was mainly due to a positive investment variance of £578m (2009: £70m). This primarily reflects higher investment returns than had been anticipated. The loss from economic assumption changes was £209m (2009: loss £539m). This mainly arose from the use of lower projected investment returns.
Restructuring and corporate transaction costs of £71m (2009: £52m) primarily represent costs incurred as part of our Group Transformation and Solvency 2 Programmes. Volatility arising from adjustments for different accounting bases resulted in a gain of £51m (2009: £67m).
Continuing operations exclude Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.
Other relates to a £59m benefit from the change in the UK pension scheme in 2010.
Assets under administration (AUA) grew by £13.6bn to £119.2bn. Fee based business, which accounts for the majority of total AUA, increased by 15% to £98.6bn (2009: £85.5bn) due to strong net inflows and positive market movements. Spread/risk business AUA has increased by £0.3bn to £13.4bn due to positive market movements. As at 31 December 2010, 63% of total fee based AUA related to retail business (2009: 65%) and 37% to corporate business (2009: 35%).
Total UK net inflows for the year increased by 147% to £2,997m. Within this, fee based business net inflows more than doubled to £3,611m (2009: £1,698m), while net outflows for spread/risk business were £614m (2009: £484m). At a product level, retail net outflows of £833m were £1,009m lower than 2009. This reflected strong self invested personal pension (SIPP) and mutual funds inflows. However, this was partly offset by increased outflows across all pension products as customers took retirement benefits before the minimum age changed from 50 to 55 in April 2010. Outflows decreased across our pension products after the age change came into effect.
The reduction in savings and investments net outflows was mainly due to lower investment bonds net outflows of £807m. Outflows were higher in 2009 due to our decision not to renew bulk investment bond deals, which contributed £581m to net outflows. We also experienced lower legacy life net outflows of £988m in 2010.
Corporate sales grew by 37% to £6,759m. Within this, corporate pensions increased by 25% to £3,287m. This rise was due to our success in winning new schemes with a higher average value compared to 2009, combined with an increase in the number of new members and increments into existing schemes. Also, our enhanced trustee-based pension proposition was successful in attracting both new and existing schemes and contributed £319m to sales. Institutional pension sales increased by 51% to £3,472m, reflecting strong growth in new customers.
Spread/risk business (S/R) 342 450 56 76 Infinite Infinite Immediate Immediate www.standardlife.com 23
In our corporate business, we successfully launched our trustee-based pension proposition and our employee benefits platform, Lifelens. This offers a compelling proposition for both employees and employers because it combines corporate savings and benefits, education and communication in one place. This innovative offering has attracted significant interest from new and existing customers, with the first customers moving onto the platform in 2011.
We also continued to offer our customers innovative solutions, as demonstrated by the Logica scheme win. With a tailored savings and benefits package, this makes the most of Vebnet’s experience in the employee benefits market. We believe the flexibility and sustainability of our corporate offering, combined with the innovative, customer-centric propositions that we are developing, will allow us to build on our strong position in the UK corporate market.
Our retail business successfully launched the Active Money Personal Pension in February 2010. This extends our reach in the individual pensions market, with a product which adapts to the changing needs of each customer. We also continued to see strong growth in our individual SIPP customer base during the year. The total number of customer accounts increased by 28% to 107,100 (2009: 83,900). Responding to adviser feedback, we continued to enhance our Active Money SIPP. New developments included offering customers the option of using their own solicitor and widening the panel of lenders for property transactions. These updates will help to ensure that our SIPP remains innovative, competitive and market-leading.
Spread/risk margin remained broadly in line with 2009. The 2010 result was impacted by policyholder liabilities increasing by £13m (2009: £34m) and included management actions to improve asset and liability matching and reduce future volatility. One-off changes also included a release of reserves due to a review of annuity policy data, modelling changes and changes to reinsurance arrangements.
Maintenance expenses included a charge of £14m following an assessment of the methodology and amortisation period for deferred acquisition costs. The rise in AUA also impacts maintenance expenses due to the increased ongoing costs to service and administer these assets.
The business maintained its strong credit profile, with a mortgage portfolio average loan to value ratio of 45% (2009: 46%). No credit losses were experienced during the period.
AUA increased by £4.0bn during the year driven by positive market movements and stable net inflows into fee business. In particular, individual savings and retirement experienced strong net flows. Our fee business grew strongly and now accounts for 55% (2009: 53%) of total AUA. Spread/risk AUA increased to £10.1bn (2009: £9.2bn), also driven by positive market movements. This was partially offset by scheduled annuity payments.
EEV operating profit before tax increased by 18% in constant currency to £250m (2009: £192m). This was mainly due to efficiency gains and higher new business contribution. Expense experience gains and assumption changes resulted in a profit of £73m (2009: loss £8m). Back book management delivered a loss of £41m (2009: gain £23m), largely due to a reduction in expected fee income in our group savings and retirement line. This was partly offset by favourable experience following a review of annuity policy data.
In our group insurance line, we continue to provide additional support to customers and improve our product offering. Our new flexible benefit administration and enrolment tool was instrumental in delivering key new accounts. We are also actively promoting our disability management expertise as part of our comprehensive benefit offering and as a stand-alone offer.
AUA in the wholly owned businesses grew by £2.0bn to £11.1bn (2009: £9.1bn) due to high net inflows in the year. In Ireland, AUA increased to £4.2bn (2009: £3.7bn) for the domestic business and to £1.8bn (2009: £1.2bn) for offshore bonds. AUA in Germany rose by 24% in constant currency to £5.0bn (2009: £4.2bn).
Net flows of the wholly owned businesses increased by 60% to £1,412m. This was mainly due to strong growth in sales in Ireland.
Ireland domestic business net inflows of £215m (2009: £11m) were higher due to strong sales growth and lower claims. Net flows of offshore bonds increased to £496m (2009: £157m) due to higher inflows from new business, particularly from our Wrap platform.
Hong Kong performed very well and increased its market share. PVNBP sales of £294m (2009: £141m) were up 108% in constant currency. This was mainly due to the distribution of the core unit linked savings product and the launch of a new product in quarter four offering 300 funds on an open architecture, targeting the established affluent and high net worth customer segments.
NBC in the wholly owned businesses increased to £44m (2009: £17m). This was mainly due to cost efficiencies and higher sales levels in Ireland and Hong Kong.
International operates as a customer-centric long-term savings and investments business. The Europe and Asia divisions were combined into one International business at the start of 2010. This will enable synergies, make it easier to share ideas and improve efficiency. The streamlined structure will position International to grow profitability and provide new solutions for customers and distributors.
We have improved our product investment range by adding the GARS products, which generated sales across Germany, Austria and Ireland. In Germany we started to strengthen our corporate propositions and will continue with this in 2011. In Ireland domestic business, we carried out a customer insight and market segmentation exercise to help us keep improving the way we deal with our customers and IFAs. In the offshore bonds business, we strengthened our propositions with the addition of a number of discretionary fund managers. We widened our distribution route through strategic deals and by increasing engagement with the UK sales force.
In China and India our focus is on increasing long-term shareholder value by delivering products that meet our customers’ needs.
Net flows in the joint ventures increased by 14% in constant currency to £254m (2009: £211m), mainly driven by India where strong growth and market share gains reflected success in the bancassurance channel.
In India, regulatory changes that affect unit linked business were implemented from 1 September 2010 and will have a severe negative impact on sales and margins across the industry in the short term. However, effective initial management of the changes helped increase our market share in the private market to 12% in 2010 (2009: 8%). We remain confident about our future competitive positioning, with our individual business emerging as the leading private player during the fourth quarter of 2010.
Our focus at Standard Life Investments is on delivering superior investment performance, supported by exceptional client service. Standard Life Investments operates as a global team, with an investment process underpinned by its ‘focus on change’ philosophy. This has proved itself to be robust and repeatable in both good and bad market conditions. Over the 12 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued during 2010.
Total third party net inflows in 2010 were £6,200m (2009: £5,674m).
The pipeline for institutional business is still encouraging with fixed income and GARS products attracting a lot of interest, increasingly from outside the UK. There is also very positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.
We entered into a strategic alliance with Chuo Mitsui Asset Trust and Banking Company, one of the largest trust banks in Japan, for reciprocal asset management services. The alliance sees Standard Life Investments provide advice on Chuo Mitsui’s Global Equity Funds and Chuo Mitsui manage and advise on Standard Life Investments’ Japanese Equity funds. We will also be able to market each other’s investment strategies through our respective distribution networks.
Our successful GARS proposition is now available to institutional investment clients in the USA, Canada and Australia where we have secured a number of new mandates. It has also recently been launched in a SICAV wrapper to access the international market. US expansion progressed well with the launch of our first segregated GARS mandate in the region and continued strong interest in the offshore GARS product.
In the UK wholesale space we had particular success with our GARS product which achieved a market-leading 39% share of 2010 sales within the absolute return sector, and the UK Smaller Companies Fund which achieved a 42% market share of 2010 sales within its relevant sector.
MyFolio was successfully launched in September 2010, following collaborative working across the Group. This is a proposition designed to help customers find the right investment solution. MyFolio has proved successful since its launch, providing new business flows into Standard Life Investments’ actively managed funds. We expect MyFolio to continue its positive growth during 2011.
Standard Life Investments also extended its range of alternative assets during 2010 by acquiring a 75.1% stake in Aida Capital Limited, a London-based FSA registered fund of hedge funds manager.
New business strain 1.5 Capital and cash generation Our strategy remains focused on careful capital management and generating cash. The emphasis on capital-efficient products is important as it demonstrates our ability to write profitable new business without committing high levels of capital.
2010 based on estimated regulatory returns. 2009 based on final regulatory returns.
Coverage of gross operating capital and cash to new business strain 2.7 3.3
Coverage of operating capital and cash to dividend declared 1.0 1.4
New business strain (NBS) is a measure of the cost of selling new business. Whilst NBS has increased to £220m, this was lower than growth in new business sales volumes. As a result, the NBS margin (NBS/PVNBP) fell from 1.3% to 1.2%.
We remain committed to our strategy of investing in capital-efficient products which deliver high capital returns and fast recovery of investment. The total internal rate of return (IRR) for new business was 17% (2009: 14%) and the payback period was 6 years (2009: 7 years). Find out more on new business profitability in Section 1.3 – EEV – Group.
Non-operating capital and cash generation from continuing operations was £134m (2009: negative £382m). This increase was mainly due to higher than expected market returns over the period.
Reconciliation of IFRS operating profit to EEV operating capital and cash generation
Covered business capital and cash generation from new business and expected return 361 23 384 315 43 358
Non-covered business core capital and cash generation (47) - (47) (19) - (19)
EEV operating capital and cash generation from continuing operations 320 (33) 287 321 50 371
Total EEV capital and cash generation 433 8 441 (24) 62 38 32 www.standardlife.com
Holding company capital and cash flows In addition to the movement in capital and cash on an EEV basis, the following summary provides an analysis of holding company cash flows and capital in relation to the Group’s ultimate holding company, Standard Life plc, and its overseas holding company, Standard Life Oversea Holdings Limited. The capital position is based on these companies’ net assets, excluding investments in operating subsidiaries.
During the year, we paid the final dividend for 2009 of 8.09p per share, amounting to £180m and the 2010 interim dividend amounting to £98m. In 2009, the previous dividend reinvestment plan (DRIP) was discontinued and a new Scrip dividend scheme introduced. This reduced the cash required to pay the 2009 final dividend from £180m to £134m and the 2010 interim dividend from £98m to £52m. We propose a final dividend of 8.65p per share, making a total of 13.00p (2009: 12.24p). This represents an increase of 6.2%, reflecting the solid progress made during the year. We will continue to apply our existing progressive dividend policy, taking account of market conditions and our financial performance.
The Group’s processes of capital and risk management are aligned to support our strategic objective of driving sustainable, high quality returns for our shareholders. The different measures of capital reflect the regulatory environment we operate in and the bases that we consider effective for managing the business.
The IGD surplus remains largely insensitive to a further 40% fall in equities from the 31 December 2010 position, with the surplus estimated to reduce by approximately £0.2bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.1bn.
The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2010: 34 www.standardlife.com
We have developed and embedded an Enterprise Risk Management (ERM) framework that enables the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically.
The Group is also exposed to equity and property risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.
Risk also arises as a consequence of burnthrough from the HWPF. However, as noted above, this fund remains well capitalised, so burnthrough cost is low and there is currently no restriction on transfers.
The Group is also exposed to fixed interest risk through the potential impact of yield curve movements on the value of assets held in defined benefit pension schemes operated by the Group.
Currency risk Foreign exchange risk is the risk that the value of overseas operations and profits generated by them falls in Sterling terms when Sterling appreciates against the local currency.
The principal sources of currency risk arise from the Group’s investments in overseas subsidiaries and joint ventures, primarily Canada and Asia (including HDFC Life and Heng An Standard Life). Hedges exist to limit the size of the exposure relating to Canada.
The UK business also has Euro exposure as a consequence of branch business undertaken in Ireland and Germany and its investment in Standard Life International Limited. Other exposures arise largely as a consequence of holdings in overseas assets within business units and variances in charges taken from unit linked funds and collective investment schemes.
The Group is also exposed to credit risk through the potential impact of widening credit spreads or credit losses on the value of assets held in defined benefit pension schemes operated by the Group.
Definition The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. For the purpose of risk management this includes liabilities of insurance and investment contracts.
Appetite The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group’s overall strategic objectives.
Persistency Persistency within the UK business arises mainly as a consequence of variances in the value of future fund charges on unit linked funds and future recourse cash flow payments from the HWPF. Generally the value of such charges will fall if withdrawals are higher than expected.
This risk is controlled through business retention activities and regular monitoring of persistency experience, as well as through product design.
This risk is controlled through regular monitoring of the size of the exposure, longevity experience and control of business volumes.
The Group manages and mitigates liquidity risk by employing a variety of techniques as appropriate, including: • Maintaining portfolios of assets that match the expected timing of payments of liabilities
• Close monitoring and active anticipation of the level of withdrawals based on expected customer behaviour
The Group also has the ability to invoke deferral terms on the majority of unit linked contracts. As at 31 December 2010 there were no funds subject to deferral.
Key operational and strategic risk themes include: • Management of existing processes including the identification and implementation of control improvements
• Management of third party providers: identification of exposures, collaborative control enhancement and robust performance indicators
• Projects and programmes: managing change and execution of projects through effective control and embedding business as usual controls as part of the design of future processes
1.7 Our customers We serve a wide variety of customers – individuals, financial advisers, corporate customers and large institutions. Making sure we give our customers exactly what they need, in the way they need it, is central to our success. We continue to drive our transformation by putting customers at the heart of everything we do.
• Being transparent about how our products work and what charges are involved
• Helping customers handle their finances effectively, empowering them so they can make informed choices
In 2010, we spoke to 8,500 customers and 7,500 potential customers. We asked them about our service and communications and how helpful or otherwise they found them. We ran 16 sessions across the UK where our senior team, including David Nish and our non-executive Directors met up with groups of customers to hear their views and opinions. We now have approximately 900 members in our online community, with 200 regular, active users who give us frequent feedback on topics like our literature, products, new propositions and the effects of the first budget of the new government.
In February 2011 we took another important step on our transformation journey when we launched our new brand and visual identity. It’s a clear signal that our focus is very sharply on the customer. Our brand is more than just a new look – it’s about the way we work and it underpins the experiences we create. It strengthens our relationships with customers and differentiates us strongly from competitors. We’re an organisation that helps customers look forward to their financial future with confidence and optimism. This is summed up in our new strapline, The Way Forward.
• Has tools to help customers become more confident in making financial decisions
Supporting financial advisers We’re also broadening and deepening our relationship with advisers. Last year we launched a campaign to get advisers’ feedback on the technology we offer. We asked them what would make a difference to them, and ultimately, their customers. This is our core focus. Based on feedback, we widened our pension proposition to cover both personal pensions and the specialist SIPP market. This now lets our IFA partners offer more choice to customers.
In February 2011, we launched the employee benefits platform, Lifelens. This cutting-edge technology lets employers offer and showcase all employee benefits and rewards through one single application. It means all members of corporate savings schemes get an easily accessible, personalised, single view of their benefits package. It directly promotes financial wellbeing by giving customers greater ownership of their benefits package.
We have embedded the Financial Service Authority’s Treating Customers Fairly (TCF) principles across the business. In 2010 we carried out a review to make sure that TCF is linked to and supports our strategy of putting customers at the heart of our business. The review showed that TCF is still embedded and highlighted opportunities to enhance our approach. We’re implementing this throughout 2011.
• Aberdeen UK Platform Awards: - Wrap Platform of the Year
• Environics Adviser Perception Study: - Ranked first in seven out of nine criteria measuring the quality of the wholesaler
One of our core values is to deliver exceptional customer service and always put our customers at the heart of our thinking. In 2010, we actively managed our customer relationships which led to very good customer retention in Ireland and Germany. In Hong Kong we developed additional web-enabled services which will add further customer value to our propositions.
• The offshore bond business also received two significant awards at the International Fund and Product Awards 2010, which recognises achievement in the offshore financial services industry: one for the Best International Life Product (UK) for our International Bond and one for the Best Service Initiative for our online trading
• The Standard Life UK Smaller Companies Trust Plc has, for the fourth year running, won the UK Smaller Companies category at the Moneywise Investment Trust Awards
1.8 Our people To become a more customer-focused business we need to develop and harness the talents of our people, working closely with them to make change happen. We believe that highly engaged people are more productive and have a positive effect on profit and shareholder value. So, in 2010, we began transforming our performance, talent and leadership practices to help strengthen the relationship that each individual employee has with our business. During 2011 we will continue to focus on increasing leadership capability, ensuring our leaders are equipped to help our people grow and fulfil their potential.
Building on our previous annual surveys of employee engagement, in quarter 2 2010 we launched the Transformation Tracker as a mechanism by which we could capture our people’s views and attitudes towards our transformational journey. Their feedback was then utilised to help shape our activities and ensure that communications were fit for purpose, relevant and effective.
We have embarked on a group-wide programme of activity to bring to life what we stand for as an organisation when we are at our best. A wide cross-section of our people have been coming together to share stories of what it looks and feels like when we do the right thing for our customers, collaborate with each other and care about our stakeholders in all of our geographies and communities. The richness of these stories contributes to strengthening the environment we work in, and in delivery of our core business objectives.
During the year we also introduced three new leadership development programmes, tailored to the needs of team, area and senior leaders. Pilots have been run successfully across the Group in 2010. The roll out timetable in Canada is well under way. Places are available for 480 UK and European leaders in 2011.
We continue to invest in building the strength and depth of our talent up through the organisation. A group-wide organisational review created the opportunity to make a number of key appointments at senior levels and to move and reposition our talent for the future. We have begun our third intake into ADS (Accelerated Development Support), our process to support the development of senior leaders with high potential, taking the total numbers involved to 60. In addition, we launched a similar process for emerging leaders and will extend this further in 2011. The quality and effectiveness of our talent processes was recognised through ADS being awarded the Talent Management Programme of the Year by Hr NETWORK (Scotland).
Our senior management are incentivised with a remuneration package which comprises a fixed salary, an annual bonus and a Long-Term Incentive Plan (LTIP), designed to deliver our long-term strategy.
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles (GAAP) measures, which have been used in the Business review, together with other measures that are calculated in accordance with IFRS, are useful for both management and investors and make it easier to understand our Group’s performance.
The most important non-GAAP measures in the Business review include IFRS operating profit and European Embedded Value (EEV) information. All non-GAAP measures should be read together with the Group’s IFRS summary consolidated income statement, summary consolidated statement of financial position and summary consolidated statement of cash flows, which are presented in the IFRS consolidated financial statements in Section 2 of this report.
For new business, profits expected to arise on the contract in future years are not recognised. Not all acquisition costs are deferred and therefore the IFRS results recognise the initial cost or strain associated with writing long-term business.
Profit on in-force business is the statutory surplus for the period adjusted for the amortisation of deferred acquisition costs.
Change in liability for third party interest in consolidated funds 443 323
Diluted (pence per share) 2.6 18.3 7.5 * The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation. The presentation of the 2009 comparatives in certain primary statements and in the corresponding notes has been reclassified accordingly, as indicated. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 and was classified as a discontinued operation for the year ended 31 December 2009.
Total comprehensive income for the year from discontinued operations 44 57
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes 2.7(a) 127 (214)
Operating profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities, are excluded from operating profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit and is presented within profit before tax.
The Directors believe that, by eliminating this volatility from equity holder profit, they are presenting a more meaningful indication of the long-term operating performance of the Group.
Assets of operations classified as held for sale 2.5 - 9,395
Equity attributable to equity holders of Standard Life plc 3,903 3,457
Liabilities of operations classified as held for sale 2.5 - 9,143
Transfer to retained earnings for vested employee share-based payment schemes - - - 5 (5) - - -
Other comprehensive (expense)/income for the year - - - (50) 21 (29) - (29)
Total comprehensive income/(expense) for the year - - - 163 21 184 (33) 151
Transfer to retained earnings for vested employee share-based payment schemes - - - 8 (8) - - -
Cash and cash equivalents at the beginning of the year 8,840 9,951
Cash and cash equivalents at the end of the year 7,330 8,840
The accounting policies as set out in the Group’s Annual Report and Accounts for the year ended 31 December 2010 have been applied in the preparation of this preliminary announcement. The Group’s accounting policies have not changed since the issue of the Annual Report and Accounts 2009, except as described below.
The Group has adopted the following amendments to IFRSs, International Accounting Standards (IASs) and interpretations which are effective from 1 January 2010 and management considers that the implementation of these amendments and interpretations has had no significant impact on the Group’s financial statements: • IFRS 3 Business Combinations (revised)
Change in the Group's chosen supplementary measure of IFRS performance During 2010, the Group adopted operating profit as its main IFRS performance measure in place of IFRS underlying profit. This performance measure was reported for the first time in the Half Year Results 2010. The Directors consider that this change will provide equity holders and other stakeholders with a better understanding of the Group’s long-term operating performance by removing the impact of short-term economic volatility. In addition, the change will better reflect the Group’s internal management approach while also allowing for greater comparability with others in the industry. The key differences between the previous and the new measure are as follows: Removal of short-term fluctuations in investment return and economic assumption changes: • Under the previous method of reporting, short-term fluctuations in investment return were only partly excluded from IFRS underlying profit through an adjustment for the volatility arising on different asset and liability valuation bases.
• Operating profit is calculated based on expected returns on investments backing equity holder funds, with a consistent treatment of the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments and the corresponding impact on liabilities are excluded from operating profit, and are reported within the statutory IFRS profit before tax. The impact of certain changes in economic assumptions is also excluded from operating profit, and is reported within profit before tax.
Other adjustments: • Volatility arising from changes in insurance and investment contract liabilities caused by changes in tax provisions in our Canadian subsidiary was previously included in IFRS underlying profit. As this item has no overall impact on equity holder profit after tax, it will be excluded from operating profit.
Canada Canadian operations offer a broad range of pensions and savings products to individual and corporate customers in addition to commercial mortgage products.
International The businesses included in this reportable segment offer a range of life and pension products. The Group has operations in Ireland, Germany and Austria, which for 31 December 2009 reporting were included in the Europe reportable segment. The Group also holds investments in joint ventures in India and China and has a wholly owned subsidiary in Hong Kong, each of which were included in the Asia reportable segment for 31 December 2009 reporting. This change in composition of reportable segments corresponds to changes made during the reporting period to the way in which the Group is managed and the relevant 31 December 2009 segment information has been restated accordingly.
Income statement and asset information is presented by reportable segment in the tables that follow. As described beneath the IFRS pro forma reconciliation of consolidated operating profit to profit for the year, operating profit is considered to present an indication of the operating business performance of the Group. Operating profit is one of the key measures utilised by the Group’s management in their evaluation of segmental performance and is therefore also presented by reportable segment.
Global investment management Other Elimination Total 2010 £m £m £m £m £m £m £m
Tax attributable to policyholders’ returns 385 - 16 - (1) - 400
Profit/(loss) for the year from continuing operations 301 145 4 79 (56) - 473
Non-operating (profit)/loss before tax from continuing operations (33) (78) 3 (3) 26 - (85)
Operating profit/(loss) before tax from continuing operations 234 110 15 103 (37) - 425
Other expenses included in the income statement include: Impairment losses (reversed)/recognised
Included in the international reporting segment, total net revenue, excluding inter-segment revenue, for Germany, Ireland and Asia is £1,253m (2009: £1,188m), £548m (2009: £597m) and £91m (2009: £44m) respectively.
Share of profit/(loss) from associates and joint ventures 7 (29) (27) 19 1 - (29)
Tax attributable to policyholders’ returns 294 - 5 - - - 299
Tax attributable to equity holders’ profits (53) 33 (3) 13 (10) - (20)
Tax (credit)/expense attributable to equity holders’ profits from continuing operations (53) 33 (3) 13 (10) - (20)
Non-operating loss before tax from continuing operations 93 121 12 9 20 - 255
Other income included in the income statement is as follows: Interest income: Other expenses included in the income statement include: Impairment losses recognised: Amortisation of intangible assets: Amortisation of deferred acquisition costs: Depreciation of property, plant and equipment
Investments in associates and joint ventures 1,915 104 80 32 38 - 2,169
Of the restructuring costs from continuing operations of £72m, £71m (2009: £52m) is adjusted when determining operating profit for the year, with the remaining £1m (2009: £1m) incurred by the Heritage With Profits Fund.
From 1 April 2011, the UK corporation tax rate will be reduced from 28% to 27%. This rate change has been included in the calculation of UK deferred tax. The 2010 Budget statement also announced the government’s intention to make further reductions in corporation tax. These reductions have not been included in the calculation of deferred tax as they are subject to legislation being enacted in future years.
The total tax expense is split as follows: Income tax: Double tax relief (1) (1)
Deferred tax: Deferred tax expense arising from the current year 197 137
Gain/(loss) recognised on the measurement of the assets of disposal group 37 (10)
Aggregate equity holder tax effect of items not recognised in the income statement (6) (3)
Weighted average number of ordinary shares in issue (millions) 2,242 2,201
Basic earnings per share from continuing operations (pence per share) 18.4 7.5
Basic earnings per share from discontinued operations (pence per share) 0.9 2.2
Diluted earnings per share from continuing operations (pence per share) 18.3 7.5
The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was six million (2009: two million).
Earnings per share is also calculated based on the operating profit before tax as well as on the profit attributable to equity holders. The Directors believe that earnings per share based on operating profit provides a better indication of the operating business performance of the Group.
Profit attributable to equity holders of Standard Life plc 432 19.3 213 9.7
2.7 Operating profit (a) Short-term fluctuations in investment return and economic assumption changes
Operating profit is based on expected returns on investments backing equity holder funds and the difference between the expected return and actual return on investments is excluded from operating profit and presented within profit before tax. Adjustments are also made consistently to allow for expected movements in equity holder liabilities. As a result, the components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected investment returns, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from operating profit and disclosed separately within the heading of short-term fluctuations in investment return and economic assumption changes.
The principal assumptions as set at the start of the year in respect of gross investment returns underlying the calculation of the expected investment return for equity securities and property are as follows: In respect of debt securities, the expected rate of return is determined based on the average prospective yields for the debt securities actually held or, in respect of the Canadian operations, is determined by the Appointed Actuary in Canada.
Subsequent to 31 December 2010, the Directors have proposed a final dividend for the year ended 31 December 2010 of 8.65 pence per ordinary share, £197m in total. The dividend will be paid on 27 May 2011 to shareholders on the Company’s register as at 18 March 2011, subject to approval at the Annual General Meeting on 17 May 2011. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2011.
Investors taking part in the Scrip scheme receive their dividend entitlement in the form of shares rather than cash and the distribution under Scrip is recorded as an appropriation of retained earnings. Dividends paid during the year ended 31 December 2010 comprise £92m (2009: £102m) settled by the issue of shares under the Scrip scheme and £186m paid in cash (2009: £158m).
Shares issued in lieu of cash dividends 44,854,401 4 55,018,211 6
The Group operates share incentive plans, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any one year is £1,500. The Group offers to match the first £25 of shares bought each month. During the year ended 31 December 2010, the Company allotted 566,626 (2009: 630,003) ordinary shares to Group employees under the share incentive plans.
The Group also operates a Long-Term Incentive Plan (LTIP) for executives and senior management. During the year ended 31 December 2010, 1,305,584 (2009: 2,842,293) ordinary shares were issued on exercise of share options in respect of the LTIP.
2.10 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets
Movements attributable to discontinued healthcare operations - (13) - (13) - (13)
The change in non-participating investment contract liabilities during the year was as follows: Initial charges and reduced allocations (9) (21)
(a) Analysis of amounts recognised in the summary consolidated income statement
The amounts recognised in the summary consolidated income statement for defined contribution and defined benefit schemes are as follows: Current service cost (67) (53)
Fair value of plan assets 2,005 175 48 2,228 1,644 144 48 1,836
Adjustment for unrecognised past service costs - (6) - (6) - (6) - (6)
Net asset/(liability) in the summary consolidated statement of financial position 281 (62) (3) 216 (56) (38) 5 (89)
The Group also recognises a net liability of £6m (2009: £5m) arising from a scheme with a total defined benefit obligation of £6m (2009: £5m) administered for the benefit of employees in Germany, resulting in a net asset of £210m (2009: liability of £94m). The summary consolidated statement of financial position presents any net scheme assets within other assets and any net scheme liabilities within other liabilities.
Rate of increase in pensions 3.05-3.65 1.33 1.00 3.80 1.33 1.00
Expected return on plan assets 6.15 7.00 5.00 6.30 7.00 5.93 www.standardlife.com 63
As at 31 December 2010, the Group had committed the following unrecognised financial instruments to customers and third parties: Commitments to extend credit: Original term to maturity of one year or less 51 112
In addition to the amounts shown above, the Group’s defined benefit pension schemes have assets of £655m (2009: £528m) invested in investment vehicles managed by the Group.
During the year ended 31 December 2010, the key management personnel contributed £1.9m (2009: £11.1m) to products sold by the Group.
Changes to the valuation of contract liabilities 3,262 (2) - 3,260 (80) 3,180 - 3,180
Exclusion of deferred acquisition costs and other inadmissible assets (122) (528) (326) (976) (111) (1,087) (43) (1,130)
Changes to the valuation of other assets and liabilities (11) (259) (120) (390) 128 (262) 208 (54)
Total available capital resources to meet regulatory requirement 4,031 321 2,361 6,713 1,413 8,126 704 8,830
Analysed as follows: Capital not subject to constraints - - 2,336 2,336 577 2,913 623 3,536
Capital resources amounting to £34m in respect of other with profits funds are disclosed within the Heritage With Profits Fund (HWPF) column.
Analysed as follows: Capital not subject to constraints - - 3,112 3,112 422 3,534 432 3,966 1 Capital resources amounting to £13m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column.
Capital subject to constraints for the UK regulated life business of £4.4bn at 31 December 2010 (2009: £2.2bn) represents capital resources held within long-term business funds, or in relation to other regulated entities, the amount of the CRR.
Intra-group transactions The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Canada, India and China. Through branches, the Group also provides such services in Ireland and Germany. With the exception of the requirements of the Scheme and the intra-group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.
The estimated IGD position at 31 December 2010 is shown in the Business review Section 1.5 – Capital and cash generation.
Equity holder/inter-fund transfers include the transfer of £nil (2009: £844m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £71m (2009: £25m) to the Proprietary Business Funds (PBF) in relation to additional expenses charged on German unitised with profits business.
2.17 Events after the reporting period On 11 January 2011, the Group’s offer for the entire issued and to be issued share capital of Focus Solutions Group plc (Focus) was declared wholly unconditional and therefore is the effective date of the acquisition. Focus is a provider of software and consultancy solutions to the financial services industry, enabling its clients to automate the delivery of financial products and services to their customers across multiple distribution channels in a rapid and efficient manner. Continued investment in innovative technology is central to the delivery of the Group’s accelerated growth strategy. The acquisition will enable the development of new and existing propositions, enhancing the customer experience and driving greater efficiencies. The consideration, acquisition date fair value of net assets acquired and resulting goodwill are as follows: £m
The goodwill is attributable to the workforce of the acquired business and its growth prospects as well as the significant synergies expected to arise as a result of the acquisition. None of the goodwill recognised is expected to be deductible for income tax purposes.
4 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 – EEV methodology.
Weighted average number of ordinary shares on a diluted basis (millions) 2,248 2,203 1 EEV operating profit before tax from continuing operations of £787m (2009: £844m) less attributed tax on operating profit from continuing operations of £249m (2009: £247m).
EEV consolidated statement of comprehensive income For the year ended 31 December 2010
Total comprehensive income for the period attributable to equity holders from continuing operations 1,041 234
Total comprehensive income for the period attributable to equity holders 3.7 1,085 291 1 Consistent with the IFRS consolidated statement of comprehensive income for the year ended 31 December 2010.
Non-covered business Following the Group’s decision to replace IFRS underlying profit with IFRS operating profit as the chosen supplementary measure of IFRS performance, non-covered business EEV operating profit was represented by IFRS operating profit for the first time for the six months ended 30 June 2010. See Note 2.1(a) – Accounting policies – Basis of preparation of the IFRS financial information for more detail.
Prior to this change, EEV operating profit for non-covered business was defined as IFRS normalised underlying profit. Comparatives for the 12 months to 31 December 2009 have not been restated to reflect the inclusion of non-covered business on an IFRS operating profit basis, on the basis that a restatement would be immaterial in the context of the Group EEV operating profit for this period.
3.1 Basis of preparation continued Segmentation Under the EEV Principles and Guidance we are required to provide business classifications which are consistent with those used for the primary statements. In the IFRS financial statements the Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business. The Heritage With Profits Fund time value of options and guarantees (HWPF TVOG) is disclosed separately in EEV, as explained in Note 3.2(a) – Segmental analysis – covered business – Segmental EEV income statement.
In the Budget statement of 22 June 2010, the government also announced an intention to make further reductions in corporation tax of 1% in 2012, 2013 and 2014. However, these reductions are subject to legislation in future years and have not been included within the best estimate assumptions as at 31 December 2010.
Additional information has been included in the new Note 3.12 – PVIF monetisation profile to indicate the cash that may emerge in the next five years from the in-force PVIF. This assumes that future experience is in line with the assumptions used to calculate the PVIF, and ignores any future new business. The expected cash emergence is provided on both a discounted basis, equivalent to the PVIF used within the closing EEV, and also on an undiscounted basis.
Equivalent analyses are also provided for the new business written during the year. This is based on the cash expected to emerge from the PVIF calculated at the end of the year, and excludes all cash flows that have emerged from point of sale to end of year.
Events after the reporting period On 11 January 2011, the Group’s offer for the entire issued and to be issued share capital of Focus Solutions Group plc (Focus) was declared wholly unconditional and therefore is the effective date of the acquisition. Focus is a provider of software and consultancy solutions to the financial services industry, enabling its clients to automate the delivery of financial products and services to their customers across multiple distribution channels in a rapid and efficient manner. Continued investment in innovative technology is central to the delivery of the Group’s accelerated growth strategy. The acquisition will enable the development of new and existing propositions, enhancing the customer experience and driving greater efficiencies. Refer to IFRS financial information Note 2.17 – Events after the reporting period.
3.2 Segmental analysis – covered business (a) Segmental EEV income statement This Note provides an analysis of EEV covered business as defined in Note 3.17 – EEV methodology.
3.2 Segmental analysis – covered business continued (a) Segmental EEV income statement continued HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although the HWPF includes business written by the UK, Germany and Ireland, the Group manages the risk at an aggregate level. This is consistent with the Group’s IFRS financial statements as disclosed in Note 42 – Risk management to the Group’s Annual Report and Accounts 2010. The results for Canada and International include the cost of the Canada and Asia businesses’ TVOG and the cost of TVOG arising on business written outside of the HWPF in Germany.
The higher development costs of £67m in 2010 compared to £47m in 2009 reflect the increased investment in the business. Development costs of £30m in the UK mainly relate to the investment in corporate and retail propositions and brand development. The £27m of development costs in International include £10m that reflect the costs of developing the joint venture businesses to build future growth, and £17m in the wholly owned businesses.
The negative £20m expected return on free surplus in the UK reflects the relatively low expected returns currently available on cash assets within free surplus, along with a higher expected increase in the value of subordinated debt liabilities relative to the expected return on the assets backing subordinated debt. The increase in the expected return on free surplus within Canada reflects the impact of an asset switch which resulted in more real estate within free surplus.
Effect of economic assumption changes was a loss of £209m. The impact of assuming lower future investment returns generated a loss of £426m, which included a loss of £59m reflecting higher HWPF burnthrough costs. This was partially offset by a non-operating profit of £185m (2009: loss £214m), which is explained in Note 3.13 – Principal economic assumptions – deterministic calculations – covered business. The UK result also benefited from a £30m contribution from the combined impact of a 1% reduction in corporation tax and a 2.5% increase in the rate of VAT. Refer to Note 3.1 – Basis of preparation.
HWPF TVOG shows separate movements in investment variances and economic assumptions, whereas in practice, economic assumption changes are highly dependent on the same factors that give rise to investment variances, for example market yields. Therefore, the key consideration is the net effect of the two items rather than the individual items themselves. Further comments on the movement in TVOG are provided in Note 3.4 – Experience variances and Note 3.10 – Time value of options and guarantees (TVOG).
Transfer back of surplus to Standard Life Investments (19) (3) (2) - (24)
Actuarial (losses)/gains on defined benefit pension schemes - (16) 13 - (3)
Aggregate tax effect of items not recognised in income statement - 5 - - 5
Opening adjustments in International for the 12 months to 31 December 2009 reflect the inclusion of the Asia businesses on an EEV basis for the first time.
3.2 Segmental analysis – covered business continued (c) Segmental analysis of opening and closing EEV continued
Opening adjusted EEV in International for the 12 months to 31 December 2009 reflects the inclusion of the Asia businesses on an EEV basis for the first time.
NBC and the present value of new business premium (PVNBP) margins are shown after the effect of required capital.
PVNBP margins are calculated as the ratio of the new business contribution to the present value of new business premiums and are based on the underlying unrounded numbers. 3 Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The 2010 impact on PVNBP is £25m.
PVNBP margins are calculated as the ratio of the new business contribution to the present value of new business premiums and are based on the underlying unrounded numbers. 3 Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The 2009 impact on PVNBP is £22m.
Other UK variances include a £28m gain from the impact of investment strategy changes in the assets backing annuity business; a £17m loss from an agreement to fund future recharges to non-covered businesses; various modelling improvements which generated a profit of £31m; with £1m of other profits mainly arising from the impact of reserve changes and other reconciliations and management actions. The £15m loss from other variances in Canada arises from various reconciliations and variances. The majority results from premium projection variances within Canada group insurance business. The £11m loss in International mainly reflects reserving changes in the joint venture businesses.
For the 12 months to 31 December 2009, other UK variances included a £111m benefit from reduction in market risk plus the EEV operating profit benefit from a £63m release of deferred annuity reserves, offset by £38m of modelling changes for life business. The £143m of other HWPF TVOG variances primarily reflected the benefits of changes in asset allocations and hedging arrangements which reduced the HWPF burnthrough risk.
Positive lapse assumption changes in the UK include improved long-term assumptions for most life and pension contracts. These changes in long-term assumptions reflect recent experience, after adjusting for the short-term impact of increased pension lapse activity ahead of the change in the minimum retirement age. The assumption change also anticipates the short-term impact of potential higher switching activity prior to the introduction of the Retail Distribution Review.
Expense assumption gains in the UK and in Europe reflect changes in the expense allocation for investment related expenses. The UK figure also includes an allowance for the expected benefits on maintenance costs arising from the headcount reductions announced during 2010, but only to the extent that these arrangements had been finalised by 31 December 2010.
For the 12 months to 31 December 2009, positive lapse assumption changes in UK and Canada mainly arose from the improved persistency of pension business. The £26m loss in International reflected higher paid up assumptions in Germany and higher lapse rates for offshore business.
3.6 Non-covered business Non-covered business EEV operating profit is represented by IFRS operating profit as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business. Refer to Note 3.1 – Basis of preparation.
Transfer back of net worth from covered business 52 (28) - 4 28
On 15 May 2009, the Group’s equity holders approved the introduction of the Scrip dividend scheme, effective for the final 2008 dividend payment onwards. Investors taking part in the Scrip scheme receive their dividend entitlement in the form of new shares issued in lieu of cash dividends. For the 12 months ended 31 December 2010, dividends paid comprise £92m (2009: £102m) settled by the issue of shares under the Scrip scheme, and £186m paid in cash (2009: £158m).
The other movement in the UK EEV net assets relates to the change in the UK non-covered pension scheme surplus of £214m (2009: £73m deficit) and the associated deferred tax liability of £65m (2009: £23m deferred tax asset).
Other movements in other including group corporate centre predominantly relate to the £92m issue of share capital other than in cash in relation to the Scrip dividend paid by Standard Life plc, offset by shares acquired by employee trusts of £35m.
business 12 months to 31 December 2009 £m £m £m £m £m
Transfer back of net worth from covered business 24 (20) - 1 5
Global investment management profits are included in EEV on a look through basis. This means that the profits from global investment management generated from the life and pensions business are allocated to covered business. However, the excluded life and pensions profits include £33m (2009: £19m) of profits relating to products which are actively marketed and sold to third parties through global investment management distribution channels. If these profits are added to the third party profits disclosed for non-covered business, there are £66m (2009: £61m) of third party related profits for global investment management.
Life and pensions look through profits before tax excluding third party profits 37 14
Third party related life and pensions profits before tax 33 19
Total EEV profit before tax 106 64 1 The non-operating items for the 12 months to 31 December 2010 include £nil in relation to the net negative fair value movement in respect of the liability remaining following the restructuring of a sub-fund of the Standard Life Investments (Global Liquidity Funds) plc and the ‘Contract for Differences’ written in September 2008, limited the liability for Standard Life Investments (2009: £9m). As at 31 December 2010, the Contract for Differences was closed at market value and all payments had been settled in full. The losses for all periods relating to the non-life net negative fair value movement and the fair value movement of assets brought directly on to the statement of financial position are also excluded from IFRS operating profit along with £3m positive other non-operational adjustments (2009: £2m).
Changes in the cost allocation methodology relating to inputs to the EEV profit calculation were introduced during 2010 together with other minor changes. The 2009 equivalent impact of these changes is an increase of £11m in life and pensions look through profits before tax, and a similar reduction in total third party related profits before tax. On this basis, the year-on-year growth in total third party related profits before tax is 32%.
Included within other are the head office costs relating to the International businesses. These costs are included within the International segment of the IFRS financial statements.
The opening adjustment for the 12 months to 31 December 2009 reflects the inclusion of the Asia businesses on an EEV basis for the first time.
Net assets attributable to equity holders on an IFRS basis 3,903 3,457
Transfer back of surplus to Standard Life Investments (24) - (24) - (24)
For the 12 months to 31 December 2009, Asia businesses are included within the covered business results for the first time on an EEV basis. This is reflected in the opening adjustment of £33m.
Transfer back of surplus to Standard Life Investments (19) - (19) - (19)
3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued
Expected return transfer to net worth 142 (60) 82 (82) -
The adjustment to opening EEV net worth and PVIF net of cost of capital represents a change to the presentation of certain Canada GAAP guarantee reserves. Prior to the results for the 12 months to 31 December 2010, these reserves were replaced with a TVOG within the Group's EEV results. In order to better align the Group's EEV net worth movement and the Group's primary measure of performance, IFRS operating profit, these reserves are now included within the EEV net worth. Total EEV operating profit for the 12 months to 31 December 2010 is unaffected by this adjustment.
Aggregate tax effect of items not recognised in income statement 5 - 5 - 5 www.standardlife.com 91
The UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. The value of this exposure has increased by £10m during 2010, with the favourable impact of better than expected investment performance over the year being offset by the effect of modelling changes and, in particular, the effect of a downward shift in the yield curve.
Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 3.2(c) – Segmental analysis – covered business – Segmental analysis of opening and closing EEV is net of these liabilities.
The £58m increase in the Canada subordinated debt liability includes £23m from currency movements.
PVIF Cash emerging in first 5 years Cash emerging in first 5 years At 31 December 2010 £m £m % £m %
PVIF TVOG Total At 31 December 2010 £m £m £m * See also Note 3.2(c) – Segmental analysis – covered business – Segmental analysis of opening and closing EEV.
* Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 4.91%
0.691% in 2011. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.
*** 1.367% in 2010. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 3.60 2.70 3.60 3.60 2.70
Changes in market risk margins generally arise from changes in the mix of business and asset allocations. In Canada, the market risk is also impacted by the relative movements in the returns assumed on equities and property compared to risk free.
During 2010, management action in Canada resulted in less equities and properties being used to back fixed liabilities. If this action had not been taken, the market risk margin in Canada would have been 0.2% higher. The impact of this reduction in the risk discount rate was a profit of £40m, which is reported through Canada other operating assumption changes as reported in Note 3.2(a) – Segmental analysis – covered business – Segmental EEV income statement.
The impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 3.2(a) – Segmental analysis – covered business – Segmental EEV income statement. The amount that relates to the changes in risk discount rate is a total of £185m, arising from UK: profit £156m; Canada: profit £7m; and International: profit £22m. These profits reflect the benefit of reduced risk discount rates which are mainly driven by reductions in risk free rates.
Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 6.11% and 5.83% respectively. The weighted average for Europe includes an allowance for SLIL which uses the same risk discount rate assumptions as UK business.
The PVIF and cost of required capital of the Asia businesses is calculated using a ‘risk neutral’ approach whereby projected investment returns and discount rates are based on risk free rates. The risk free rates used were: As a result of this risk neutral approach there is no requirement to hold a market risk margin within the risk discount rate.
Non-market risk has been allowed for via a specific deduction to the PVIF, based on a non-market risk ‘cost of capital’ approach. This has reduced the PVIF at 31 December 2010 by £28m (2009: £21m). Similarly, the 2010 pre-tax NBC has been reduced by £18m (2009: £12m) as an allowance for non-market risk.
3.14 Principal economic assumptions – stochastic calculations The level of the TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 3.17 – EEV methodology.
Inflation This variable is calibrated based on the relationship between the real and nominal yield curves.
Rental yields are derived from rental income on our actual portfolio of property (with three month lag).
The model equity-implied volatilities are set out in the following table: UK equities Term (years) 31 December 2010 31 December 2009
Property-implied volatilities Property-implied volatilities have been set as best estimate levels of volatility based on historic data.
For the UK and Europe, the model is calibrated to property-implied volatility of 15% for 31 December 2010 and 15% for 31 December 2009.
3.15 Foreign exchange A description of the approach to the currency translation for foreign entities is provided in Note 3.17 – EEV methodology.
• 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases.
• 10% decrease in lapse rates (a 10% sensitivity on a base assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.)
3.16 Sensitivity analysis – economic and non-economic assumptions continued New business contribution: UK Canada International HWPF TVOG Total
• The Group’s share of results in the joint venture in India, HDFC Standard Life Insurance Company Limited, at 26% for the 12 months to 31 December 2010 (during the 12 months to 31 December 2009: 26%)
• The Group’s share of results in the joint venture in China, Heng An Standard Life Insurance Company Limited, at 50% for the 12 months to 31 December 2010 (during the 12 months to 31 December 2009: 50%)
The Group’s non-covered business predominantly consists of the third party global investment management business of Standard Life Investments, Standard Life plc, the non-covered business of Standard Life Savings Limited, other non-life and pensions entities and the Group’s UK pension scheme. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and the banking business, Standard Life Bank plc, was sold on 1 January 2010. Both businesses have been classified as discontinued operations.
• Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments
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, we have 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 our internal capital model, and quantifying an additional risk margin based on the results of the stress tests.
In Asia, the PVIF and cost of required capital is calculated using a ‘risk neutral’ approach whereby projected investment returns and discount rates are based on risk free rates. As a result, there is no need for an additional market risk margin in the discount rate. Non-market risk is deducted directly from the PVIF using a ‘cost of capital’ approach on the risk capital arising from the key sources of non-market risk. For the Asia businesses, this methodology would give a similar result to the methodology used in the UK, Europe and Canada since the calibration of a risk discount rate would have allowed for the market and non-market risks.
The TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.
An adjustment is made to allow for TVOG arising on a selection of guaranteed annuity benefits on unit linked and smoothedmanaged businesses within Germany.
Asia The TVOG in the Asia businesses within International arises from guarantees and options given to with profits business written in India and China.
The Group’s offshore business, which is sold by SLIL, is included within International results but has the same economic assumptions as UK covered business.
Details of the assumptions used for this reporting period are provided in Note 3.13 – Principal economic assumptions – deterministic calculations – covered business.
Global investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing global investment management services to the life and pensions business rather than the investment fees actually charged.
For the UK, classification as new or existing business is determined as follows (using the approach used for the published new business figures): • New recurrent single premium business is classified as new regular premium business to the extent that it is deemed likely to renew
• 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
During 2009, a loan was made to the HWPF by Standard Life plc, repayment of which is contingent on the emergence of recourse cash flows and surplus in the HWPF (contingent loan agreement). A transfer to equity holders was then made to transfer the remaining unallocated surplus to equity holders without equity holder tax arising. As a result of this the market risk associated with unallocated surplus was reduced. Future transfers to equity holders from the HWPF will, in the first instance, take the form of repayments under the contingent loan agreement. Such transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers to equity holders will move toward the standard rate of corporation tax.
Embedded value and other items within the statement of financial position denominated in foreign currencies have been translated to Sterling using the appropriate closing exchange rates. NBC and other items within the income statement have been translated using the appropriate average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of comprehensive income. Details of the exchange rates applied are provided in Note 3.15 – Foreign exchange.
IFRS operating profit/(loss) before tax from continuing operations 234 110 15 103 (37) - 425
Tax on non-operating items 9 (23) - - 5 - (9)
Profit/(loss) for the year from continuing operations 240 145 4 79 (56) - 412
IFRS operating profit/(loss) after tax from continuing operations 249 58 24 60 (26) - 365
Tax on non-operating items 26 22 2 - 4 - 54
EEV operating profit after tax from continuing operations 311 186 72 (31) - 538 24
EEV operating profit/(loss) after tax from continuing operations 466 141 21 (31) - 597 27
IFRS operating profit/(loss) before tax from continuing operations 234 110 15 103 (37) 425
IFRS operating profit/(loss) after tax from continuing operations 198 90 7 76 (35) 336
Impact of different treatment of assets and reserves (20) 4 2 - - (14)
EEV operating capital and cash generation from continuing operations 219 109 (30) 24 (35) 287
EEV operating profit/(loss) after tax from continuing operations 302 183 64 24 (35) 538
IFRS operating profit/(loss) after tax from continuing operations 249 58 24 60 (26) 365
EEV operating capital and cash generation from continuing operations 265 114 (8) 35 (35) 371
EEV operating profit after tax – PVIF 175 27 24 - - 226
Conventional with profits (excluding annuities) 6.9 0.2 (1.1) (0.9) 0.6 6.6
Standard Life Investments third party 56.9 12.4 (6.2) 6.2 8.5 71.6
Closing AUA at 31 Dec 2009 £bn £bn £bn £bn £bn £bn
Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
Standard Life Investments third party assets under management 56.9 12.4 (6.2) 6.2 8.5 71.6
Group assets under administration managed by: Standard Life Group entities 144.9 164.0
SIPP is included within UK mutual funds net flows in the third party investment operations. 2 Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The total 2010 net outflow is £3m (2009: net outflow £13m). 3 UK long-term savings include a total net outflow of £1,778m in relation to conventional with profits business (2009: net outflow £2,081m). Of this, a net outflow of £855m is in relation to annuities business (2009: net outflow £874m). 4 Includes net flows in respect of Standard Life's share of the Asia joint ventures.
Individual insurance, savings and retirement 225 (245) (20) 196 (218) (22)
SIPP is included within UK mutual funds net flows in the third party investment operations. 2 Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The total 2010 net outflow is £3m (2009: net outflow £1m). 3 UK long-term savings include a total net outflow of £449m in relation to conventional with profits business (2009: net outflow £436m). Of this, a net outflow of £209m is in relation to annuities business (2009: net outflow £217m). 4 Includes net flows in respect of Standard Life's share of the Asia joint ventures.
4.4 Group assets under administration and net flows continued Long-term savings operations net flows (regulatory basis) 15 months ended 31 December 2010
Includes net flows in respect of Standard Life's share of the Asia joint ventures.
4.5 Analysis of new business Long-term savings operations new business 12 months ended 31 December 2010
12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 12 months to 31 Dec 2009 Change
Individual insurance, savings and retirement 624 587 4 3 662 623 6% (4%)
Third party insurance contracts (new business classified as insurance products) 18,370 5,104 (1,897) 3,207 2,790 5,997 24,367
Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2010. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column. The principal closing exchange rates used as at 31 December 2010 were £1: C$1.56 (31 December 2009: £1: C$1.69) and £1: €1.17 (31 December 2009: £1: €1.13). The principal average exchange rates for the 12 months to 31 December 2010 were £1: C$1.60 (2009: £1: C$1.78) and £1: €1.17 (2009: £1: €1.12).
3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 2009 Change
Individual insurance, savings and retirement 196 169 1 1 205 181 13% 4%
Total worldwide investment products excluding money market and related funds 39,758 1,725 (1,354) 371 1,729 2,100 41,858
Total third party assets under management 69,106 1,846 (1,962) (116) 2,623 2,507 71,613
In the three months to 31 December 2009 Canada mutual funds gross inflows were £72m and net inflows were £21m.
3 months to 31 Dec 2010 3 months to 31 Dec 2009
The three month period to 31 December 2010 and to 31 December 2009 exclude the full impact of year end changes to non-economic assumptions. The effect of changes to year end non-economic assumptions was an increase in total PVNBP of £171m in the final PVNBP results published in the 2010 Preliminary results (2009: decrease £110m).
4.6 Exposure to investment property and financial assets Group exposure to investment property and financial assets
The total Group external exposure to investment property and financial assets including discontinued operations has been segmented below based on the stakeholder sub-group with which the market and credit risk relating to those assets lies.
Investments in associates and joint ventures 37 1,557 1,138 117 2,849
The total shareholder exposure to investment property and financial assets of £17.9bn (31 December 2009: £26.2bn) includes £11.2bn (31 December 2009: £10.1bn) of assets held by non-segregated funds of the Group’s Canadian operations. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than the nominal level of exposure presented below because changes in the value of assets are typically accompanied by offsetting changes in the value of related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees which may be triggered.
Canada non-segregated funds exposure Standard Life Bank exposure Other shareholder exposure Total shareholder exposure
The Group’s exposure to debt securities has been further analysed in the tables below. The high quality of the debt security portfolio has been maintained, with 52% of debt securities rated AAA (31 December 2009: 57%) and 95% (31 December 2009: 95%) being rated as investment grade.
Debt securities classified as corporate include securities issued by corporate entities which carry government guarantees. Debt securities classified as other consist primarily of securities issued by supranational institutions.
Shareholders are directly exposed to loans of £2.8bn (31 December 2009: £9.9bn) which, in 2010, primarily comprise the Canadian non-segregated funds commercial mortgage book. This mortgage book is deemed to be of very high quality. In 2009, loans also included Standard Life Bank’s retail mortgage book.
The Canadian mortgage book has an average loan to value of 45% (31 December 2009: 46%).
4.7 Fair value hierarchy of financial instruments To provide further information on the approach used to determine the fair value of certain financial assets and derivative financial liabilities measured as at fair value on the Group’s IFRS statement of financial position, the fair value of these financial instruments has been categorised below to reflect the following fair value hierarchy: Level 1: Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 1 Level 2 Level 3 Total 4.8 Total expenses and operating cost base 2010 2009 £m £m
UK Canada International Global investment management Other Total £m £m £m £m £m £m
5 Movements in the operating cost base, which are specifically identifiable and relate to investing for growth.
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This document has been published by Standard Life for information only. It is based on our understanding as at March 2011 and does not provide financial or legal advice.